Market recap: Fourth quarter 2021
We take a look at the S&P 500 Index, Russell 3000 Index, and others, along with the U.S. equity, non-U.S. equity, and U.S. fixed income.
As the pandemic turned from weeks to months and people made the shift to working at home, many people started to view their homes in a new unfavorable light. Whether it was wanting a kitchen upgrade, realizing that their work-from-home solution was inadequate, or wanting to create a backyard oasis, many homeowners decided to make those home improvement wish lists a reality. As demand increased, delays wreaked havoc on an already stressed supply chain for building materials, causing prices of construction materials to soar. Contractors for homes and businesses alike were facing increasing labor and supply costs that were being passed along to the consumer. For homeowners and businesses, this can now be seen in the form of higher renovation costs and higher homeowners or property insurance premiums. For property insurers, these costs translate into evaluating the policy limits of their current policyholders and the need for higher reserves on open claims. These sectors and their impact on insurance are discussed below.
Based on a survey performed by Houzz with over 70,000 U.S. respondents,1 home renovation projects were up in 2020, with most of the projects in kitchens, home offices, and outdoor spaces. According to the report, homeowners increased spending by 15% on home renovation projects in 2020. The cost of large kitchen remodels increased by 14%, the cost of home office renovations increased by 10%, and outdoors areas increased in popularity by 6%. Respondents also reported a strong volume of renovation projects and spending in 2021 with the share of homeowners planning to renovate at 56%, which is the highest it has been since 2017.2
Business shutdowns and travel restrictions due to the pandemic created supply chain issues around the world, which led to shortages of many building materials including lumber, steel, and copper. Habitat for Humanity reported that the framing job for one Habitat for Humanity house is typically $6,000. This year, that same framing job costs $12,000.3 According to the latest Producer Price Index (PPI), building materials (inputs to residential construction less food and energy) have increased 19.4% during the past 12 months.4
Those homeowners seeking contractors instead of taking the do-it-yourself (DIY) approach are facing an uphill battle to find laborers. The current backlog on home improvement projects is 10.8 weeks, which is an increase of 4.5 weeks from a year ago and over double the backlog from Q3 2019 (4.9 weeks).5 In addition, the Recent Business Activity Indicator6 reached an all-time high of 82 in Q2 2021. This is up from 49 in Q2 of 2020 and 58 in Q2 of 2019.7
For those looking to undertake home renovations in the near future, expect start delays on the project and potential increases in costs throughout the project. Before beginning, you may want to confirm with your contractor that all of the building materials, fixtures, and appliances are currently available and that it has them in its possession.
On the commercial side, businesses are also facing skyrocketing building material prices and labor shortages. In May 2021, lumber hit an all-time high of $1,515 per 1,000 board feet, which was an increase of 323% from $358 per 1,000 board feet a year prior.8 And while the price of lumber has been decreasing in more recent months, the cost of lumber is still higher than pre-pandemic levels. Lumber is expected to trade at $909 per 1,000 board feet by the end of this quarter and at $1,139 per 1,000 board feet in 12 months’ time.9
Steel prices also continue to rise. According to the U.S. Bureau of Labor Statistics, the price of steel has increased nearly 125% in the last 12 months and nearly 100% in 2021.10 Other industries are facing similar increases, including copper and plumbing fixtures.
In addition to building material costs, contractors are also experiencing increasing costs due to the price of personal protective equipment, fewer workers allowed on job sites, and projects taking longer than previously.11
Contractors are also having difficulties finding experienced workers. According to the Associated General Contractors of America (AGC), 89% of survey respondents cannot fill hourly craft positions and 86% of respondents cannot fill salaried professional positions.12
One favorable piece of news is that the Construction Backlog Indicator (CBI), as produced by Associated Builders and Contractors, has been decreasing in recent months and is down since the start of the pandemic. In August 2021, the CBI was 7.7 months as compared to 8.0 months a year ago and 8.5 months in August 2019.13
Coupled with the decreases in backlogs, however, is a decrease in contractor confidence. Higher material prices and labor costs have put a lot of projects on hold or have caused projects to be terminated completely. According to the AGC, 52% of contractors reported delays due to shortages of construction materials, equipment, or parts.14 These pandemic-related delays are not expected to vanish anytime soon. According to an analysis by IHS Markit, the supply chain delays experienced this year will continue into 2022 and possibly into 2023.15 In addition, 32% of contractors reported delays due to shortages of craftworkers and subcontractors.16
Similar to home renovations, finding a contractor may take a little longer than prior renovations, along with a heightened need to make sure you have all of your building supplies sourced.
So what does this all mean for insurance? The insurance market has been hardening over the past couple of years and these increasing costs and supply delays may exacerbate that hard market.
The COVID-19 pandemic impacted our daily lives in many ways, some of which are here to stay. People discovered they could easily work from home and enjoyed it too, especially after some home remodeling to create a home office or two. Another lasting side effect of the pandemic is the higher cost of construction materials and supply chain delays, which are not expected to disappear in the coming year. With all of these increasing costs, it is important for homeowners, businesses, and insurers to do their homework to make sure that these higher costs have been recognized in plans and budgets.
9Trading Economics. Lumber. Retrieved October 3, 2021, from https://tradingeconomics.com/commodity/lumber.