It's so hard right now," the president of one of the nation's top 10-ranked public homebuilding enterprises told me yesterday. "Last year's challenges were different. We didn't know what we didn't know. This year, the root causes of trouble and their ripple effects are all on the radar – we know more of what we're up against – and still there's so much out of our control."

One can only hope as much.

Crystal clear recognition of challenges homebuilders, developers have been up against on the low inventory-supply side of market-rate housing's equation put money, time, land, materials, buyers, and sellers into a pressure cooker.

In 2021, builders' unknown-unknowns more often than not weighed on output – the result being that what was already-constrained was more constrained, forcing prices higher. In 2022, many supply-side capacity and output constraints moved from the unknown into plain view. The scenario – fully baking in those challenges – included:

• Increased costs of goods sold – materials, transportation, warehousing
• Higher skilled-worker costs
• Further elongated start-to-completion cycles
• Hard constraints on new-community openings
• Revenue and margin misses on forecast, requiring reforecasts and contingency expense reductions

And, that, it turns out, is a better-case scenario than what homebuilders large, medium, and small, are looking at.

As painful as it may have been to deal with hard limits on what producers could produce and sell, knowing there was a deep replenishable well of demand waiting their turn for the next new release of homes – so far, it's still there – was a saving grace.

Now, that bulwark assumption – that "if we can build it, they will come" – faces a new barrage of shock and stress.

Here, from a Marcus and Millichap special analysis:

Prior to Russia's invasion of Ukraine, the prospects of stagflation – where inflation is high but real economic growth stalls – were nominal. Despite this, the added pressure created by rising fuel prices and a potential yield curve inversion, in conjunction with the ongoing labor shortage and supply chain problems, could dampen economic growth. Much will depend on consumers, as they drive two-thirds of the economy."

The risky unknowns of the moment apply less to supply, more to demand, which has been, and is expected to continue to be an unstoppable juggernaut, mostly thanks to sheer numbers of people in young adult life-stages selecting an adult-life-stage home and community.

This morning, Bloomberg reports:

U.S. consumer sentiment tumbled in early March to the lowest since 2011 and year-ahead inflation expectations rose to a four-decade high in the aftermath of Russia’s invasion of Ukraine.

The University of Michigan’s sentiment index dropped to 59.7, from 62.8 in February, data released Friday showed. The median estimate of economists in a Bloomberg survey called for a reading of 61. Consumers expect prices to rise 5.4% over the next year, the highest reading since 1981, according to the data.

While many producers – including builders and developers -- have fixated on the impact of higher prices on their own costs, they've remained confident in consumer households' stalwart pull on them, no matter what the impact on cost.

Still, as Scott Cox put it in his piece in The Builder's Daily yesterday:

There is a lot of conflicting analysis out there regarding sustainable demand. So, you can make your own call on which you believe. But you have to believe that higher prices ultimately reduce demand.

Higher prices – at the gas pump, in the butcher's section at the grocery story, for rent payments, for online streaming services, for college graduate starting salaries, and now, on mortgage payments – are here, everywhere. There's nowhere to hide because those higher prices impact paychecks, savings and investment accounts, even household wealth that came as a benefit of home value appreciation in the past two years.

• Inflation snatches cash out of people's pockets
• Interest rate increases both lop off qualified borrowers and run monthly payments beyond more households' budgets

The narrative – "low inventory meets high demand" – has set the rules of engagement, the priorities, the problem-solving, and the measure of expectation and achievement now for 36 solid months, exacerbated on the supply side by a whiplash of pandemic era disruptions to materials prices and availability.

Now, as part of the hangover effect of the pandemic and with a brand new force-factor of ripple effects from the war in Ukraine, new rules begin to apply.

Assumptions that go into forecasting demand now need to be checked for risk exposure – especially in the next three months to three years.

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