It’s become a regular headline: low housing inventory is responsible for fewer sales. With slow but steady economic growth, low unemployment, consumer optimism, and strong demand for housing, it seems builders would be scrambling to get new homes on the market. However, sales of new inventory is still about a third of what it was in 2005. Both Freddie Mac and Trulia have a few answers on why we don’t have more homes on the market.
The U.S. hit a nine-and-a-half year high for the construction of new homes in February, but housing starts have been disappointing since then. They fell over the next three months to an eight-month low in May. They dropped 7.7 percent in March, then 2.7 percent in April, and then 5.5 percent in May. In June, they rebounded somewhat with an 8.3 percent increase and dipped another 4.8 percent in July.
So, why can’t we keep the pace of home construction on track to meet demand? And, how does that affect the market as a whole, including the sale of existing homes? Freddie Mac blames it on two things — the tight labor market and high development costs.
Labor Shortage
Freddie Mac says there are four reasons for the labor shortage.
1 | When the housing market collapsed ten years ago, it decimated the construction industry. 1.5 million construction jobs were lost. Freddie Mac says many of the people who were laid off have never returned to their old line of work, leaving a huge gap in the workforce.
2 | The construction industry is having a tough time attracting young workers out of high school. In the past, many young people would replace or postpone their college ambitions, to work in the construction industry, but Freddie Mac says there’s not much interest now.
3 | Freddie Mac says the third reason is a little less clear, in term of a quantifiable impact, but opioid use among construction workers is apparently a problem. By one estimate, 15 percent of construction workers are using illegal drugs. Subcontractors are also reporting that many
job applicants are failing drug tests.
4 | Last but not least, there’s the issue of foreign-born workers who are here in the U.S. illegally. The enforcement of immigration laws is eliminating workers who were already in the U.S. and discouraging other potential workers from coming. Freddie Mac says they’ve made up as much as 35 to 40 percent of the workforce in places like California, Texas, Nevada, and New York.
Rising Development Costs
When it comes to higher costs for development, Freddie Mac cites three reasons.
1 | It says land prices have risen so high that developers can’t afford to build entry-level homes. While they may be able to lower the cost of building a home, land prices are fixed.
2 | Land-use regulations are also a big problem. They are so complex in some states, that builders have to wait many months to get permits. In Hawaii, Maryland, and Washington, D.C. it often takes more than a year to get permit approval. Several states in the northeast along with California, Arizona, Colorado, Washington, and Florida have a six to nine-month approval process. Permits take up to six months to obtain in most of the other states with a few exceptions. In South Dakota, Mississippi, and West Virginia, it only takes one to three months for permits.
3 | There’s also an issue “finding” buildable land in some areas. Cities like San Francisco have very little undeveloped land available for construction. In other areas, land features like steep slopes or bodies of water make it impossible to build.
Other Reasons for Low Inventory
In a separate analysis, Trulia came to the same conclusion about the lack of construction. It says that the building bottleneck is by far the most significant factor in the inventory crisis, but it’s not the only one. In a recent blog, it looked at “five” theories on why we don’t have enough inventory. They are:
1 | Homebuilding
2 | “Boomers” who are reluctant to sell
3 | The lack of affordability due to higher prices
4 | A large gap in prices making it difficult to “trade up”
5 | Investor ownership
It says that when you look at the results, the only ones that make a dent in available inventory are the lack of homebuilding and investor ownership. But investor ownership has a very small impact compared to the need for more construction. The report says investor ownership has a 2.5 percent negative impact on inventory levels while an increase in homebuilding would have a 13.3 percent positive effect on those levels.
The most interesting part of this exercise, is the “what if” scenario. Trulia based its analysis on a 1 percent change in any of these areas. So, for homebuilding, it would be a 1 percent increase, and that would translate into a 13.3 percent increase in inventory. That’s mostly due to a domino effect that takes places when homeowners at the top of the real estate food chain start buying. They put their homes on the market so they can “trade up.” Other buyers at a level below them do the same thing, and that continues on down to the people who want to buy entry level homes. For investor ownership, you need to look at a 1 percent “decrease.”
Trulia offered a few examples. It says if builders in the Los Angeles area had increased their output by 2.6 percent instead of 1.6 percent from 2010 to 2016, there would’ve been another 1,300 homes on the market. For investor ownership, Trulia said if investors in Boston had reduced their ownership by 1 percent during that same time frame, there would have been another 100 homes on that market.
One anomaly — Trulia says for some reason, there’s more inventory in areas where boomers are holding on to their homes. Trulia researchers aren’t sure why. They say it may have something to do with the fact that many boomers live in retirement areas where there’s more construction. But Trulia also says boomers may have more of a future impact depending on whether they continue to live in their homes or move to a retirement community.
As for the other two factors, Trulia says high home prices and a large gap in pricing, have an almost insignificant impact on inventory. The obvious conclusion from this data is that we need to build more homes!
Some say there’s a new norm for homeownership levels, because the rate continues to trend lower than it did in the past. People don’t settle down in one spot for their entire lives, so rentals give people more flexibility. Lifestyles have also become more creative, and for many, less complicated, when the landlord is the one fixing the roof. So, landlords should profit for doing that work.
The original transcript for this podcast can be read here. It was published on September 8th, 2017.
Kathy Fettke is the founder and co-CEO of Real Wealth Network. She can be reached at kathy@realwealthnetwork.com.
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