What’s Really Holding Back the Housing Recovery

The housing market’s recovery continued its bumpy path last month with home construction falling 9.3%, the second consecutive month of declines and the weakest showing since September 2013.

“Nothing in this recovery is going straight up with consistency, it’s about fits and starts,” says Keith Gumbinger, vice president of real estate website HSH.com. “The market is still doing better than last year, but just not quite as good as we are used to.”

Lawrence Yun, chief economist at the National Association of Realtors (NAR), calls the data “baffling” and points to labor shortages and tight credit markets as culprits of the slow building.

“We have a case of builders wanting to build, but they can’t find the financing.”

According to Yun, small homebuilders historically aggregate more than half of total home building in the U.S., but haven’t been able to maintain that pace since the financial crisis. “The small builders rely on loans from small and community banks and (those lenders) don’t have the confidence to lend. That leaves the bigger players, the KB Home (NYSE:KB) and Toll Brothers (NYSE:TOL), with access to Wall Street, as the only ones able to build.”

On top of tight lending practices, Yun says builders are having a hard time finding skilled workers. “Construction jobs pay well, but what we can interpret from this is Americans are unwilling to go out in the sun and play with dirt to help build homes. They want an air-conditioned job. It is frustrating, the job market isn’t normal, they pay well but the builders are having a hard time finding skilled workers.”

A June report from the NAR shows new home construction activity is insufficient in 32 states and the District of Columbia, and is not keeping pace with job creation. The lag could lead these states to experience “persistent housing shortages and affordability issues.”

Tight inventory causes home prices to rise, which could deter potential buyers from entering the market. In May, home prices rose 8.8% compared with 12 months earlier, according to data provider CoreLogic.

The labor and housing market are closely linked, with Yun saying there tends to be one new home construction for every one-and-a half new jobs. Increasing home construction would be a boon to local economies and their labor markets as well as the overall economy.

On Thursday, Goldman Sachs (NYSE:GS) slashed its second quarter GDP forecast from 3.3% to 3.2% on "substantial disappointment" in housing data.

While the economy has recovered the eight million jobs it lost since the Great Recession, Gumbinger points out that doesn’t mean people are financially ready to become a homeowner. “It takes some time to become aligned to be able to buy a home. Income growth has been weak for those that have had jobs. It can be hard to come up with the required down payment and high credit score.”

He adds that it will take a while to get back to the historical homeownership rates under new Dodd-Frank regulations. “You aren’t going to see a lot of product innovation as we saw in other booms that followed a downturn. The last recovery was fueled by different and novel ways to get people into mortgages—good and bad—but there tends to be periods of innovation following a downturn that helps boost the recovery. That isn’t happening this time around because of all the regulations.”

Thursday’s report from the Commerce Department shows starts for single-family homes, the largest part of the market, dropped 9% in June. Construction in the south specifically dropped to its lowest level in two years.

“This is puzzling because this region has less regulatory issues.” He says a drop in the West Coast makes sense since areas like San Francisco have strict permit requirements, but in Southern regions, including Houston and Atlanta, the process is less stringent. “This shows it’s not about housing permit availability, it’s all about labor, lending and demand.”

Thursday’s data runs counter to data released Wednesday that showed confidence among single-family home builders climbing to a six-month higher in July with optimism over strong sales for the rest of the year.

“It’s hard to know what makes them happy, but the building report shows they were working a lot less” says Gumbinger. “But they are finally profitable after the beating they took after the crash and the prospect for sustainable future business is strong.”

Potential home buyers are keeping a close eye on mortgage rates, which have been in flux since the Federal Reserve’s $10 billion taper announcement in December. Interest rates ticked higher toward the end of 2013 to 4.48% on 30-year fixed-rate loans, but have since moved lower with rates sitting at 4.13% this week.