Home construction is approaching its lowest level in decades as fears emerge that a new, different industry crunch could be emerging.
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Home construction per household is near its lowest level in 60 years, according to the Kansas City Fed, as reported by The Wall Street Journal. This comes a decade after a construction bubble produced a massive amount of excess supply and helped to precipitate the financial crisis.
The National Association of Home Builders predicts there will be fewer than 900,000 new home starts this year, even though the market could absorb 1.2 million to 1.3 million, indicating another year of underbuilding.
Demand, on the other hand, is strong. The U.S. economy is slowly picking up steam, the labor market is improving and the demographic outlook is progressing. So what is causing the supply issues, particularly in the single-family home segment?
The current situation is unique, Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors (NAR), told FOX Business. In previous recoveries, the housing market has rebounded much more quickly and consequently bolstered economic growth.
“If housing construction got back to normal, we could easily have 3% GDP growth,” Yun said.
One of the main impediments is a labor shortage in the construction industry.
As previously reported by FOX Business, construction positions carrying six-figure salary potential are going unfilled as the industry has a harder time attracting younger workers and finding applicants with the right training and skills. The industry is potentially facing a 1.5 million worker shortage by the year 2020.
Regulation is also a burden for builders and developers, a problem frequently mentioned by President Donald Trump, who made a career as a real estate developer.
Regulatory costs rose 29% from 2011 to 2016, according to Robert Dietz, chief economist at the National Association of Home Builders, which has served to further restrict inventory.
Some of these regulations are environmental safeguards, according to Yun. Dietz said others are labor and land use rules that were enacted under the prior administration.
Construction loans have declined in the wake of the Great Recession as small and medium-sized financial institutions became saddled with post-financial crisis regulations under Dodd-Frank. Lawmakers, however, are seeking to eliminate the impact of the law’s reach on smaller institutions, which Yun said could be a positive contributor to single-family home construction moving forward.
Finally, tariffs out of the administration have served as a deterrent for some builders. The duty imposed on Canadian lumber imports last year, coupled with the new steel and aluminum tariffs signed earlier this month, are making materials more expensive for builders and giving them “pause.”
Yun said the tariffs may not be “a major decision-maker, but it’s an added cost,” and one that will be passed on to the consumer or prevent builders from constructing lower-cost properties, which are already the major focus of the shortage.
The consequences of low inventory in the housing market are manifold. A lower supply of homes, coupled with strong demand, means that prices rise, adding more obstacles for first-time buyers, who were responsible for just 29% of existing home sale transactions in January.
Home prices are now higher than they were at the peak of the housing boom. The National Association of Realtors and Freddie Mac estimate that median price growth will accelerate by 3.5% in 2018, and in some cases will rise faster than income gains over the coming years.
Interest rates are also on the rise as the Federal Reserve continues on the path toward normalization, which has the potential to disrupt the market even further.
Rising rates mean that “for some consumers who are right on the margin, they just can no longer obtain the mortgage for the home they want to purchase,” Yun said, adding that will cut back demand, but not in the most productive manner for the industry.
Over the long-run, these trends could ultimately have wealth consequences, Dietz said, since home ownership has traditionally been a great source of wealth building in the U.S.
Unfortunately, there are no quick fixes for the single-family housing crunch, either.
“None of this is going to change quickly. … All of these factors limit the amount of growth the industry can experience during a year,” Dietz said.