Costs of home construction keep rising
With an improving economy and the recession in the rear-view mirror, it seems like a great time for the new-home construction industry. But the real estate market is never so simple to predict.
During the Great Recession, the construction industry was the hardest hit, losing over 30 percent of construction jobs. With plunging home prices, it made little sense to buy a new home when the market was full of lower-priced existing homes. Many experts predicted that the decline in new construction would eventually lead to a housing shortage, and they were right. Beginning in June 2015, the national inventory of homes dipped into negative territory and remains currently down by 10 percent.
A healthy, balanced market has about six months of inventory available, but most all the major markets are well below that. With this imbalance in supply and demand, the most obvious question is whether we are in a bubble. Most real estate economists do not believe that is the case, but Lawrence Yun, chief economist for the National Association of Realtors, said that just because we are not in a bubble now doesn’t mean that we won’t enter one: “If supply and demand continue to become more and more out of balance, it could trigger a fast price growth. A best-case scenario is largely dependent on new home construction. An increase in inventory will provide some much-needed release.”
With a shortage of homes, one might think that any home for sale would simply fly off the shelf. Well, this is true to some extent. In many markets, homes were selling for more than their asking prices. With demand strong and supply low, home prices continued to increase. Rising home prices currently outpace wages by a ratio of 2-to-1. At some point, there will be an affordability crisis and people will simply not buy. We may have reached that point already, as existing home sales dropped throughout the summer. It is possible that higher prices have driven would-be buyers back to the sidelines, where they will wait for a better market.
People buying and selling existing homes doesn’t fix the problem, said Danielle Hale, chief economist for Realtor.com. “Its’s adding inventory instead of shuffling people
around in existing homes.” Hale added that “overall, prices are expected to increase, and we’re expecting to see more of that in lower-priced homes. It will get a bit worse before it gets better for buyers of starter and midprice homes.”
The real problem is not simply adding inventory, but building homes that people can afford. This is becoming a real struggle for homebuilders as costs continue to rise. The challenge of keeping homes affordable is what’s preventing the construction industry from rallying at a time when they are greatly needed. In addition to a steady increase in labor and material costs, permitting costs also have increased. During a conference this summer, Robert Dietz, chief economist for the National Association of Home Builders, said, “It’s more expensive to build homes and it’s influencing supply. Over the last five years, the total effect of building codes, land use, environmental laws and other rules have caused regulatory costs to rise 29 percent. And then came the tariffs.”
While some industries celebrated the Trump administration tariffs, the construction industry is not so bullish. One third of the dimensional framing lumber used to build homes in the United States comes from Canada, and the tariff on Canadian lumber imports has caused prices to rise and has created instability in lumber markets. Economist Dietz estimated that there is an effective 20 percent tariff rate on Canadian softwood lumber and that has pushed up the price of a typical newly built home by $9,000. The demand for new homes is high, but the price is keeping buyers away. We must find a way to address these concerns and build new and affordable homes to prevent another real estate bubble.