New home building is key to health of real estate

Astable residential real estate market played a key role in the ongoing, decade-long economic expansion. Yet, to sustain real estate and, by extension, the national economy, an increase in the supply of new homes is crucial.

That was a key conclusion of three economists who participated recently in a session held at the 2018 Realtors Legislative Meetings & Trade Expo in Washington, D.C.

The session, “Outlook for Home Prices and Residential Construction,” focused on rapidly rising home prices, tight home inventories and whether or not the country is in the middle of a bubble.

The three panelists agreed that more new home construction is necessary to meet rising demand from increasing household formation and to curtail the affordability crisis. More than most Southern California communities, Santa Clarita has a flow of new construction already in the pipeline.

Yet, even

here,

if supply and demand fall out of balance, that could trigger a fast price growth, said NAR Chief Economist Lawrence Yun, noting that the problem is more acute here in California than almost all other states.

“A best-case scenario is largely dependent on new home construction,” Yun said. “An increase in inventory will provide some much-needed release.”

Yet, in the absence of new construction, where is real estate headed?

“Are we in a bubble? No, not currently,” said Len Kiefer, deputy chief economist for Freddie Mac.

He outlined ways the current market is different from the one leading up to the recession, such as no signs of over-leveraging and the very low ratios of household income to debt. The aggregate risk of mortgages in the U.S. is also comparatively low.

“Those risky loans that contributed to the last bubble have largely gone away in the current market,” he said. “Young adults of today are forming households at a much lower rate than previous generations, and high housing costs contribute to that.”

Kiefer noted that onethird to three-quarters of U.S. markets have an elevated home price-to-income ratio and many major markets, have already or are close to surpassing their 2008 highs.

Ken Simonson, chief economist for Associated General Contractors of America, discussed how low employment in construction is also contributing to the lag in new home construction, despite high demand.

“Construction saw a 30-percent drop in employment in the previous decade, the largest drop of any industry. They also began laying people off a year before the recession began and did not start hiring again until much later than other industries,” said Simonson. This has led to difficulty in bringing skilled laborers back to the industry.

“Construction companies are having to hire people with no experience and spend more time and money on training,” he said.

Rising material costs also have contributed to the low rate of construction. The price of diesel fuel, which is used in earth moving vehicles and in transporting materials, has risen 42 percent since 2017. And, the cost of lumber and plywood has increased 11 percent while ready-mix concrete rose 7 percent.