Here’s the conundrum: Home prices across the country are just below pre-recession levels and home sales numbers are at an all time high as people hurry to grab historically low (but rising) interest rates and inventory, and home builders are moving at a snail’s pace. What’s going on with this seeming disconnect of high demand and low supply?
Instead of the construction industry jumpstarting the economy as it has historically done, the construction industry is lagging behind the rest of the labor market. For example, home builders across the country are breaking ground on just 848,000 new single family homes right now, according to the National Association of Home Builders (NAHB). Ten years ago, in 2007, home builders built 1,036,000 new homes. Today, just 767,000 people are employed in residential construction jobs. Ten years ago, 920,400 people were employed in residential construction jobs. These numbers represent a 20% decrease.
Homebuilders such as Donnie Evans of Dallas based Altura Homes tells the NAHB that a labor shortage of “…good, reliable labor with the right skills…” is the culprit. Labor advocates respond by saying that if home builders want more workers, builders need to raise wages. (When adjusted for inflation, the average hourly wage for skilled labor has gone unchanged since 2006.) Builders then reply that if they were paying higher wages, home prices would surge far beyond the reach of the typical buyer. (Evans of Altura quotes average home prices to be $160,000 four or five years ago to now $240,000.)
It turns out there is no one culprit in this high demand, low supply real estate conundrum. There are multiple factors contributing to it…
- The labor shortage, most certainly.
- Onerous government regulations and fees that make building “…uneconomical even when land is cheap…” (Evans) is another.
- 25% of new home construction costs are due to infrastructure contributions required from builders by state and local entities.
- Tight financing and the wariness of banks to dive back into real estate lending…outstanding construction loans are 40% of 2007 levels.
- Buildable land paucity in many metro areas without changes in zoning regulations.
What to do?
- State and local governments can reexamine and revise regulations and land use laws.
- The feds can revise and expand affordable housing tax credits.
- Builders must face the law of supply and demand and raise workers wages.
If not, we can expect to see little meaningful change in this situation. It appears that changes on all sides will have to occur to put new construction back at the top of industries that move the economy forward.