Homebuilders were busier in September, digging more dirt and ready to bring more new homes to the market. But construction was tilted towards multifamily apartment units. Single-family home construction still remains well below historical norms. A housing shortage is a definitive possibility next year unless homebuilders get more active.
In September, housing starts rose 6 percent to 1.02 million. The figure is well below the needed figure of 1.50 million. The laggard is the single-family construction. Multifamily housing starts – mostly of apartments and some on condominiums – are essentially back to normal.
A robust rise in the number of renters and the rises in rents have led builders to focus on apartments. However, the overall inventory of single-family homes for sale is on the relatively tight side and could quickly move to into a shortage situation if the demand picks up. Home prices could then rise notable faster (say 7 percent in 2015), much higher than what most economists are projecting (current about 4 percent in 2015). Housing affordability will take a hit then. Therefore, more homes need to be built. Ideally, housing starts need to rise by 50 percent from the current levels to reach the historical average of 1.5 million.
Builders generally do not have problems selling newly built homes. The current supply situation is 4.8 months, which is already on the tight side. But trying to obtain construction loans has been very difficult for small-time homebuilders, with lenders complaining of excessive banking regulation that hinders construction loan approvals. The big-time homebuilders of Lennar, KB Homes, and Toll Brothers get their money to build from Wall Street and are having easy days because of less competition from small builders.
Another reason for sluggish recovery in the single-family housing starts is due to labor shortage. The following anecdote perhaps says it all. A police officer bought a new home in Florida. He wanted to check up on the progress. When visiting the construction site in his police cruiser, there was a scramble of workers running away. Evidently, some of the workers were undocumented persons. Then the question should be why aren’t more American citizens willing work in construction?
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.