Homebuilders are not building enough. In August, housing starts fell for the second straight month. Without a robust addition of newly constructed homes, an inventory shortage will continue.
Specifically, housing starts fell to 1.13 million units (annualized pace) in August. That is seven percent below the recent peak set two months ago. More importantly, the current pace is well below the historical normal pace of 1.5 million units annualized pace. The hurt is concentrated in single-family home construction. Single-family home construction was at 739,000, compared to around 1.2 million normal activity. Multifamily apartment construction is doing fine. Multifamily construction was 387,000, which is slightly above the long-term average.
It’s logical that more apartments are being built with rising rental demand. It is, however, strange that single-family homes are not being robustly built even though there is an inventory shortage and rising home prices.
Regionally speaking, the South is doing relatively better over the past several years. The West region is witnessing moderate growth. The Midwest and the Northeast regions are not seeing any measurable gains.
A survey of homebuilders has shown great optimism – reaching the highest level in a decade. But the results are less meaningful and likely biased. After all, housing starts are only half the activity of a decade ago. The expressed rising confidence is likely reflecting larger-sized homebuilders who are having no problem finding a buyer and thereby making a good profit. However, many small-sized builders are struggling to get back into the game and evidently are not responding to surveys.
What’s holding back the small-time homebuilders are two things: (1) the difficulty obtaining construction loans and (2) the inability to compete with large builders in obtaining skilled workers. The average construction workers’ wage of $25.27 per hour much above the minimum wage. Yet, very few workers want to enter this profession.
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.