Labor, lots and lending limiting housing growth

While forecasting growth, NAHB chief economist says numerous obstacles remain.

The NAHB's chief economist shared his analysis at the ProDealer Industry Summit.

Phoenix – While the overall message was positive, there are mild headwinds thwarting growth in the housing industry, according to Robert Dietz, chief economist for the National Association of Home Builders.

Dietz delivered his message here this morning at the 2017 ProDealer Industry Summit, noting that a shortage of labor, tight lending from small banks, and a lack of land suitable for building is hampering potential single-family housing growth in the country.

The good news is that Dietz and the NAHB forecasts about 7% growth for single-family housing starts in each of the next three years. “We think momentum is switching form the rental market to owner-occupied. We are now seeing fairly solid growth and a switch in the market,” Dietz said.

"I would argue strongly that this is not a bubble. It’s a correction in pricing due to lack of supply.”

The economy continues to create jobs and the nation is 6% higher than the employment level before the great recession. Approximately 2 million jobs are being created every 12 months. But the labor market is tight. “In a growing economy you need the growth of the labor force,” Dietz said. “You could have a job market that slows simply because of a tight labor market."

Labor force participation has declined and taken a step back in the last decade because of aging population, a lack of people willing to work, and even factors as exotic as the opioid drug crisis. Wage growth that led to more employees entering the labor force has stabilized the market since 2015, Dietz said. And although higher wages have translated into increased spending, a lack of available housing is increasing prices ahead of income growth.

“I would argue strongly that this is not a bubble. It’s a correction in pricing due to lack of supply,” Dietz said.

Mortgage interest rates are expected to increase to about 5% by 2018 and 2019, which could cause a “psychological” barrier when it comes to milllennials deciding to purchase a home. They might look at homebuyers from previous years who paid a lower interest rate and balk at mortgage offerings, he suggested.

Conversely, there are about 4.7 million millennials who are between the ages of 26 and 27 and approaching age 30: the time to settle down, marry, have children and purchase a home.

Then again, consumer debt is on the rise lead by student and auto loans, which could prevent some millennials from setting foot in a newly purchased home.

Lending and Land

Builder loans only grew 9% in last quarter as small banks are reducing lending to builders. “Banks are pulling back some of their development financing and it has become harder to develop multi-family housing due to tight lending,” Dietz said. Additionally, regulatory costs for new home construction have grown 29% in the last five years and now amount to 25% of the final price on a new home as building material prices have spiked 20% in the past 12 months.

Regulations -- including zoning codes and the ability to process plans -- has slowed the process as well. When the bubble burst and jobs were lost, regulatory careers were lost: this includes those approving zoning and land development. Builders are running into inexperienced personnel who are slowing down the time required to build homes, according to Dietz.

There aren’t enough builders either. Before the Great Recession there were more than 80,000 home builders. Today the number stands at about 50,000. “If we want single-family construction to grow we are going to need more building companies going forward,” Dietz explained.

Simultaneously, builders are struggling at times to find land suitable for housing starts. According to the NAHB, 64% of builders are saying that lot supply is low.

“We have a disconnect,” Dietz said. “Lot supplies are scarce, lot prices are climbing, and we are seeing the need for a smaller home footprint.”

For 2017 remodeling is forecast to grow 17%, the NAHB estimates. But the forecast for 2018 is much more conservative – 4% growth – largely due to a lack of existing homes available for sale, which require makeovers and upgrades.

“But we keep underestimating the remodeling market,” Dietz said while pointing out that the average U.S. home is 40 years old and require remodeling. The gap between new homes and existing homes has also widened thanks to lack of supply.

The townhouse market, particularly in urban markets, should experience growth as millennials move into their own spaces in the coming years.

Looking at the big picture, the NAHB forecasts the GDP to grow 2.3%  in 2018 and just 1.9 percent in 2019.

Dietz warned that a slight recession could be lurking within the next four to five years, however. Although it’s not predicted to have the economic impact of the Great Recession, Dietz said we are due. The nation has experienced a 100-month consecutive, economic growth cycle. “That’s the longest cycle we’ve had,” Dietz said.


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