Builders Are Not Keeping up with Demand

July 18, 2018

Housing production has remained lower than demand for the past eight years, ever since the housing market dusted itself off and started climbing back up from the bottom. Today’s number shows that this problem has worsened. Both single-family and apartment construction fell in the new data for June.

Single-Family Construction Disappoints

One of the main headwinds for homebuilding has been the supply (and therefore the price) of developed lots in locations where the builders want to build. The pace of lot development has not kept up with the need, particularly for builders who would like to build in a price range that middle-class people can afford.

Homebuilders are reporting very high levels of confidence these days, but they simultaneously say that lot prices are a major issue for them, as are material and labor costs. Most of these higher costs get passed on to home buyers. These high costs have had the biggest negative effect on production of houses under $300,000, where there is the largest amount of under-served demand.

Apartment Construction is Slowing Too

Apartment construction boomed during the past seven years, and it is slowing now, so as not to get into an overbuilt situation. The apartment market is much more cyclical than single-family housing, more prone to getting ahead of demand.

The slowdown in apartment construction is a positive shift, in that it will reduce the likelihood or impact of a downturn. It is the drop in single-family home construction that is more worrisome.

Implications

People who are looking for a home to buy are finding it frustrating and expensive. As a result, many are re-evaluating their need to move.

Surveys by HomeAdvisor show that the rationale for wanting to move has more to do with aesthetics and space than needing to relocate for a job. Some homeowners are deciding to stay where they are and to instead refresh, reorganize, or expand the home they already have. Still, if not enough homes are being built to keep up with household formations, all the home improvement in the world won’t fill the supply-demand gap.

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