Redfin: Under-Building, High Construction Costs Perpetuating Housing Shortage

Mike Sorohan msorohan@mba.org

October 27, 2017

Redfin, Seattle, said while new homes represent a growing share of the market over the past five years, high construction costs and persistently low inventories leave the U.S. market substantially underbuilt.

The quarterly Redfin analysis noted new homes rose from one in 13 homes for sale in September 2012 to one in eight homes in September 2017. However, housing starts--the number of new residential homes that have begun construction--remain 22 percent below their long-term average.

Redfin said new construction homes sold at an average premium of $87,000 in the third quarter compared to existing homes. New home prices were up 3.3 percent year-over-year compared to existing home prices, which grew by 7.9 percent in September.

Single-family building permits, which examine the new home pipeline, rose by 9.7 percent year-to-date through September compared to last year. More than three-quarters of the nearly 100 metro areas Redfin tracks had positive growth in the first eight months of the year in single-family permits compared to last year. New permits for multi-family units (buildings of five or more units, including both apartment and condo developments) were down 3.6 percent year to date.

"After almost a decade of underproduction, we are finally seeing a slow, steady increase in single-family housing starts, up 9 percent from a year ago," said Redfin chief economist Nela Richardson. "But high building costs are limiting the construction of homes that today's buyers can afford. This is why even in the midst of extreme inventory shortages for existing homes, new homes are sitting on the market instead of selling."

Redfin said the national average cost to a builder constructing a new home rose to $240,000 for single-family units in August, the highest since the Census Bureau began reporting this in 1988. Richardson said construction costs are rising in part because the availability of construction workers is still 25 percent below the peak in 2006 and there is also less competition among homebuilders. Housing material costs have also been rising, with lumber prices recently hitting their highest level on record since January 2003.

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