Survey Says New Construction Shortage to Persist Until At Least 2022
MBA NewsLink Staff
New home construction shortages-the bane of current housing market-is likely to remain below historical averages until at least 2022, according to a survey of economists and real estate analysts conducted by Zillow Inc., Seattle, and Pulsenomics LLC, Boston.
A slight majority of panelists expect the level of new single-family construction remain below one million units until 2022 or later, with the most pessimistic projections pushing this off until 2029. One in five surveyed said that threshold will be reached by the end of next year, while a quarter are targeting 2021.
"The American housing landscape was shaped in a big way by the drive for the classic American dream; swaths of cities were set aside solely for single-family, detached homes, with big minimum lot sizes and slow local review processes," said Zillow Director of Economic Research Skylar Olsen. "Jump ahead three decades and housing affordability is a major issue across the country. Those same practices now arguably limit the ability of the next generation to become homeowners."
Olsen said without new homes to meet population growth and replace an aging housing stock, home buying is expected to move further out of reach. "The most-popular solutions among experts all ultimately suggest rolling back these rules to increase flexibility and get more projects through the process faster," she said.
Zillow noted while home values have recovered since the Great Recession and, in many cases, surpassed their pre-recession peaks, single-family home construction activity has continued to languish. The for-sale market has experienced persistently low inventory over the past few years.
Last month, the Mortgage Bankers Association's Builder Applications Survey data for July show mortgage applications for new home purchases increased by 11 percent from June and by 31.2 percent from a year ago. MBA estimated new single-family home sales at a seasonally adjusted annual rate of 754,000 units in July, an increase of 16.7 percent from the June pace of 646,000 units.
Meanwhile, the National Association of Home Builder's Housing Market Index showed builder confidence in the market for newly built single-family homes rose one point to 66 in August, although the measure charting sales expectations in the next six months fell by one point to 70.
Zillow said a continued low rate of new construction would likely keep demand high for the relatively limited single-family homes that are available and keep many in the rental market for longer, putting price pressure on both the for-sale and rental housing markets. It noted historically, single-family housing starts have averaged more than one million units a month and reached heights of more than 1.8 million in 2006 before plummeting during the Great Recession. Activity has picked back up since then, but has yet to again reach the historic average.
Zillow said the rate of U.S. home construction has lagged behind what would typically be expected given the rate of population growth over the past decade. Issues such as scarce land, a worker shortage and high costs for permits and materials have plagued builders in recent years, making it increasingly difficult to profitably build large numbers of homes--especially at price points accessible to low- and middle-income home buyers.
When asked on actions that would most effectively increase the supply of single-family housing, panelists expressed the strongest preference for relaxing local review regulations for projects of a certain size--56% of respondents included this option among their three most-preferred. Reducing mandatory minimum lot sizes (38% of respondents) and easing the land subdivision process for landowners (38%) were the next most commonly chosen.
Builders' eagerness to increase activity is tied closely to their expectation of future home value growth. Panelists have lowered their growth projections since this time last year. On average, panelists expect home values to grow 3.6% in 2019, then slow to 2.5% in 2020 and 2.2% in 2021, before picking back up to 2.6% in 2022. As of July, home values were growing at a 5.2% annual pace.
"Overall, the outlook for U.S. home prices remains positive in both nominal and inflation-adjusted terms. But it continues to soften, despite diminished mortgage rates and a low supply of entry-level homes," said Pulsenomics Founder Terry Loebs. "Appreciation expected through 2023 has fallen to an average annual rate of 2.9 percent--the most subdued five-year panel-wide projection in the past seven years--and experts who believe there is downside risk to their forecast outnumber those who see upside by a ratio of more than four-to-one."