WASHINGTON — Homeownership hit its lowest point in 25 years,
Though home prices have started to rise, new home construction has remained low as builders have struggled to gain momentum due to tight credit and shortages of developed lots and skilled labor.
Following the housing bust, new home construction fell to 445,000 units in 2009, the lowest level since the government started tracking housing starts in 1959.
Single family starts used to average around 1.2 million in the late 1990s and early 2000s. They reached 648,000 units in 2014 — half of what is considered normal.
"Years of underproduction have left us with a housing shortage and rising housing costs," said Lawrence Yun, chief economist at the National Association of Realtors, said at an industry conference on April 21. "People are getting squeezed on housing prices and rents."
The under production is mainly due to the withering of the building industry's infrastructure. Home construction peaked in 2006 when builders employed 3.4 million workers. By January 2011, that number had fallen to 2 million. Lumber mills closed, prices on building materials spiked and many construction workers moved to the oil and gas fields of Texas and North Dakota to find jobs.
Since January 2012, residential construction payrolls have expanded by 378,000, according to the National Association of Home Builders, but shortages of skilled construction still remain.
Meanwhile, demand for new homes has not rebounded as in other recoveries.
"There is a significant lack of first-time homebuyers," said David Crowe, chief economist at the National Association of Home Builders, during the same conference.
A great deal of demand for new homes comes from trade-up buyers that sell their existing home to first-time buyers. "Without that ladder effect, the builders simply don't have the demand out there to build more homes," Crowe said.
He went on to point out that builders that survived the housing bust have also become a lot more conservative. "They are not going to get ahead of the market this time."
But the builders are more optimistic now. NAHB's estimates single family housing starts will reach 737,000 this year, a 14% increase over 2014. And sales of new homes will hit 551,000 by year-end, up 25% from 2014, the group predicted.
Household formation is also picking up and credit conditions are easing. Nearly half the builders surveyed recently indicated that it's getting somewhat easier to hire new workers.
"If we get a break on labor shortages, that might be helpful and turn around the inventory, boosting supply," said Robert Denk, a senior economist for NAHB.
While most builders cater to the trade-up and luxury home buyers, some builders are finding it worthwhile to fish for first-time buyers too.
D.R. Horton, Inc. started building entry-level homes last April.
"We're not having any problem selling those houses," said Michael Murray, executive vice president and chief executive of DRH, during a conference call last week. "Our evidence would show that we think that any limitations for the entry level buyer are supply driven."
Murray also said that anyone with a "decent credit history can get a mortgage today." The Fort Worth-based builder has a mortgage banking subsidiary.
Publicly traded builders like D.R. Horton have the resources to attract skilled workers and maintain land. Horton controls 170,000 building lots nationwide and it spends $2 billion to $2.3 billion a year to replenish its land supply. But the smaller builders are not that fortunate.
Scott Anderson, the chief economist of Bank of the West, said that the smaller builders are having a harder time ramping up production.
"Credit is tight for a lot of builders," Anderson said in an interview, and there is not a lot of building in the suburbs.
Based in the San Francisco area, Anderson said that building lots are scarce and most the construction involves infill activity. "So you are seeing an acceleration of home prices and people scrambling to find a place to live."
Meanwhile, Anderson said the economy is improving, consumer confidence is rising and Millennials are feeling better about their economic and financial future.
"As demand continues to ramp up I think a lot of the supply constraints will start to weaken. Builders will find it easier to qualify for construction loans," the chief economist said.
"If there is clear excess demand in the housing market," Anderson added, "banks will be willing to step up and make loans in that space. It will be a slam dunk to make money and pay back the loans."
Banks held $238.6 billion in construction loans as of yearend 2014, up from $210 billion a year ago, according to the Federal Deposit Insurance Corp.
Mark Vitner, senior economist for Wells Fargo Securities, is also optimistic about the outlook for 2015, despite the low inventory.
"This year will mark a bit of a change," he said in an interview. "The supply of new homes will increase to the point where it will begin to alleviate some of the shortage."
He said that mortgage purchase applications are up 15% year over year.
"We are not going to see sales come roaring back this year. But I think we will see new home sales rise somewhere in the 8% to 12% range. And I think we will see fairly solid gains in new home construction because there is not that much inventory," he said. [New home sales totaled 436,000 in 2014, up from 429,000 in 2013.]
He said there isn't a lot of development activity in the suburbs where builders traditionally carried a lot of inventory. Instead, builders have become more adept at small-scale infill development that is occurring closer to the center city. These infill projects have higher development costs and much lower unit counts.
In a recent commentary, Wells Fargo economists said that "development activity, particularly in the suburbs, has been slow to get back on track and land, entitlements and infrastructure improvements are all more costly and cumbersome to deal with than in the past. As a result, new home construction may be hard pressed to ramp up in a major way even if demand strengthens more than currently expected."
