More hurricane pain: Fewer homes, shortage of construction workers

The need to rebuild and repair houses following Hurricanes Harvey and Irma is likely to put a damper on new construction and aggravate the inventory shortage.

The same crews that build new homes are also used to renovate existing ones, said Mark Fleming, chief economist at First American Financial Corp.

After any storm, "there is a material slowdown in the pace of new construction because all of the construction workers are busy repairing the existing homes," Fleming said. "So the housing stock stops growing as much as it had been, but that's really the only longer-term implication."

Even before the recent storms, there was a labor shortage in the home building industry.

"This will only serve to exacerbate the existing shortage-of-supply problem. It's hard to know at this junction if the magnitude of that exacerbation is significant or not," Fleming said.

In August, the residential construction industry employed 786,400 people, the second most since the housing bust, according to preliminary data from the Bureau of Labor Statistics.

There were 1.4 million people employed in residential building at its peak in August 2006. Employment bottomed out at 528,000 in February 2011.

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"Labor shortages have been the story of the construction underperformance for the last three years," said Redfin Chief Economist Nela Richardson. "A lot of those workers will be diverted to rebuilding and repair, not just the homes, but the infrastructure damaged during the storm. So it is a bleak picture from a new construction point of view."

The storms were responsible for September's three-point drop in the National Association of Home Builders/Wells Fargo Housing Market Index.

"The recent hurricanes have intensified our members' concerns about the availability of labor and the cost of building materials," NAHB Chairman Granger MacDonald, a homebuilder and developer from Kerrville, Texas, said in a press release.

From discussions with builders and material dealers, "our takeaway is absolutely across the board labor is the critical, critical pain point that we're getting a tremendous amount of feedback on this month," said Todd Tomalak, the vice president of research at John Burns Real Estate Consulting.

During Hurricane Katrina, which made landfall on Aug. 28, 2005, the rebuilding in the Gulfport-Biloxi, Miss., area took eight years. Across the state, wages went up 12% on average per each construction worker, causing a reallocation of the labor force from other parts of the country.

"Katrina stands out amongst all of them for the degree to which the housing stock was significantly damaged," Fleming said.

The magnitude of damage in coastal Louisiana and Mississippi was well above what happened in Houston, but there could be a similar effect in Texas and Florida as material costs and labor costs rise in those areas, Tomalak said.

Storm-driven labor shortages are also affecting the building supply companies, he said. There are even shortages being reported for the workers that install electric and natural gas equipment in a new home, said Jody Kahn, the senior vice president of research at John Burns Real Estate Consulting.

"Everything is backed up because the utility crews have gone to the hurricane zone to help with the recovery process,” she said.

Building inspectors and insurance adjustors are being taken from other parts of the country as well, she added. That makes it more challenging to predict when a new home can be delivered or even when construction can start.

"It is a bidding war for a finite pool of labor in the area," Tomalak said.

For sales of existing homes in areas affected by a hurricane, there are also short-term price and transaction disruptions.

"As a buyer, my first question is, The home I was thinking of buying, has it been damaged, and if it's been damaged, does that make me want to walk away from the transaction?" Fleming said.

Sales generally slump while prices rise immediately after a storm. While that seems counterintuitive, usually these storms remove "a sizable portion of inventory and it's really inventory, not demand, that is driving prices, especially now."

Prior to Katrina, which made landfall 45 miles southeast of New Orleans, the median sales price in that city was $156,500, according to Attom Data Solutions.

There was no data for September. But over the next 15 months, the lowest median price was $184,500 in October 2006, and for six months during that time frame, the median was over $200,000.

But New Orleans was susceptible to the real estate bust and in the first three months of 2007, the median went from $190,000 to $112,000.

Since June 2009, New Orleans' median sales price has for the most part been at levels seen before the storm.

That suggests prices are affected for the first two to three months after the storm. And demand appears to have returned in Houston, not just from potential owner-occupants but property investors as well, Richardson said.

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