National New Home Construction
August 23, 2017
Granger MacDonald
National Association of Home Builders
Against a backdrop of modest economic growth, the U.S. housing market is on target to produce about 1.2 million new units — 855,000 single-family and 379,000 multifamily — this year as it continues its slow recovery from the depths of the Great Recession. At present, Gross Domestic Product (GDP) is growing by about 2 percent annually, the labor market is tight, the unemployment rate is decreasing and the Federal Reserve Board is proceeding with carefully calibrated interest rate increases.
Given these conditions, housing starts next year should rise to 1.33 million — about 961,000 single-family and 365,000 multifamily — according to NAHB’s housing forecast. By the end of 2018, rates for 30-year fixed-rate mortgages are likely to be at about 5 percent. Looking further to the future, NAHB’s projections call for 1.44 million starts in 2019. Most important, single-family starts are expected to reach 1 million for the first time since 2007.
Although this is a significant benchmark, it represents only 83 percent of the 1.3 million units that NAHB analysis shows are necessary to meet demand generated by household formations and replace homes that are removed from the nation’s housing inventory.
Even as NAHB’s projections generally call for smooth sailing, a number of supplyside headwinds are constraining production and keeping it lower than is necessary to meet ongoing population growth and replacement needs: labor, lot supply, lending and lumber.
Labor
Nationwide, a shortage of skilled labor is the most pressing problem that builders (and remodelers) are currently experiencing. Not only is the lack of workers acute, there are proportionally more vacancies in construction than in other industries. NAHB and its education arm, HBI, are working to bring more skilled workers into the field, and individual home builder associations around the country are reaching out to local school systems and students to promote careers in the construction trades. NAHB is also addressing broader issues at the policy level, including education programs and federal guest worker programs.
Lot Supply
A shortage of buildable lots is another significant drag on the market. Approximately 64 percent of NAHB members surveyed for the monthly NAHB Wells Fargo Housing Market Index in May 2016 reported that lot supply in their market is low or very low. This is largely due to the effects of the Great Recession when the land development pipeline almost shut down and many lot developers left the industry. In addition to supply, another concerning factor is cost. In recent years, the regulatory costs associated with lot development and home construction have increased 29 percent, according to NAHB member surveys.
Lending
Although AD&C (acquisition, development and construction) loans are more readily available to builders now than just a few years ago, securing financing is still challenging. In particular, many smaller local banks have reduced AD&C lending noticeably or even stopped making AD&C loans.
Lumber
Lumber — both cost and supply — is perhaps the most unpredictable factor affecting the housing market today. The trade agreement that has governed imports of softwood lumber from Canada since 2006 effectively expired at the end of 2016. Since that time, the U.S. Commerce Department has imposed a 19.88 percent countervailing duty and a 6.87 percent anti-dumping duty on lumber imported from Canada. About a third of the lumber used in new home construction in the U.S. is imported from Canada, so these duties are expected to result in the loss of more than 11,300 fulltime jobs, $685.5 million in wages and salaries for U.S. workers, and $481.8 million in taxes and other revenue for governments in the U.S. Equally important, such duties drive up the cost of new home construction. Further complicating the issue, more than 20 percent of builders polled in the May survey for the NAHB/Wells Fargo
Housing Market Index reported a shortage of framing lumber. Closer to home, the Arizona housing market appears to be on track to outperform the national market over the next three years with production percentage increases that are higher than the national rate.
Together, the Phoenix-Mesa-Scottsdale and Tucson Metropolitan Statistical Areas will account for more than 80 percent of Arizona’s new home production through the end of 2019.
