The US Census Bureau reported that new housing starts at an annual rate of 1.549 million in May, down a whopping 14.4% from April and 3.5% below the start rate in May 2021. The sudden calm is attributed to both rapid. High prices and a sharp rise in mortgage rates are making affordability out of the reach of many buyers.
Single-family home prices rose about 20% in 2021 driven by strong demand and exacerbated by severe shortages of materials and labor in the wake of the pandemic. But the housing crisis is not just an artifact of Covid’s supply chain disruption or the improvement in consumer debt profile and savings rates. The housing shortage in the United States has been growing for nearly four decades and the market continues to suffer from the effects of significant remnants of the financial crash in 2006.
The truth is, American housing construction has simply not kept pace with population growth since the 1980s. Housing starts of 1.8 million units in April brought us back at an annual rate to the 1998 level of new home construction and far behind the annual rate of 2.5 million units in the early 1970s. Meanwhile, the US population grew by more than 50% over the same period. And while continued interest rate increases by the Fed are weakening demand for the time being, the long-term imbalance will take many years to clear up.
While many remember the early 2000s as a period of oversupply in the residential property market, the truth is that new housing stock was only just beginning to pick up to meet population growth before the bottom collapsed. It wasn’t overbuilding per se, but rather a combination of factors related to how the building’s expansion was financed that led to the catastrophic meltdown that nearly wiped out the entire American economy. Ongoing changes resulting from the collapse have continued to impede a full recovery in new construction ever since.
The factors that led to the 2006 crash are many, including misguided government policy, the emergence of non-bank lending, mortgage securitization including underwriting lax mortgages, regulatory gaps, as well as greed and deception by mortgage originators. . It is estimated that $14 trillion in American wealth has been destroyed, and the average family has suffered a 39% decline in its net worth. Several reforms were adopted in mortgage lending and securitization in the wake of the massacre that made it difficult to qualify for a home purchase loan, but also pushed some potential buyers out of the market.
Construction of new privately owned housing units begins
Perhaps the most important factor in the construction of condominiums was the carnage that homebuilders suffered during the collapse. Before the Great Recession, the direct and indirect impact of residential construction and sales accounted for 15%-20% of US GDP. As a result of the ensuing crash in 2007-2009, more than half of all residential builders have left the industry due to financial stress or bankruptcy. Nearly a quarter of all US mortgages are in water, causing millions of homeowners to mail their keys to the bank. Millions of skilled construction workers left their trade behind to find other jobs, causing a skills deficit that has yet to be compensated. Many builders today testify that the pandemic has only exacerbated an already severe shortage of skilled labour.
The complexity of the general construction of housing is a mixture of new construction. The new offer of entry-level homes is particularly restricted. The share of new single-family units less than 1,400 square feet makes up only about 10% of all homes compared to about a third of all homes in the 1970s, leaving many first-time buyers out of the market.
Local zoning laws in many communities favor single homes and severely limit allowing multi-family units, even when local market demand favors them for townhouses. Meanwhile, the regulatory burden on contractors has increased dramatically over the past generation and according to the National Association of Home Builders they represent 25% of the cost of the average home. This makes the construction of housing for beginners fundamentally unprofitable.
The extent of the building shortfall can be seen in the accompanying graph showing the ratio of new housing to the population level since the early 1970s. The chart shows the general downward trend in homes started per 1,000 inhabitants and highlights how construction has yet to fully recover from the 2006 crash.
A report from the National Association of Realtors in 2021 notes that, on average, new housing units per year since 2001 have averaged about 1.25 million compared to 1.5 million from 1968 through 2000, resulting in an estimated deficit of 5.5 to 6.8 million homes. The report notes that “the scale of infrastructure and the current gap between supply and demand is enormous… and will require a significant national commitment to build more housing of all types.”
The current cooling of demand may provide some relief to allow stressed supply chains to normalize and to train more skilled workers. But the broader issue is complex, involving governments at every level to rethink lending, zoning, and regulatory policy to allow the market to respond appropriately.
Christopher A. Hopkins, CFA
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