By Dr Denver H. Bubble
Another insightful article from the Wall Street Journal echoing a theme we have been harping on, a massive shortage of housing supply. The article The Next Housing Crisis: A Historic Shortage of New Homes highlights that "Home construction per household a decade after the bust remains near the lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City." While the Denver metro area economy has been running at its fullest potential since the last market crash one would think this would lead to an increase in houses being built. This is not the case. The article cites that "land and construction costs have roughly doubled since the end of the last boom a decade ago," according to a builder from the article. The builder has shifted his construction from starter to mid to high priced properties that have the thickest profit margins. Industry experts are saying that combination of striker housing regulations, a shortage of construction labor and a land is driving the crisis.
From the article, "the National Association of Home Builders estimates builders will start fewer than 900,000 new homes in 2018, less than the roughly 1.3 million homes needed to keep up with population growth. The overall inventory of new and existing homes for sale hit its lowest level on record in the fourth quarter of 2017, at 1.48 million, according to the National Association of Realtors." This shortage is what is pushing up prices in our market with inventory being only around 3,000 to 4,000 versus a historical average of 13 thousand. Prices roses national 6.3%, and 8% in the metro Denver area. This increase is making already expensive area more pricer and first-time buyers having a harder time cracking the market as the national increase was double the rate of income growth and three times the rate of inflation."
Builders are complaining about quite a few factors that have contributed to lower construction of new houses. The push to send high schoolers to college has shrunk enrollment at trade schools, which produce skilled labor which builders depend on. A decline in immigrants is lowering the supply of unskilled labors. The construction workforce in the U.S. declined to 10.5 million in 2016, from 10.6 million in 2010, which was the bottom of the real estate crash. Both types of labor are necessary for building homes. And less labor means higher wages, which reduced profit margins which is why builders are targeting the mid to high-end housing marketing for new builds because that's where the money is.
An interesting point is raised from the article as well. The article reads " Economists say that in many large metropolitan areas, suburbanization might simply have reached its limits, as potential buyers increasingly reject long commutes. During the 1950s, buying a home in a new suburb, where land was plentiful and cheap, often meant driving half an hour to a job in the city. Today commutes from new developments can be several times that long." Given that the infrastructure in the metro Denver was built for a 1980s size population, some of the cheaper exburbs of Denver aren't seeing the boom that the metro area has seen most likely to the rejection of long commutes. “There’s a tremendous mismatch between the places where people want to live and the places where it’s easiest to build,” says Edward Glaeser, a professor of economics at Harvard University who studies constraints on housing supply.
Another increase in the cost of construction has been from regulatory compliance. " In 2016, the National Association of Home Builders estimated regulatory costs added nearly $85,000 to the cost of a home, up more than 30% since 2011."
The supply crunch is going to continue to be with our metro Denver area housing market for a while. The costs have continued to increase almost doubling in five years. The costs of being driven by the labor and compliance costs. Unless we can increase the supply of homes on the market the price is going to march higher until finally pricing out all first-time buyers forcing a correction to a more realistic price level.