New Construction Having a Tough Time Keeping Up
At a recent summit of economists sponsored by the National Association of Realtors (NAR), the economists expressed optimism at the prospects for the housing market in 2020. But there were 4 areas of concern. The esteemed chief economist for the NAR, Lawrence Yun, said, “Real Estate is on firm ground, with little chance of price declines. However, in order for the market to be healthier, more supply is needed to assure home prices as well as rents do not consistently outgrow income gains.”
Here are the four areas of concern for the economists at the NAR conference:
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Some of the economists expressed concern about the cost of construction lending. While the federal funds rate is currently 1.75% compared with 2.25% a year ago, it would appear on the surface to be good news for construction borrowers. However, the cost of construction loans may not have come down, according to a study by the National Association of Homebuilders (NAH). As a matter of fact, there is evidence to suggest that the easing of monetary policy, did not come down proportionately for construction loans according to the NAH study.
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With the improvement in the employment numbers, more and more workers are leaving construction jobs and seeking employment in better paying and higher prestige industries. As a result, builders are struggling to find workers to keep projects on schedule. For example, in Texas, construction workers are leaving the industry for considerably higher paying jobs in the energy sector, particularly fracking. Also, the Great Recession of 2008 – 2009 drove many employees out of the construction field, as new building projects drastically slowed. Many of those construction workers have not returned, as they have found new careers in other industries. Additionally, unlike most of America’s history, young people don’t seem to be as interested in entering the field as past generations did.
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Another issue negatively impacting new construction is zoning laws. Danushka Nanayakkarahe, assistant vice president at the (NAH), said that nationally, two thirds of homebuilders reported that there aren’t enough lots to build on. She added that there needs to be a loosening of zoning rules to free up more land for home construction.
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Lastly, high regulatory costs are proving to be challenging for homebuilders. Amazingly, regulatory costs for homebuilding are almost 25%. For multifamily construction, the percent can be as high as 32%. Ben Carson, Secretary of the Department of Urban Development who spoke at the conference, said that about 80% of government regulations that restrict home construction are state and local ordinances. According to Carson, the Trump administration is working hard to address the 20 or so percent that are federal regulations.
But according to a November 2019 article in the Wall Street Journal, another reason for the slow down in home construction is that, “Aging baby boomers are the biggest culprits because many are staying healthier later in life and choosing not to downsize. Some look around at the lack of smaller, less expensive homes and are loathe to get into bidding wars with their children’s generation to get one.”
At any rate, if the economy continues to expand, there is certainly reason to expect the situation to improve, as confidence rises. An idea being floated is to issue visas to foreigners with construction experience.