Housing starts plummeted to a 1.09 million-unit, annualized rate in March, well below expectations, with the single-family market hit harder than multifamily. The only increases occurred in the multifamily market in the Northeast. The slowdown in multifamily reflects overbuilding in some markets and is to be expected. The same is not true for the single-family market, where demand has consistently outstripped supply and prices continue to accelerate.
First-time buyers are finally coming back to the market, according to recent mortgage data. However, the only way they can afford to buy is to qualify for low down-payment, highly leveraged loans, which exacerbates price increases at the entry level. These are the not the subprime loans of the past; they are buyers with higher FICO score who have qualifying income.
The shortfall in single-family home construction is largely due to escalating fees and land-use constraints. Builders are complaining that they can’t build at entry-level prices, given the rise in “impact fees” they have to pay to cover schools, utilities, roads, etc. These fees surged as real estate revenues plummeted during the crisis and in the years that followed. Fees have yet to fall since the rebound in real estate values and revenues; now they account for an outsized share of construction costs, which is pushing builders upscale on construction and forcing them to go for higher value over volume.
Materials costs have also risen in recent years. That, and a shortfall in less expensive immigrant labor, is also pushing builders into upscale instead of the downscale construction more typical this late in the cycle. Builders typically follow the money as cycles mature: Early in the cycle they build fewer, more expensive homes; later in the cycle, they usually build more of the less-expensive homes for the masses. In fact, new home prices actually dipped below existing home values during the height of home construction and urban sprawl back in 2005 before the housing bust.
Last month, applications for building permits were also weak, suggesting that the single-family market, in particular, will remain tight and undersupplied. The stock of move-in ready, entry-level homes is scarce, which means bidding wars will remain common.
Bottom Line: The housing market recovery has yet to deliver on single-family home construction activity, despite improving demand from entry-level buyers. This is one of many factors holding back overall growth in the economy. Housing is one of the largest accelerants for employment and spending. The shortfall in supply relative to demand also further complicates the Federal Reserve’s decision to raise rates because it drives prices higher while it limits economic growth.