Home Perspectives Realty Views: Lack of New Home Building Continues

Realty Views: Lack of New Home Building Continues

Even as housing experts, nonprofit organizations and government agencies – not to mention major media outlets – cry out for the need for more housing and greater affordability, the prime reason seems to be largely ignored – the lack of home building.

Some revealing statistics contained in a press briefing from the John Burns Real Estate Consulting Company shows that on the national level the volume of home building is less than half of what it was 14 years ago before the financial crisis that began in 2008. But with more population from immigration, births and demographic shifts into major markets we need more housing than ever before.

Simply put, more housing – especially of the affordable variety – is necessary. But controlling rents and instituting more regulation is not going to create more units. Building does that, and the current state of home building is, in a word, appalling.

Despite more than a decade of financial recovery and interest rates that are almost at historical lows, home construction in the top 10 markets of the U.S. is 54% lower than 14 years ago. None of the top housing markets have reached 2005 peak levels.

Dallas and Houston, which are building at a rate of 77% and 69%, respectively, of their 2005 peak and are the top two cities closest to achieving their peak home building levels. Yet Atlanta is building at a only 42% and Phoenix at 39% of peak levels. The three worst among the top 10 markets for single-family building permits compared to 2005 are Chicago at 18%, Riverside-San Bernardino at 21% and Las Vegas at 29%. Chicago, for instance, has fallen from the seventh-largest single-family housing market in the country to the 32nd-largest market.

The Burns Company, one of the most well-known consultants to builders and developers nationally, noted that they get asked many times when this country will get back to producing one million or more single-family homes in a year – and their answer is: “When the builders can make money selling one million homes.”

They cite the many cost increases at every stage of development that have driven up expenditures to a point where it is difficult to build a home that can be priced at $250,000 – the price point buyers can afford in locations that most people want to live.

“There is plenty of total housing demand, but most of the demand is below today’s new home prices,” Erik Franks, senior vice president of the Burns Company, explained. “In 2003, before subprime lenders broke the rules, half of the new homes in the country were priced below $191,000. Today, half of new homes are priced above $313,000, and 15 of the 18 largest publicly traded home builders sport an average sales price north of $365,000.”

Just to get back to 2005 levels and a million new homes produced annually, builders are scrapping to find ways to keep prices down in the range where the demand is. According to a Burns survey, 55% of entry-level builders are building on smaller lots, 45% are building smaller homes, 39% are using less costly materials and 33% are moving further from the job centers.

But with greater regulation comes increased costs, not to mention various government impact fees, such as environmental and development fees, that are adding thousands of dollars to the cost of a home that is passed through to buyers. As the Burns group mentioned, there is a mismatch between demand and supply of new, lower-cost homes in desirable areas.

A better description might be dysfunction, since there appears to be a keen awareness of this critical problem at all levels of government and in the building industry. But solutions are hard to come by and real action even harder to achieve.

Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at terryross1@cs.com or call (949) 457-4922.

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