How the Home building Struggles Impact Summit County Real Estate
We hear people say quite frequently that the housing market is about to crash or that it will definitely begin to become a more balanced market this year. This just is not true, and there are several factors impacting the housing market with the biggest one being supply chain issues and costs of homebuilding.
Inman, a leading real estate news source, interviewed a number of businesses in the building industry and provided great insight into the causes of rising homebuilding costs. Stuart Miller who is the Executive Chairman for Lennar (the country’s largest homebuilding company) had this to say, “While demand is strong, supply is short and constrained. The ability to actually build and deliver homes has been slowed by the supply chain that is all but broken, by the workforce that is short in supply, and the intense competition for scarce entitled land assets. Therefore, the supply of homes has remained quite limited and is not prone to overbuilding.”
Robert Dietz who is the National Association of Home Builders Chief Economist says that the root of the inventory problem reaches back to the Great Recession. Prior to the Great Recession, the country had a record-high residential vacancy rate of 13.4%. That overbuilding required a decline in home production. That resulted in about half of private homebuilders in the country going out of business.
In addition to the mass workforce exodus and tougher lending standards, the recession also ushered in more stringent zoning laws. Zoning laws prevent the addition of the number of homes we need to fill the supply. Many zoning laws only allow single family homes, where it could be more cost effective to build a multi-family unit such as a duplex or tri-plex.
Additionally, cost increases in building supplies have increased the cost of building a home by 22% over the past year alone. Lumber prices are about three times their cost pre-Covid. Additionally, the Biden administration announced a tariff increase on Canadian softwood from 9% to 17.9% which will cause even higher prices for homebuilders and homebuyers.
While many homebuyers think they can hold out for another year or two in hopes of a more balanced market, industry experts feel that it will take up to another decade to fix the deep-seated issues which keep homebuilders from closing the inventory gap.
By building 1.2 – 1.3 million single family homes in a year, that only reduces our housing deficit by 100,000 units in that year. At that pace, it will take about 10 years to really catch up. And housing prices will continue to be high as long as there is a housing deficit.
This is good news for sellers who will continue to see their home value’s increase. But buyers should not wait for a turn in the market. Prices will continue to increase over the next few years, and that coupled with rising interest rates mean higher costs for buyers who wait.