In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses housing starts.
- New home construction rose in July to 896,000 (annualized pace), up 6 percent over the month and showing a decent gain of 21 percent from a year ago. The monthly gain was in multifamily and not in single-family new units, though both property types are up from one year ago.
- Even with the increase, housing starts are still well below the long-term average of 1.5 million new units each year. In other words, do not expect any notable relief to the housing inventory shortage any time soon. Another good 50 percent increase in new home construction is needed to help relieve the inventory shortage conditions.
- The inventory of newly constructed homes is essentially at a 50-year low. Months' supply – how many months it would take to exhaust the inventory at the current sales pace – is also bumping into low figures. Whatever the builders are constructing is getting sold. Yet, more building activity is not taking place.
- Because of excessive government regulation arising from the Dodd-Frank financial regulatory law and the uncertainty related to international capital rules (Basel III), construction loans have been very difficult to come by. Many small-time local home builders, therefore, have all but thrown in the towel. But the big builders who can tap Wall Street funds like Toll Brothers and Lennar are smiling. Less competition from small home builders will no doubt lead to an environment of more tacit collusion among large builders. A case of the revenge of economic laws on American consumers because of excessive government regulation?
- From consumers’ perspective, inventory will continue to remain tight in most of the country. Multiple bidding is not going away in those markets with acute shortages, even with rising mortgage rates.
- At least new homes are built for durability in the U.S., providing the basis for wealth building for U.S. homeowners and their inheritors. In Japan, homes typically get demolished after 30 or 40 years with zero value at the end, other than the land value. Part of the reason is a culture of wanting to experience renewal. But it could also be due to the very high inheritance tax in Japan. Why leave something behind if the government is essentially going take a big chunk of your asset?