No Bubble Yet But A Dearth Of Construction Could Hurt

Dated: May 22 2018

Views: 318

No bubble yet – but a dearth of construction could hurt

WASHINGTON – May 21, 2018 – An increase in housing supply is crucial to the health and sustainability of the real estate market and the economy, according to speakers at a session organized by the Realtor® University Richard J. Rosenthal Center for Real Estate Studies during the 2018 Realtors Legislative Meetings & Trade Expo. The session, "Outlook for Home Prices and Residential Construction," focused on rapidly rising home prices, tight home inventories and whether or not the country is in the middle of a bubble.

All three of the panelists agreed that more new home construction is necessary to meet rising demand from increasing household formation and to curtail the affordability crisis.

"Young adults of today are forming households at a much lower rate than previous generations, and high housing costs contribute to that," said Len Kiefer, deputy chief economist for Freddie Mac. According to Kiefer, one third to three quarters of U.S. markets have an elevated home price-to-income ratio, and many major markets, such as Austin, Miami and Portland, are getting close to surpassing their 2008 ratio.

"Are we in a bubble? No, not currently," said Kiefer. He defended that opinion by outlining ways the current market is different from the one leading to the recession, such as no signs of over leveraging and the very low ratios of household income to debt. In addition, the aggregate risk of mortgages in the U.S. is also comparatively low.

"Those risky loans that contributed to the last bubble have largely gone away in the current market," Kiefer said.

However, the panelists quickly pointed out that just because there's no current bubble doesn't mean the U.S. won't eventually have one. If supply and demand continue to become more and more out of balance, it could trigger a fast price growth, said NAR Chief Economist Lawrence Yun.

"A best-case scenario is largely dependent on new home construction," said Yun. "An increase in inventory will provide some much-needed release."

Ken Simonson, chief economist for Associated General Contractors of America, discussed how low employment in construction is also contributing to the lag in new home construction, despite high demand.

"Construction saw a 30 percent drop in employment in the previous decade, the largest drop of any industry. They also began laying people off a year before the recession began and did not start hiring again until much later than other industries," said Simonson. This led to difficulty in bringing skilled laborers back to the industry.

"Construction companies are having to hire people with no experience and spend more time and money on training," Simonson said.

Material costs have also contributed to the low rate of construction. The price of diesel fuel, which is used in earth moving vehicles and in transporting materials, has risen 42 percent since 2017. The cost of lumber and plywood has also increased 11 percent, copper and brass mill shapes have risen 10 percent and ready-mix concrete has risen 7 percent.

© 2018 Florida Realtors®

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