Wells Fargo: Rising Builder Costs Dampen Housing Affordability

Wells Fargo Securities, Charlotte, N.C., said the recovery in home prices has contributed positively to homeowner equity and household balance sheets, it has also intensified affordability concerns in many pockets of the country, as home price appreciation is outpacing wage gains.

In a special commentary (http://image.mail1.wf.com/lib/fe8d13727664027a7c/m/1/homebuilder-costs-20161031.pdf?utm_source=SFMC&utm_medium=email&utm_campaign=&utm_content=&utm_term=7230679&sid=40566), Well Fargo Senior Economist Mark Vitner said affordability concerns are further exacerbated by rising costs with building new homes, creating a gap between new and existing home prices of nearly $75,000. Scarcity of buildable lots, government regulations and labor shortages across the nation, particularly among construction workers, has added to the problem.

The report noted the median price of a new home has averaged $306,000 since the start of the year, up from $296,400 in 2015 and $221,800 in 2010.

“Part of the run-up in the median price has to do with changes in the composition of homes being built,” the report said. “The share of new homes priced at the higher end has grown, with roughly 16 percent priced above $500,000. In contrast, the proportion of new homes priced under $150,000 continues to decline, falling 12.4 percentage points over the past 10 years, to a low of 5.2 percent in 2015. Despite this change, home buyers still expect to pay much less for their home.”

Vitner noted the National Association of Home Builders found that 31 percent of recent and prospective home buyers expect to pay less than $150,000 for a home and 15 percent expect to pay under $100,000) The availability of supply at this price point, however, is scarce in many markets.

“Increased government mandates have become one of the largest issues facing developers,” the report said. “With many local governments pressed for funds, developers now have to pick up more of the costs of providing infrastructure for new residential development.”

The construction industry is also facing a shortage of qualified workers. The share of builders reporting a “serious shortage” or “some shortage” of construction labor has spiked, rising 35 percent from a low of 21 percent in 2012 to 56 percent in 2016. Availability of subcontractors is also scarce, as 58 percent of builders indicated a shortage in 2016.

“The lack of qualified workers is not necessarily a surprise, considering how much the construction workforce thinned during the aftermath of the Great Recession,” Vitner said. “However, the losses have been exacerbated in recent years by tightened immigration laws and the retirement of many skilled construction workers. The reported worker shortage is also somewhat disconcerting given the modest recovery in homebuilding.” He added that the worker shortage has also resulted in higher wages, adding to homebuilding costs.

Additionally, the report noted less apartment construction as the increased pace of deliveries is pushing vacancy rates higher and financing for new apartment projects has become more difficult to obtain. “That said, we still see apartment building holding at a fairly strong level and have overall housing starts trending modestly higher over the next two years,” Vitner said. “The pace of the increase is now noticeably slower, however.

Vitner added that affordability remains a challenge for many potential home buyers, particularly with higher rent burdens and student loan debt making it difficult for younger households to save enough for a down payment.