Is Housing Supply Relief on the Way?

The Story of Housing in America for the past several years has been all about the lack of available housing. That, said housing analysts, could be changing.

Would-be home buyers, particularly Millennials who are increasingly flexing their muscles, face historically low housing inventories from which to choose. Home builders have been hamstrung by labor shortages, rising supply costs and limited spaces in which to build. The existing home market has been hampered by homeowners who, still mindful of the Great Recession, have opted to stay in place and wait for more favorable conditions.

Mark Fleming, chief economists with First American Financial Corp., Santa Ana, Calif., estimates the annual amount of housing completions necessary just to keep pace with growing millennial demand and eliminate the housing shortage is estimated to be 1.5 million units (the housing starts historical average). Earlier this month, HUD and the Census Bureau estimated housing starts at a seasonally adjusted annual pace of 1.32 million units. The Mortgage Bankers Association’s most recent Builder Applications Survey estimated new home sales at a seasonally adjusted annual rate of 682,000 units in March.

But Fleming and other analysts see reason for optimism after a lengthy period of volatility. He said the March housing starts pace could “modestly alleviate” the supply shortage. Housing starts increased by 1.9 percent month over month and by nearly 11 percent higher from a year ago. Housing completions increased by 1.9 percent from a year ago, which Fleming said “provides some immediate relief” for the supply shortage.

“Two important trends signal that some modest relief for the housing supply shortage is on the way–the continued year-over-year growth in completions means more homes on the market in the short-term and the dramatic rise in construction employment this month indicates housing construction is likely to increase in the months ahead,” Fleming said.

Mark Vitner, senior economist with Wells Fargo Securities, Charlotte, N.C., said despite a dip in single-family starts, “data for the first three months of the year are unambiguously positive and indicate that new home construction has more momentum than previous reports had indicated.”

Vitner noted February data was revised up significantly in both housing starts and housing permits, particularly because of stronger growth in the West, where starts through the first three months of the year are up by 34.2 percent from last year and single-family starts are up 26.5 percent.

“The West is where economic growth has been the strongest and home building has generally lagged behind population and employment growth,” Vitner said. “With home prices soaring, governments have become more proactive at trying to pave the way for more residential development, even in California. Home buyers out West are also seeking out more affordable markets in California’s Inland Empire, the Central Valley, and in Nevada, Arizona and Utah.”

However, Vitner also noted the South and the West have accounted for a near-record 76.5 percent of housing starts over the past year. “The unusually high concentration of housing starts in these two regions may be heightening concerns about shortages of lots, labor and building materials,” he said.

Fleming said home builders are beginning to find more workers, which should also help alleviate some housing shortages. “The number of residential construction jobs is now 4.5 percent higher than a year ago,” he said. “The growth in residential construction jobs supports further improvement in the pace of home building because building a home does not readily lend itself to outsourcing and automation. Additionally, while builders continue to voice frustration about the lack of developed lots and the rise in material costs, builder confidence remains high amidst strong buyer demand.”

Fleming said continued year-over-year growth in completions means more homes on the market in the short-term and the dramatic rise in construction employment this month “indicates housing construction is likely to increase in the months ahead. Residential construction employment is easing as a headwind to future housing starts.”

(Mark Fleming’s blog can be accessed at http://blog.firstam.com/economics.)