This is not to say that the nation’s homebuilders have fully “recovered.” Far from it. They are increasing production, slowly, but they continue to battle significant headwinds, and they are still not building at historically normal levels, never mind accounting for huge pent-up demand. A historically normal level of single-family housing starts, going back 40 years or so, is about 1.1 million per year. That fell to a low of about 350,000 in the spring of 2009. Now it’s back to about 850,000.
“Whatever progress has been made in new home sales since the economic recovery began, recent data makes it clear that builders have been struggling to ramp up new single-family home construction for years,” said Aaron Terrazas, senior economist at Zillow. “If building levels had largely stayed near their historic norms and had kept pace with population growth, there would be millions more single-family homes nationwide, and the current imbalance between housing supply and housing demand would not be nearly pronounced.”
The housing shortage has been the one glaring villain holding back a more robust housing recovery. Demand is strong, thanks to basic demographics, an improving economy and a stronger labor market. The trouble is that most of that demand is on the low end of the market, where supply is leanest.
“Builders need to manage rising construction costs to keep their homes competitively priced for the newcomers to the housing market,” said Danushka Nanayakkara-Skillington, senior economist at the National Association of Home Builders. “While affordability conditions remain positive and the labor market sees low unemployment, prospective homebuyers face increased uncertainties as interest rates trend higher and trade war concerns grow.”
Mortgage rates are higher now than they were one year ago, but not by a lot, and they are still, by historical measures, pretty low. It is the anemic growth in new home construction that is raising some red flags, even at the Federal Reserve.
“In contrast to other sectors, residential construction activity appeared to have softened somewhat, possibly reflecting declining home affordability, higher mortgage rates, scarcity of available lots in certain cities, and delays in building approvals,” according to the minutes of the Fed’s meeting that concluded Aug. 1.
The housing recovery may have peaked, but it isn’t over. As more supply hits the market, sales will grow again. Consumer credit scores are still strengthening, a huge generation is aging into its homebuying years, and another huge generation is downsizing into active adult communities and urban condominium developments. While there is a new affinity for renting, that demand can fuel home construction and the overall housing economy as well.