April 22, 2018

Wanted: Builders Building Homes

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Wanted: Builders Building Homes

Household formation can’t stay suppressed forever, and it’s ready to pop.

The inventory of homes for sale peaked at 4.5 million units in 2007, fueling the big drop in home prices that we’ve seen. Today, we have the opposite problem: Only 2.49 million homes are for sale, even though demand has risen some 10 percent from a year earlier.

At the same time, the shadow inventory of distressed homes is no longer the threat that it was. While seriously delinquent mortgages remain high, at 7 percent, their share of the market is down from a peak of 10 percent in 2009. That suggests inventory will further decline—unless home builders start building again. But most builders can’t do that because lenders are making few construction loans. Housing starts have been running at a 700,000 annualized pace since the beginning of the year, less than half the average rate over the last 50 years.

For much of the downturn we could get away with this low number of new starts because household formation had halted during the recession, as young adults found roommates to share costs or moved back in with their parents. But like a recoiled spring, household formation can’t stay suppressed forever, and it’s ready to pop. The economic recovery, even though it’s at a slow pace, is leading to notably higher household formation, census figures show. So we can expect to see increased housing demand over the next several years, assuming no return to recession. What could cause a slide? Political polarization in Washington could if the White House and Congress fail to resolve budget issues looming this year.

I believe lawmakers will find a compromise, and rising sales and rents will convince lenders to make construction loans again. Housing starts could jump by up to 70 percent in 2013, corresponding to about 1.2 million new homes. That’s still below the historical average of 1.5 million but an improvement. If builders can’t ramp up production, we’ll see price gains of near 10 percent annually—and that’s not healthy.

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