Lamenting Housing Supply

It’s often repeated in major metro areas and elsewhere throughout the country: Housing supply is not meeting housing demand in terms of price, condition and location.
To be sure, national trends do not always apply to high end markets like Greenwich, New York, San Francisco and Los Angeles.  But large scale demographic trends, such as baby boomers downsizing and millennials looking for first homes, are relevant in all major metro markets and at all price ranges.  Many prospective purchasers are looking for housing at the affordable end of a community’s price range, whatever that price range might be.  The pricing curve (and salary curve) might be higher in major coastal markets, but it’s still a curve.
I Just Want a Simple Home I Can Afford
Is a modestly sized new or renovated home within 30 minutes of work within the price range that a college graduate (or two) can afford too much to ask?
Let’s consider a few points on the supply side:
  • Homeowners are living longer and are wealthier than generations before.  They can stay put longer.  A smaller fraction of housing convenient to employment may be available to buy today than a decade ago.
  • Available inventory in convenient in fill locations tends to be older and can suffer from functional obsolescence (dated or poor floor plan).  
  • Employment mix and job opportunities increasingly funnels demand to supply constrained markets.
  • According to the National Association of Homebuilders construction labor is in demand.  The International Housing Association announced at its annual meeting earlier this month its focus on the global shortage of skilled labor for the residential construction industry.  Skilled workers are aging and not being replaced.  The increase in young adults seeking a college education has left a shortage of labor overall and a concentration of labor in their 50s and 60s.
  • Prior generations built housing on the outskirts of town.  These days, the outskirts may not be near highways and train stations. Sprawling suburbs may have reached their limits.  
  • Construction companies left holding inventory they couldn’t afford to carry during the last recession may have left the industry or approach it differently now: build fewer homes at a time, reach for higher profit margins on luxury homes or build to suit with purchaser financing.
  • Cost of construction is increasing.  The building process is more complex, lengthier and costs more (especially in those high priced in-fill locations).  Oh, and according to the most recent Federal Reserve Beige Book prices for construction materials continue to rise briskly, especially lumber, drywall and concrete. The National Association of Home Builders has this chart of framing and lumber prices on its home page:

  • There is a floor.  Selling below assessed value or replacement cost does happen in difficult times, but it only makes sense for a few sellers.  Otherwise market prices prevail or the home isn’t sold.
  • Houses are available for renovation, but the older generations have been there and done that and are ready to move on, and the younger generations are too busy working two jobs to do it – even if they could find financing.
  • The elimination of interest deductibility on new indebtedness may incentivize owners to stay in their current home and not sell.

So what does all this mean to a prospective purchaser? 

Supply side conditions may not change much in the near future.  New construction is costly.  One-off renovation takes time, particularly in infill locations.  Labor shortages are likely to endure for the time being, especially as unemployment declines.  In the meanwhile, housing demand will continue to rise as more and more millennials continue to form families, and major portions of them will need to live within commuting distance to major metropolitan areas (whether or not they like the inventory currently available).  Purchasers may need to adjust expectations.
Take heart though.  Every era has its challenges and innovations.  Home buyers may have to compromise on price, condition or location, but on the upside the buyer just may be able to catch a ride in a self driving car, and during the commute, get work done on a laptop that recognizes your face, app order a coffee to be waiting upon arrival, skype with friends on vacation and get confirmation that your groceries and smashing new tailor made clothes via body scan were delivered to your porch with all that money earned by taking that job and money saved by choosing that house.  Not bad.
Mary-Stuart G Freydberg
Your Real Estate Matters
20 years professional real estate advice
Photo by: David Siglin

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