In 2013- 2014, early in this economic cycle, I attended a few economic conferences to get a feel what other people were saying about the status of the housing market. At that time, everyone seemed to share the sense that housing starts were going back to their 50 year average of 1,500,000 per year, in short order. Today, even though we are in year 8 of the economic cycle, this did not and has not happened. The “why” is two-fold; demographics and the fact that we have built a lot homes over the last decade and these homes simply don’t disappear.
A graph from Calculated Rick shows the boom in multifamily slowing down, thus making the single family residence construction a bigger part of starts going forward
Both charts show a slow steady rise from the lows in this cycle, that are the lowest level post WWII.
A longer look at starts and permits, separately, adjusting to population is depicted in this chart, again from Doug Short.
Early in our economic expansion, in the 1980s and ’90s, we needed to build a lot homes to accommodate the growth in our prime age labor force. This growth peaked in 2007. The prime age labor force is only now beginning to expand again.
From Calculated Risk
So what happens next?
Although a smaller segment of the market in terms of units sold, the new home sale is more important to the economy than the sale of an existing home. New home sales mean construction jobs, housing starts, big ticket item purchases, and all the other purchases that goes along with that.. Existing home sales, on the other hand are commission exchanges and can boost purchases at Home depot and moving van activity. New home sales, as we know, haven’t reached the levels that many housing analyst promised us early on.
From Doug Short
We have heard recently that builders can’t fill construction labor job and that, due to regulations, it cost too much to build smaller new homes.
While those things may be true, those factors are not responsible for the decreased construction. Builders know we are in a light demographic patch and this is significantly impacting the appetite for new home sales.
Demographically, the US is over represented in the ages of 17-29 and 49-65. Folks in these age ranges, typically do not buy new homes. This is why total mortgage demand for both new and existing homes combined has never breached over 5 million in the period between 2008-2016. If we didn’t have the extra 15%-20% of cash buyers gobbling up the existing inventory, then housing sales would be running between 4 to 4.5 million in recent years. Bluntly, America still smells too much like teen spirit (and older people) for a housing nirvana.
Other factors, too are preventing sales from reaching the levels anticipated by the nirvana analysts. For one, the lack of exotic loans is also taking a toll on sales
More here on this subject:
Previously, a lot of A paper loans (at least they appeared to be, on the books)had exotic debt structures that helped to finance the higher priced homes. Next, the size of the new homes offered for sale has changed. In 1975 median size home was 1,500 sq. ft. Today the median size for a new home is over 2,500 sq. ft. We have been increasing the size of new homes for decades and now are waking up to the reality that there is a shortage of lower priced or entry-level new homes.
The builders knew that the demand for lower priced homes from first time home buyers would be soft, even if they didn’t want to say it in public. So for the sake of profit margin they went big and sold big . We have to give them kudos for knowing where the real demand is. And this is why it is unlikely builders will start providing smaller, less expensive home models. Existing homes, which are cheaper and have geographical advantages over new tracts, will continue to provide the inventory for the first time home buyers going into the next decade. For now, we will need to wait for years 2020–2024 for our massive labor force to mature into home buying age before the demographics provide the appetite for new, entry-level homes. Also we need to respect the fact that we have built many homes over the last decades and homes last longer than the humans that occupy them.
Logan Mohtashami is a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.