Rising demand calls for new construction
After housing starts increased in June, experts weighed in, explaining why 2017 could be the best year for new construction in a decade.
Experts explained the growing imbalance between the number of homes for sale and the demand allowed builders to construct more homes.
“Most likely a result of the trending imbalance between homes for sale and demand for new homes to purchase, housing starts finally edged up in the month of June to 8.3%,” said Greg Parsons, Semper Capital Management CEO and head of investment committee. “The need to balance the growing demand for housing with a dwindling supply, coupled with a strong economy, has given builders an opportunity to break ground and build more homes.”
Building permits for single-family housing also increased, showing the uptick in housing starts in June will continue in the months to come. One expert, who served as Fannie Mae’s chief economist for more than 20 years, says the upward trend will continue throughout 2017.
“With new home sales and household formations still moving higher, we expect that housing starts will increase further in 2017, although there will be months in which they are down temporarily,” Nationwide Chief Economist David Berson said. “For all of 2017, total starts should be around 1.25 million units, the highest level since 2007.”
Another economist agreed, saying the increase will continue throughout the year, especially in the Midwest and Northeast.
“Single-family homes continue to show steady growth, which is an encouraging sign as we move through the warm summer months, especially in areas like the Midwest and Northeast,” said Bill Banfield, Quicken Loans executive vice president of capital markets. “More importantly, starts and permits are up year-over-year, showing promising opportunity for the housing market.”
One expert explained that while housing starts increased in June, much more housing is needed in order to bring relief to the competitive market.
“Though a recovery in housing starts in June is welcome news, more consistent gains are needed to help rebalance the housing market,” said Lawrence Yun, National Association of Realtors chief economist. “The latest 1.22 million in total housing starts is still well below the historical average of 1.5 million.”
“That is why the country is experiencing a stubborn housing shortage,” Yun said. “With rising population and steady job gains, drastically more new home construction is needed to fully and satisfactorily house new households that will be formed this year and upcoming years.”
And this low level new homes for sale is driving up home prices on new residential properties, one expert pointed out.
“However, we will continue to monitor the impact of affordability concerns, especially in the first-time buyer segment,” PwC Partner Scott Volling said. “Rising material costs have helped drive the median price of new homes sold in May to an all-time high of $345,800, according to the U.S. Census, which may be an indicator that certain segments of buyers will be priced out of the market and that builders may be limited in their ability to fully capitalize on favorable demand.”
But while many experts believe housing starts will continue to increase throughout the year, one expert pointed out the latest employment report showed a drop in construction jobs, which could create a pull on new construction.
“The employment situation report, released earlier this month, reported a decline of 1,500 residential construction jobs between May and June,” said Mark Fleming, First American Financial Corp. chief economist. “Building a home does not readily lend itself to outsourcing and automation.”
“Home building still requires manual labor as a key input into the production process,” Fleming said. “It’s very hard to increase housing starts without increasing residential construction employment.”
“This month’s decline and, more importantly, a lack of growth in residential construction jobs is a significant impediment to increasing the pace of housing starts,” he said.