Mark Fleming

SANTA ANA, CA—Despite the encouraging number of residential-construction jobs being added to the US market in December 2017, productivity needs to increase in order to meet inventory demand for housing, First American Financial Corp.'s chief economist Mark Fleming says. The firm reports that housing jobs increased by 8,200 to a level of 780,000 in December, a 1.1% increase over November and a 3.6% increase over a year ago.

Nevertheless, housing inventory is still well below demand. “As 2018 begins, one of the most important concerns for the housing market is the availability of inventory for sale,” said Fleming in a prepared statement. He noted in the firm's estimation of potential home sales in December that homeownership demand will remain strong in 2018, particularly as more Millennials make the lifestyle decisions that drive the desire to be a homeowner, such as getting married and having children; yet, existing homeowners, the largest source of supply for the housing market, are increasingly unwilling to sell. “Whether unable to find something affordable to buy because of the shortage of inventory, or rising mortgage rates means that even borrowing the same amount of money costs more each month, the incentive to move for existing homeowners is declining.”

More homebuilding is one solution to this dilemma. And while December's large increase in residential-construction jobs is a positive sign for 2018, homebuilders still face three challenges to more building at the moment, said Fleming: limited access to buildable lots with the appropriate infrastructure, rising building material costs as exemplified in the cost of lumber and labor constraints. “These three Ls—land, lumber and labor—are important for the production of new homes.”

Moreover, improving the productivity of already-employed laborers is another solution. “Homebuilding has traditionally been a labor-intensive endeavor that has not (yet) benefited from productivity enhancements like many other industries in recent years,” said Fleming. He adds that houses are still largely build individually, on site and mostly by hand, as has been done for many decades.

Productivity of construction labor can be measured simply by looking at the number of housing units started and compare it to the amount of construction labor available—in other words, housing starts per worker, said Fleming. “Prior to the recession, the industry was starting more than two homes for every construction worker, but that level of productivity declined dramatically as the housing crisis hit and the recession followed.”

Fleming added that since the recession, labor productivity has improved, but seems to have settled at just above 1.5 starts per worker. “Based on today's employment situation report, I estimate that productivity of construction labor is 1.7 starts per worker, about the same level of productivity as a year ago. Finding ways to increase the productivity of construction workers is critically important to alleviating the labor-shortage challenge and the gap between household formation and homebuilding.”

The homebuilding job site of the future needs to look very different than the current picture if we hope to solve the long-run shortage of housing supply, Fleming concluded.

As we recently reported, First American reported that homeowners are beginning to feel like they're prisoners in their own homes due to the dearth of supply, according to a recent report from First American Financial Corp. On the other hand, housing starts appear to be increasing, which could ease the situation a bit, another report from the firm states.

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Carrie Rossenfeld

Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.