Home Builders Still Playing Catch-Up Amid Construction Boom

There is a shortage of 1.35 million new construction homes since the Great Recession in the 35 largest US housing markets, according to a new report from Zillow.

That is the equivalent of having zero new homes built for 2.7 years, the company said.

Builders are racing to catch up, but supply chain disruptions and labor shortages are slowing their efforts.

The biggest new-construction shortfalls since 2008 have been in Dallas, Miami, Phoenix and Seattle. Chicago, Pittsburgh and Detroit have the biggest surpluses.

Supply Chain, Labor Issues and Pricing

At the same time, supply chain disruptions and labor shortages are having their inevitable effect on pricing. “Homebuilders and general contractors have kept their prices lower during the pandemic to win bids against competitors but they no longer are willing to take a hit to profits with materials prices skyrocketing with 13.2% over 12 months, since October 2021,” Andreis Bergeron (no relation), head of brokerage operations at Awning.com, tells GlobeSt.com. 

“With a shortage of over 5.5 million homes nationwide, we still have several years before supply will be able to meet home buying demand,” he continues. “During the past few years, we have seen aggressive year-over-year and month-over-month price growth and I do not see this market shifting to a buyers’ market any time soon.” 

Bergeron said, historically real estate is a cyclical asset class and buyers should expect a cool down from the hyper-competitive market seen in spring and summer. 

“While I expect velocity and prices to slow down in the coming months, macroeconomic forces such as higher inflation, historically low interest rates, and an undersupply of housing inventory will continue to drive prices higher,” he says. 

Fierce Competition for Homes That Are Out There

Additionally, the Freddie Mac House Price Index is an industry accepted standard for home price growth “and over the past year, we have seen a 20% price growth,” Bergeron said. “FMHPI forecasts a slow down to 4.4% price growth for 2022. While this is drastically lower than growth in 2021 buyers will still see competition.”

In Texas during the summer, Awning.com clients were constantly needing to put offers in at 7% to 15% over asking to win deals. 

“It was not uncommon to be competing against 10 to 20 buyers,” he said. “Over the past few months, this has changed. While we are certainly not shifting to a buyers’ market, buyers should expect a cool down in winter. This should allow home buyers with less appetizing terms like longer inspection periods and FHA loans to have a chance at winning the deal.”

Residential Building Permitting Highest Since 2007

There is some surface progress being made: New-home construction in the US reached an important benchmark in February, when more than 1.5 million residential building permits were issued over the prior 12 months, Zillow reported.

This level of activity indicates a housing boom that hasn’t been seen since August 2007. The momentum continued through the summer, reaching 1.69 million permits in the year ending in August. This building boom has drawn comparisons to the glut that characterized the Great Recession, but in truth, builders are only beginning to fill the hole of unmet demand that was dug in the fallout from the mid-2000s housing bust.

“Builders in recent months have put the pedal to the metal to get new homes up and meet a rush of demand, and we just saw the first full year of above-average construction since the mid-2000s housing crash,” Zillow senior economist Jeff Tucker said in prepared remarks. “This isn’t a new boom cycle of new construction so much as it’s an attempt to get even from the last bust. There is still a long way to go to catch up from more than a decade of slow construction, and some markets have longer to go than others.”

Average Household Size Shrinking

It’s also not clear whether simply keeping up with the pace of pre recession construction is enough to meet current demand, Zillow reported.

The average household size is about as small as it has ever been—there are about 2.5 people per household now, compared to three people per household as recently as the mid-1970s—meaning more homes are needed as the population grows.

There are also millions of “missing” households over the past 15 years: Households headed by people who, historically, would be expected to have their own home by their current age but have been unable or unwilling to move out on their own. Those households need to be taken into account when considering how many homes to build, according to Zillow.