Five L’s Hamper New Home Construction and Affordability

constructionThe good news? In the past year, 909,000 new single-family homes have been started, and it’s projected that by 2020 starts on new home construction will hit the one million mark. The bad news? The need will be for 1.2 million, a leading economist said Thursday.

“The forecast is that home prices will continue to outpace income growth,” Robert Dietz, Chief Economist and Senior Vice President for Economics and Housing Policy for the National Association of Home Builders said.

Dietz was part of a panel discussion about home building at the annual National Association of Real Estate Editors conference held this week in Las Vegas. Ben Caballero of HomesUSA.com and Jim Boyd of Toll Brothers were also in the panel.

Dietz said that affordability for new homes peaked in 2012, and is currently at a level of 62. “That’s because of (home) price increases,” he said, adding that the level could hit 50 by 2020.

“One of the ways we can get out of this trap is by building more homes,” he said, adding that a tight existing home market inventory should normally create favorable conditions for home builders, but that there hasn’t been a larger supply response from the industry.

Why? Dietz said that the five L’s come into play — labor, lots, lending, local regulatory concerns, and lumber prices.

Some of the biggest issues, he said, involve labor and regulatory costs.

“Labor has been an issue for the homebuilding industry for the past three or four years,” Dietz said. “The job openings rate now is actually higher than it was at the peak of the building boom around 2007, despite the fact that we’re building fewer homes.”

Local regulatory obligations contribute a great deal to the cost of a new home, too, the economist said. “A quarter of a new home’s purchase price is regulatory — up to 29 percent of the cost,” he said.

And regulatory costs impact multifamily housing starts as well, with new analysis from the NAHB and National Multifamily Housing Council revealing that 90 percent of multifamily developers typically incur hard costs of fees paid to local governments — when applying for zoning approval and in construction authorization.

“The cost was highest for changes to building codes over the past 10 years, accounting for 7  percent of the cost of developing the property on average,” the new study revealed.

Boyd said that his company has seen the impact of labor issues and regulatory requirements — particularly in more regulation-heavy states like California.

“What used to take six months to build, now takes seven to eight months to build,” he said. Because the sheer size of Toll Brothers, they can meet their targets, but that largely depends on the good long-term relationships they have with their subcontractors, he added.

The company also has four plants that produce the framing panels, which allows them to buy lumber in bulk. Doing so also means that they can cut down on their labor needs and reduce lumber costs.

“Our biggest issue is regulatory — it used to take one to two years to get from concept to shoves to homes, and how it takes three to four years,” Boyd said, adding that one project in California actually took them 20 years.

“That’s really the biggest governor on our ability to meet demand,” he said. “The demand side of our business is pretty fabulous right now.”

Boyd said that Toll Brothers worked with California legislators on a bill that would loosen some requirements regarding building near transportation hubs. The legislation would have required cities to increase density, loosen parking requirements and height requirements around these hubs.

“It died in committee,” he said. “But it was a start.”

Caballero said that because the hunt is always on for more affordable building sites in the North Texas area, Dallas builders often find themselves needing to know the building regulations for multiple cities.

“These poor builders in the Dallas area have 130-something cities to deal with to get building permits from,” he said.  

Caballero also said that he found in Texas, often Realtors didn’t understand the process of selling new construction. Agents are often used to doing things one way and find that they don’t understand why builders may want to use a different contract, or a specific title company, or that they can’t guarantee a move-in date.

“It’s an education process to help Realtors understand that builders aren’t being arbitrary, they have reasons for what they are doing,” he said, adding that his company’s education arm now offers continuing education classes for Realtors to help them understand the differences between selling existing homes and new construction.

“It’s sold out every time,” he said. “I’m encouraged by that.”

Dietz said that he and other economists are seeing a change in momentum in the housing market. Census Bureau statistics show that 2010 to 2016 was a rental dominated market, with 2015 being the peak year for multifamily housing starts.

Builder confidence is at 70 — a nearly two-decade high, Dietz said. “Demand is really strong,” he added. “There’s a lack of inventory, but we just need to find ways to build that housing.”

One of those ways, he says, is likely going to be in an expanding townhouse market.

“I am particularly bullish about the townhome market,” Dietz said. Currently, it accounts for 12 percent of single-family starts, but “it checks off the boxes for a lot of people.”

The average townhome is about 2,000 square feet, he said, and where townhomes are located is often attractive to people who may be wanting something different than a condo, but also not a detached single family home.

“They want to become homeowners, and want a single family aesthetic —  like a front door — and they want walkability,” Dietz said of the typical townhome buyer.

But since townhomes create an opportunity for higher density development with lots of amenities nearby like shopping, dining and recreation, Dietz sees the townhome market being a real boon for builders, buyers and cities looking for ways to increase homes in areas where land is expensive.

“Builders will build what and where the demand is,” Dietz said. “I believe the demand is there.”