In my last column, I argued for the strength of the construction economy in the U.S. to keep us out of any recession that might be brought on by external influences like a slowing China economy, terrorism both in Europe and now here after the terrible events in Orlando, or the uncertainty of a presidential election cycle that has many consumers skittish. And since my last musings I shared here, there has been a poll of economists conducted by leading news organizations that sees the risk of falling into recession over the next twelve months at 21%, hardly odds I would like to take a bet on, even in a horse race.
But some new data released by the U.S. Census Bureau and the Department of Housing and Urban Development recently gives me some pause, because it speaks to the issue of housing affordability, and provides strong evidence that the cost of producing new housing is making it difficult to build homes for a significant number of typical new home buyers.
Each year at the beginning of June, the Census Bureau traditionally releases data they call “Characteristics of New Housing” for the previous year, based on the same survey used to generate the familiar metrics on housing starts and new home sales. The National Association of Home Builders (NAHB) analyzed this recent data, which shows that the median sales price of single-family homes started in 2015 was just under $300,000. Roughly 78% of the new homes were priced between $150,000 and $500,000, and 93% between $150,000 and a $1 million. Slightly less than 6% were priced under $150,000, and an extremely small share were under $100,000.
In contrast, NAHB reported that its 2015 Home Buyer Preferences Survey showed that 31% of recent and prospective home buyers expect to pay less than $150,000 for a home, and 15% even expect to pay under $100,000.
So why don’t the new home price points and buyer’s price expectations square? As I have reported before, the costs of acquiring land, developing it into a lot, and constructing a home on it often make it impossible to produce a new home at a price substantially below $150,000.
Beyond the simple arithmetic illustrated above that creates a challenge for producing lower cost housing, another major factor that persists is the shortage of workers and subcontractors in key trades that has also caused the majority of builders to increase house prices. The count of unfilled jobs in the overall construction sector remained elevated in April after a post-recession high in March. However, the count of total jobs in the residential construction sector has declined for two straight months.
It has been widely reported that Fed Chair Janet Yellin has a favorite metric she likes in conducting her analysis of the economy, which is the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS). In an analysis conducted by the NAHB, the number of open construction sector jobs on a seasonally adjusted basis fell slightly to 200,000 in April, after a cycle high of 215,000 in March. The March estimate represents the highest monthly count of job openings since May 2007.
The open position rate, or job openings as a percent of total employment, was 2.9% for April, near the cycle high. On a three-month moving average basis, the open position rate for the construction sector increased to 3%. The overall trend for open construction jobs has been increasing since the end of the Great Recession, which is consistent with survey data indicating that access to labor remains a top business challenge for builders.
Finally, it is important to note the NAHB recently reported that government regulation, on average, accounts for an astonishing 24.3% of the price of a new home, which translates to about $84,000 based on the most recent data on the average price of new homes built for sale. Regulatory cost factors like these, heaped onto land prices, construction costs, and labor shortages leave little mystery about why the lower 30% of the home buying public is often priced out of the market for new homes.
These factors appear to be coming together to create a housing market beyond the reach of nearly one-third of all prospective home buyers, which may continue to drive the move towards multi-family rental housing as recent trends have indicated. I hope the pendulum can swing back, and that housing affordability goes back to the industry averages of past decades that allows a new home to be within reach of most home buyers.