It’s a shortage of skilled labor and higher development costs that are keeping construction starts low and housing inventory strapped, according to new data from Freddie Mac. According to the GSE, the number of open construction jobs has increased steadily since the housing crisis nearly a decade ago.
According to Freddie, the housing market has largely recovered since the Great Recession—with one holdout: inventory. “A decade after the Great Recession, the housing market is rebounding,” Freddie Mac reported. “House prices today are higher than they were at the peak in the summer of 2006, near-record-low mortgage rates have boosted housing demand, and sales volume is robust. The spoiler is the lean inventory of houses for sale.”
Currently, the nation has just a five-month supply of homes and, according to Freddie, “residential construction is not doing much to fill the gap.” “With home prices rising and housing demand high, we’d expect builders to increase production,” Freddie reported. “Instead, they are providing less housing (relative to population) than in the past. The main reasons appear to be a shortage of skilled labor and an increase in development costs.
The labor shortage is due to four factors, according to Freddie’s data: layoffs during the housing crisis, the difficulty the construction sector has in attracting young workers, drug use and drug testing failure among constructor workers and contractors, and stronger enforcement of immigration laws.
As for development costs, Freddie reports that the price of land has increased faster than the price of homes. “Since the cost of land is largely a fixed cost in a building project, the increase in the cost of land tends to make entry-level housing less profitable and thus tilts development toward higher-end housing,” the GSE reported.
More land-use regulations and lengthier permit approvals—about 3.5 months on average—also drive up development costs.
Still, despite the lagging inventory, Freddie reports the housing market is positioned for a good year.
“The housing market remains on track for a strong year despite a tight inventory of homes for sale,” the GSE reported. “Home sales bounced back in May after a relatively weak April, and sales year-to-date are running at an annual rate of 5.2 million units, compared to 4.7 million units for the first five months of 2016.”