Can New Construction Dig Us Out of the Hole We’re In?
So what do you think about this hot market we’re in? In my 30+ years of being a real estate appraiser, I have never seen a market like we are in. New construction, or lack thereof, has played a big role in where we are.
The combination of low-interest rates and even lower inventory has made it the perfect storm for skyrocketing home prices. Today I would like to discuss the second part of the puzzle which is the low inventory but more specifically low new construction inventory.
We are now paying the price for having not invested in new home construction after the last recession that occurred around 2008. This lack of focus on adding more new home inventory after the recession may be the result of all the builders that went belly up with all of the inventory they had at the time of the real estate market’s collapse.
New construction was going like gangbusters and many builders had a lot of houses on hand. When the collapse occurred they were stuck with this inventory and could not sell it.
The builders that could not weather this storm went bankrupt and got out of the business. New home construction since the recession has been rather anemic compared to what it was at the top of the market.
So what effect did all of this have on the current state of affairs? Part of what we are seeing now more than likely was brought on, at least partially, by the minimal amount of new construction.
Because the inventory of homes has not been growing to meet the demand we are now in a lopsided market with a lot more demand than supply. Here are some charts I came up with to visualize what we have been through.
The first chart shows the trend in building permits for Jefferson County and the second chart is for Shelby County. Do you see a trend? It’s obvious that we are nowhere near the level we were at the top of the market.
The chart below shows the trend in median home prices for new construction. Prices are continuing to rise, which is expected given the imbalance between supply and demand.
U.S. vs Alabama Unemployment Rate
The demand for housing can be tied in part to the unemployment rate. If people have a good-paying job that they are happy with they will be more likely to buy a home. After the recession of 2008, the national unemployment rate peaked at around 10%, which was about double what it was before the recession.
With an increased unemployment rate, and the market flooded with foreclosure homes, there was little interest in new construction. At the time there was plenty of inventory to match the demand.
At some point during the recovery when employment started to improve an effort should have been made to encourage new construction to match the increased demand that was sure to come. But this did not happen and the lack of forethought has brought us to where we are now.
Of course, the nation did take a hit during COVID when unemployment spiked at close to 15%. It has since declined from this high amount, however overall we are not where we were before the pandemic and certain sectors are worse off than others.
Even though the current national unemployment rate is not at its lowest we still have a strong demand for housing that we are struggling to meet. At 3.4% for May, Alabama has one of the lowest unemployment rates in the nation which is helping fuel demand for homes in our state.
Interest Rates
Interest rates are at historical lows and this has created a strong demand from buyers that want to become homeowners. The low-interest rates have made it more affordable than ever to buy a home with an affordable payment.
Shortly after the pandemic interest rates dropped below 3% which set off a buying frenzy that is still going strong. With a lack of new construction occurring over the last 10-15 years, we are feeling the squeeze in housing inventory.
Interest rates have shown signs that they are starting to creep up and I believe this may be what is needed to tamp down the current housing demand. If interest rates go higher some buyers may decide not to buy and short of getting a quick boost in housing inventory, this seems to be the only answer to getting more balance in the market.
Conclusion
What are your thoughts on new construction trends? Is it possible to quickly build enough homes to solve our supply needs? If you are in a different market than I am in are you seeing the same thing? Let me know your thoughts by leaving a comment below and as always thanks for reading.
Love the charts Tom. It’s good to see more permits pulled lately. We are seeing a similar thing in Sacramento, though we are way down from 2005 levels (looks like you are too).
Thanks, Ryan. Yes, we are down. It’s interesting to see if we can “catch up” so that the supply and demand dynamic is more in balance.