Home builders face a long timeline to fill the nation's housing shortage. But they still have plenty to offer in a difficult market.
The nation has a shortage of approximately 1.5 million homes, according to the National Association of Home Builders. The lack of inventory is the result of what NAHB Senior Vice President and Chief Economist Rob Dietz describes as the five "Ls", factors which arose following the last housing crisis.
"It took us about a decade to get into this housing deficit, and it's probably going to take us about a decade to get out," said Dietz.
Rob Dietz, senior vice president and chief economist at the National Association of Home Builders.
Herman Farrer/Herman Farrer Photography
Today's high rates have created a "lock-in" effect for existing housing stock, and builders have swooped in to capture demand. A third of current market inventory is new construction, according to the NAHB, and builders are developing smaller, more competitive properties with sales incentives expected to stay as long as rates remain elevated.
National Mortgage News spoke with Dietz about the timeline to solve the inventory shortage, how new homes stack up against existing inventory, and sectors of the industry to watch.
This interview has been edited for length and clarity.
Why is there an inventory shortage?
Rob Dietz: The short-run factor is the lock-in effect. The long-run cause is that over the last decade, homebuilding activity was lower than you would have expected given the size of the population and household formation growth.
We've been warning since around 2014 that that lack of home building was due to constraints on the supply side. We called those the 5 "L's" for builders: a lack of labor; and a lack of lots to build on; lending; lumber; and legal and regulatory issues.
Construction loans for builders right now average 12% to 14% annualized effective interest rates. That financing goes to about 60% of building activity, that's how the typical private homebuilder gets money to acquire land, develop lots and construct the home.
There's been challenges in the building material supply chain. Regarding legal and regulatory burdens, it's just simply more expensive to build anything today because of zoning rules, more building codes, design and setback requirements. They all make it expensive to build and limit the amount of supply.
We do a survey once every five years and in the latest version, we found about a quarter of the final sales prices of typical newly built single family homes is due not to materials or labor, but rather to various regulatory costs, fees and taxes.
Those five Ls produced a decade-long period where we had under-construction, and we now estimate a housing deficit of 1.5 million homes.
How long could the housing shortage last?
Rob Dietz: It took us about a decade to get into this housing deficit, and it's probably going to take us about a decade to get out. We've estimated that if the market was building a bit more than 1.1 million homes per year, you're reducing the housing deficit.
That 1.1 million comes from roughly 800,000 to 900,000 single family homes you need a year to keep up with household formation growth, and an additional 200,000 to 300,000 for constructing new second homes and replacing those destroyed in natural disasters or those that simply age out of the housing stock.
Over the next two years, maybe we will get closer to 1.2 million. At that level, you're potentially reducing the housing deficit by about 100,000 single-family homes a year. It's going to take probably 5 to 10 years to make a really meaningful dent. We think that happens in the back half of this decade.
Can the housing shortage be erased?
Rob Dietz: Yes. We had a surplus of homes on the market around 2011. There was a glut of homes from a period of building around 2006 due to demand that didn't exist, in terms of the demographics, because of some of the poor mortgage underwriting rules.
Look to the 2030s when some of these dynamics reverse. But in the meantime these challenges are really hard to address. I've told policymakers for a number of years there's no single, simple, scalable solution.
One thing I sort of lose patience with, sometimes I go to conferences or testify before state legislatures and there'll be somebody there saying, "If we just fix this single issue, the housing deficit will go away." It could be improving zoning rules.
It doesn't work that way. Yes, we need to fix zoning rules, but then the constraint becomes the skilled labor shortage. Any given month, the construction industry is short 200,000 to 400,000 workers. We've got a wave of retirements coming, and productivity in the residential construction labor force has lagged productivity growth for the overall economy. It's a headcount issue and a worker productivity issue.
I'm optimistic that in the next five to six years we'll see improvements, but people need to be realistic that it's really about incremental gains in the volume of construction as we move forward.
The latest federal data shows overall housing starts at a seasonally adjusted annual rate of 1.35 million units. How do you consider that pace?
Rob Dietz: I don't use (those numbers) as a gauge to help the market. This time of year, the year-to-date numbers are really good. Our forecast for the year is about 1 million single family starts, that would be comparable to 2022. For 2024, we're doing 10% better than 2023.
I think we'll end the year probably closer to a 5% to 6% gain. Multifamily construction this year is taking a really large drop, our forecast is for about a 30% decline in starts. Last year, there were 1 million apartments under construction. That was the highest count since 1973, so there was a certain amount of oversupply there.
Our forecast is for another 200 basis points of Federal Funds rate cuts going into 2026. Maybe we change that after the election, given some of the bond market expectations. But if that's the case, you would expect some of these builder loan rates to go down by roughly 200 basis points as well. That really helps the availability of capital and should help the single family and multifamily markets.
What incentives are home builders offering today?
Rob Dietz: Buydowns and price cuts are the two most important incentives. Mortgage rate buydowns are more likely to be used by the biggest builders that have deeper pockets. Price cuts have been used by roughly a quarter of builders and tend to be fairly small, in the 5% to 6% range.
If you look at median new home pricing in Census data, a year ago the price was $426,000, and (this) September it was $426,000. So whereas resale pricing continues to go up, median new home prices actually kind of leveled off.
Right now a third of market inventory is new construction. It includes homes that haven't started the construction process or homes that are in the construction process. But historically, new construction was only 12% of inventory. So high home prices on the resale side and the lock-in effect has led new construction to expand its footprint.
Other builder incentives include offering upgrades at no or reduced costs, helping buyers sell their existing home, and energy efficiency programs. And this is rarely used, but giveaways like a free car or raffles.
Will builders stop offering buydowns if mortgage rates drop to the 6%, or even 5% range?
Rob Dietz: I'm not sure there's a magic number, but my expectation is builders will be reducing incentives as we get closer to 6%.Those programs aren't free, they're the cost of doing business. One of the things we've seen in some consumer data we've undertaken is that if rates were just below 6%, you get a disproportionate amount of demand getting priced back in the market.
The latest federal data also showed rising sales for new homes priced under $300,000. How are homebuilders approaching that more affordable segment?
Rob Dietz: Zoning issues and regulatory costs make it a challenge to build a smaller home.
We've done research that shows the per square foot construction cost for a smaller home is higher than the per square foot cost of a larger home. As the home grows, you're adding in relatively lower-cost spaces. You're adding in bedrooms or open rooms, whereas every home has to have a kitchen, for example, and that's a higher-cost room. So economies of scale go up as home size increases.
There are some reasons for optimism. Markets that have undertaken zoning reforms allowing for small lot single-family units have seen gains. If you look at data going back roughly 20 years, about a third of new homes were built on fifth of an acre lots or smaller. Today, closer to 65% of homes are built on lots of a fifth of an acre or smaller. So there's a bit of a myth that builders keep building on bigger and bigger lots.
The share of new construction on those small lots has increased, which to me is an indication that if a community can zone for a little more density, they can see some increase in supply. The market that absolutely proves that case is townhouse construction. Its market share is about 17% of single-family home building, which appears to be an all-time high. My expectation is we'll see more townhouse construction take place. It's a great way to add some entry-level housing.
Are there any misconceptions from consumers about new construction being more expensive?
Rob Dietz: I think frustrated homebuyers should absolutely give new construction a second look. There's a lot of different considerations in terms of the cost of housing, including maintenance and utility costs.
One of the benefits with new construction is the operating cost is going to be lower. When you buy new construction, you're not buying a fixer-upper that's going to require remodeling and repairs. The property is going to be more energy efficient. The home is going to be more resilient, so it's got lower risk in terms of natural disaster-type issues.
What else should we pay attention to in the home builder industry?
Rob Dietz: One of the most underreported parts of the market is the remodeling market. Homeowners have more than $30 trillion in home equity, and we have an aging housing stock where the typical age of a single family home is above 40 years old, and there's a lot of aging in place.
Not everyone's going to move to Florida or Phoenix to retire. So as mortgage rates come down, we expect the remodeling market to continue to grow. The other thing to keep in mind, single family build-for-rent is about 10% of single family construction. It used to be 3% and that's carved out a permanent larger niche within the housing industry.
Do you think either incoming administration can have an immediate impact on the housing shortage? (The NAHB does not endorse candidates.)
Rob Dietz: Housing stakeholders should take some appreciation that housing is a tier one issue in this election. That's the first time that's happened in decades. Even with implemented policies, it's simply just going to take some time to really reduce the housing deficit. It's now about turning that recognition into policy action, and then allowing market forces to work.
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