Did housing starts nosedive because of a labor shortage?

Analysts trying to figure out where it went wrong in February

Housing analysts are still trying to figure out why housing starts nose-dived in February.

Privately owned housing starts in February plummeted 17%, down to an annualized 897,000 from the revised January estimate of 1,081,000, with drops in the Northeast, Midwest and West leading the collapse.

Single-family housing starts in February were at a rate of 593,000; this is 14.9% below the revised January figure of 697,000.

Some looked at the weather as the primary culprit despite the big drop in the West region, but now thoughts are turning to other factors like whether there’s a skilled labor shortage, or whether younger buyers are still staying on the sidelines.

“The housing market had a slow quarter mostly due to the intense winter in the Northeast slowing home buying there. That activity will snap back and create a stronger than usual demand in the spring,” said Jeff Taylor, managing partner at Digital Risk. “That said, most of the reason for the lower issuance numbers to this point is actually structural, not weather-driven.

“An underlying trend we observe is that the expected millennial-led boom isn't happening, Taylor said.  “There a constriction in supply that has driven up prices in urban areas where millennials most want to own housing.”

Concurrently, Taylor argued, there is loose supply and lower prices in the suburbs because these young buyers don't want to buy there. He said that delayed buying from the winter will lead to a stronger second quarter.

“Overall, this means that for investors, lenders and financial institutions will continue to perform better than builders because of the structural imbalance of too little available housing in already developed areas and lack of demand where there is room to build,” he said.

Meanwhile, Ed Stansfield, chief property economist at Capital Economics, looks at the theory – among other problems – there are not enough skilled workers.  He finds this isn’t the case, necesarily.

“Anecdotal evidence suggests that labor shortages continue to hold back homebuilding. However, there are few signs in the macroeconomic data of a widespread problem,” Stansfield said. “Instead, we expect stronger housing demand to support homebuilding and construction employment over the course of this year.

“…(R)esidential construction employment growth has comfortably outpaced that of the whole economy since 2012. This implies that homebuilders have had little difficulty hiring new workers. That said, just because homebuilders are hiring at faster rates does not mean that they wouldn’t hire more workers were they available,” he said. “After all, employment in the sector is still low by past standards.

However, if homebuilders were struggling to employ new construction workers, we would expect to see a spike in wage growth as firms attempted to lure workers into the sector. There has been no evidence of this, with the hourly earnings of construction workers rising at an average annual rate of 2.1% in the 12 months to February, exactly equal to the whole-economy rate over the same period.”

The bottom line for Stansfield?

“The upshot is that we don’t expect labor shortages to hold back homebuilding this year,” he said. “Once the effects of the severe winter weather dissipate, the strength of the wider economy, looser credit conditions and a rebound in household formation should contribute to a steady rise in both homebuilding and construction employment.”

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