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Real Estate

Rising construction costs squeeze housing supply

Stalled immigration is one reason

One major obstacle stands in the way of a balanced housing market, and that is the lack of home sales, according to an article by Selma Hepp for Pacific Union Insights.

Housing demand in major cities and urban areas is high, however the price to build is expensive, driving prices continually higher, according to the article.

Millennials, especially, are struggling to save enough money for a home since prices are rising faster than their pay. Today, the typical first-time homebuyer purchases a home that costs 2.6 times his or her annual income.

The lack of new construction is also a hindrance to the market, according to the article, but construction spending continues to rise each year, rising 10.4% annually in January, according to the U.S. Census Bureau. 

Since the housing crisis, fewer immigrants have entered the U.S., causing the cost of building a house to rise, as there have not been as many immigrants to employ in the construction industry, according to Q1 Zillow Home Price Expectation Survey. Since 2007, undocumented immigration has dropped 20%. If immigration rates continue to fall, the market could continue to see rising prices for new construction, and a greater focus placed on building high-end homes. 

The supply, however, must reach the increasing demand for new housing within the center of the city, the article for Pacific Union Insights states. For many, companies such as Uber, Yelp and Airbnb have made urban living more attractive.

Younger households have lower homeownership rates, according to the article. In fact, for households aged 35 to 44, rates are at an all-time low at 10 percentage points lower that the previous lows in 1984 and 2005.

The 233,000-drop in homeowner households last year brought the total decline since the 2006 peak to 1.7 million.

Two factors play a large role in this decline: Generation X and Millennials.

“With the gen-Xers accounting for such a significant share of the first-time and trade-up markets, the drop in their homeownership rates may well be a more critical factor in the ongoing weakness of the owner-occupied segment than the slow transition of the Millennial generation (born 1985–2004) into homebuying,” according to the 2015 State of the Nation’s Housing report from the Joint Center for Housing Studies of Harvard University.

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