Real Estate

Experts: New home starts create bottleneck to economic recovery

Inventory shortages expected to continue

Privately owned housing starts decreased in April, a factor that experts say is continuing to block economic recovery.

As new home starts and building permits decrease, inventory shortages are only heightened in the competitive housing market, driving prices to new highs.

“With housing starts declining in April, inventory shortages will continue for a longer period of time” said Lawrence Yun, National Association of Realtors chief economist.

“The intensifying housing shortage will push up home prices and rents, and easily above wage growth and the broad consumer price inflation,” Yun said. “This continued, slow pace of construction of new homes is a major bottleneck to a faster economic and housing recovery.”

And he isn’t the only one to note the importance of housing starts to the market.

“The lack of inventory of homes for sale is one of the most pressing challenges in the housing market today, and new homes are the source of supply that increases the total stock of housing to meet our nation’s growing demand,” said Mark Fleming, First American Financial Corp. chief economist.

Experts were not expecting the decrease in starts this month, and were actually waiting for an increase after the decline in March, according the Nationwide Chief Economist David Berson, who served as chief economist at Fannie Mae for over 20 years. However, even this decrease is expected to be temporary.

“The weakness in April housing starts is likely to be short-lived, as the demand for housing units, both owner-occupied and rental, continues to climb,” Berson said.

And the report did contain some good news as the decrease in housing starts can be credited to the multifamily sector, not single-family homes.

“The silver lining for new homebuyers is that most of the construction pullback is in the multifamily sector, where economists have been expecting an eventual slowdown given the charge of multifamily units coming out of the recession,” Trulia Chief Economist Ralph McLaughlin said. “It looks like the retreat is finally here.”

The real danger lies in the building permits, which decreased overall and for the single-family sector.

"The one number to note is the decline in single-family permits,” McLaughlin said. “We'll be closely watching this closely in the coming months to see whether this is an anomaly or the start of a trend.”

Some experts took a more positive approach to the report, focusing mainly on the slight increase in single-family starts.

“As expected, the spring home-buying season has been off to a very strong start,” said Bill Banfield, Quicken Loans executive vice president of capital markets. “It’s encouraging to see homebuilders breaking ground on more single-family homes, as this can help ease some of the pressure with the market lagging in inventory. Moving into the summer months, we’d like to see a stronger pace of construction to help offset this growing demand.”

Other experts agreed with this optimistic assessment, saying single-family starts are a better measure of the health of the housing market.

​“Single family starts showed a strong 835,000, up 9.3% year-over-year, 0.4% over last month, and the 7th straight month above 800,000,”said Marc Waco, PwC engineering and construction advisory leader.

“​The more volatile multi-family number dropped 16.1% year over year to 328,000,” Waco said. “That said, we consider the single family number to be the primary indicator of the health of the market.”

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