Real Estate

A solution to the inventory problem? Housing starts are expected to rise this year

Capital Economics predicts 1 million new single-family homes will be built this year

Economics has long been dubbed “the dismal science.” But the economists at Capital Economics are showing some optimism for single-family housing starts in 2020.

Their latest report predicts single-family housing starts to average around 1 million annualized this year. 

“There are encouraging signs that the cost and availability of materials, lots and labor are all starting to improve,” the report stated while also mentioning a strong new home demand and a shift toward the construction of cheaper homes.

Last year saw an increase in building material prices as well as challenges with costs and availability of labor

That exacerbated a problem in the housing market because there are simply not enough homes available for sale, but more new housing starts (and therefore more new houses being built) this year would be a welcome change.

In a recent speech, Federal Reserve Governor Michelle Bowman stated that one of the biggest challenges facing the U.S. housing market is a lack of construction workers. Combine all of these factors and there is little wonder why some may be pessimistic about housing starts. 

However, Capital Economics’ latest report says that it may all be turning around. The report states that lumber prices have dropped by almost 40% in the year to May 2019. With lower material prices, the report predicts that builder will shift their focus to constructing cheaper properties that “are in the most short supply.”

Supply aside, the report echoes Bowman’s claim that the biggest limitation to housing construction has been a labor shortage. Citing a National Association of Home Builders survey from last August, the report says there was no change in the number of home builders reporting labor shortages.

“And, at 4.5% after seasonal adjustment in December, the unemployment rate in the construction sector was close to its lowest since records began in 2000,” the report states.

That said, the report also shared some good news regarding the shortage, stating that, as of November, there was a sharp decline in the rate of job openings in the construction sector.

“While volatile, openings have been edging back since spring of last year,” the report said. “Helped by a shift to constructing cheaper properties, builders can, therefore, look forward to a less constrictive homebuilding environment in 2020. After all, it is hard to square severe limitations on building with overall homebuilders’ confidence reaching a 20-year high late last year.”

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