[Higher Building Costs Equal Higher Home Prices

Real Estate News for Investors Podcast Episode #149

The nation is suffering a housing shortage, yet builders have been reluctant to dive in and satisfy the gap.

I spoke at IMN’s 4th Annual Private Equity Forum on Land & Homebuilding in Las Vegas last week. Many panelists discussed the concerns builders have regarding rapidly rising costs to build – roughly 30% on average.

New regulations for construction permitting have skyrocketed, making it very difficult for builders to keep new homes affordable. And that’s a problem in areas where there is job growth, but no place for people to live.

According to the National Association of Realtors, job creation is much stronger than the construction of new single-family home. The association says 80% of metro areas are experiencing a big shortfall in housing for workers.

The NAR study looked at the amount of new home construction in 171 metro areas over a three-year period and compared those to their corresponding job markets. It shows that single-family construction is way below the average ratio of one new home to every 1.6 new jobs. The current average ratio is more like one home to every 3.4 jobs.

NAR’s chief economist Lawrence Yun says: “Inadequate single-family home construction since the Great Recession has had a detrimental impact on the housing market by accelerating price growth and making it very difficult for prospective buyers to find an affordable home — especially young adults.”

He says: “Without the expected pickup in building as job gains rose in recent years, new and existing inventory has shrunk, prices have shot up and affordability has eroded despite mortgage rates at or near historic lows.”

Yun says that many areas experienced a construction increase last year compared to 2014. But, he says it’ll be many years before the inventory catches up because homebuilders face so many obstacles.

I heard about plenty of them at the homebuilder’s conference. There are higher costs everywhere. Builders are constantly faced with a more complicated and costly regulatory environment. There are also more hoops to jump through when it comes to financing. And, it’s also difficult to find skilled labor and when they do, it costs more to hire them.

An article in Housingwire says that many construction workers dropped out of the industry during the housing crisis. And, it says that many don’t trust the industry enough to jump back in.

According to The National Association of Homebuilders, the industry lost about 30% of its workers during that crisis. And, today, the association says an estimated 200,000 construction jobs remain unfilled.

The presidential election could also have a big impact on this construction labor gap. If Donald Trump wins, he has promised to deport many of our immigrants. And, many of them work in the construction industry.

If that happens, construction costs could rise even higher. Immigrants are typically the most cost-effective workers in the labor force.

Builders need people who will work hard for their pay. And while there are plenty of other people who might be able to fill those jobs, they will likely be more expensive. You can’t have high salaries and low home prices.

In California, the Los Angeles Times published a report recently, that the lack of housing will put a dent in the state’s economic growth. That’s according to two new studies out of UCLA and UC Riverside.

They both found that the state cannot sustain the kind of economic growth it’s seen in the last few years unless it can bring more people into the workforce. And it can’t do that, without enough homes.

Co-author of the UC Riverside report, Chris Thornberg, told the Los Angeles Times: “Long-run growth is a function of the number of bodies in your economy.”

The report shows that in California, permits for residential construction in the first half of this year were 2% lower than in 2015. Multifamily permits were down 11%.

UC Riverside researchers say job growth will be hobbled. They expect a 2% growth rate this year. They say that will drop to 1.7% next year and 1.1% in 2018.

The UCLA report says California’s 5% unemployment rate also means that companies will have a tough time recruiting people who already live here. And it says the high-cost of living in California will discourage migration. In other words, many people can’t afford to buy or rent homes in California.

In other states, real estate investors are filling the home construction gap with single-family rentals. That’s difficult to do in California when home prices are so high, and the investment goal is to cash flow.

But there are opportunities to own single-family rentals that “do” cash flow in other parts of the country. Yun says there’s an overwhelming preference for single-family homes. And, of course, if people can’t buy, they will be renting.

It was interesting to hear at the builder conference that most builder want to build in the A markets – San Francisco, New York, LA, etc. – because they can make a bigger profit. But those are also the areas where regulations have gone through the roof – so to speak.

So builder have turned to B Markets, like Dallas, Atlanta and Chicago. But now they have concerns that those markets could become oversaturated.

They have concerns about C markets because they just can’t turn a profit. ( Ohio, PA and other tertiary markets).

This leaves an incredible for real estate investors who are willing to buy old homes and make them new. With less new builds in those areas, expect home prices to continue to rise , just as price points seem to be stalling in the A and B markets.

Investors have the opportunity to buy homes that cash flow today, and will increase in value over time. If you want to check out some of these properties…

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