The Housing Market Has a Major Supply Problem

But it’s also common for people to exaggerate the significance of their problems. And that’s why many economists have taken complaints from homebuilders about a shortage of qualified construction workers with a grain of salt. These analysts assumed that the homebuilding community had just gotten used to the glut of cheap labor that the great recession produced.

But homebuilders may actually have a point.

On Wednesday, the Census Bureau announced that new home construction fell 11% in October, suggesting there may indeed be a supply problem—in terms of labor and land—in the housing market, rather than just an issue of weak demand and a lack of available credit.

Recoveries in home prices often come a bit ahead of a broader economic recovery. The real estate market rebound began in earnest in 2012, as investors anticipated that the eventual recovery of the labor market and continued population growth would justify higher home prices. Back then, the unemployment rate was above 8.2% and the Federal Reserve hadn’t even begun its third and open-ended round of quantitative easing.

So even though home prices were rising, it wasn’t because Americans were actually rich enough to demand the construction of new housing stock. In fact, by 2012, housing formation had fallen to historic lows, as a growing population doubled up with extended family members, friends, and roommates rather than striking out to start new households.

But as the labor market has strengthened, so has the American desire to have a home of one’s own. As you can see from the chart below, Americans are forming households at a rate that is comparable to before the crisis.

But when it comes to homebuilders building new single-family homes, we’ve barely recovered much from the lows of the crisis.

Some of this can be attributed to a cultural change, as more young people now prefer to live in multifamily housing close to urban centers. But total existing real estate inventory is down 2.9% year-over-year, and it has been falling ever since the worst of the housing crisis. That’s after home prices have already recovered to their pre-bubble trends. This suggests that homebuilders can’t keep up with demand.

Eventually, homebuilders will start to pay workers more, but those costs will be passed on to the consumer at a time when affordable housing is severely lacking in many parts of the country. This should give the homebuilding industry more ammo in its fight against the EPA, which it says is also making housing more expensive with new rules aimed at protecting waterways and wetlands.