U.S. Home Construction Lags Behind Broad Economic Rebound...

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1 This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit U.S. U.S. Home Construction Lags Behind Broad Economic Rebound Sparse building of new single-family houses remains an impediment to balanced recovery Construction in Canonsburg, Pa., seen on Nov. 10, Economists say sparse construction of new houses remains one of the enduring legacies of the housing bust. PHOTO: GENE J. PUSKAR/ASSOCIATED PRESS By CHRIS KIRKHAM Updated Dec. 16, :03 p.m. ET U.S. unemployment is hovering near the lowest level in a decade, jobless claims have reached a 43-year low and home prices have surged to records. But in this eighth year of economic expansion, the number of single-family homes under construction remains at recessionary levels. Housing starts dropped 18.7% in November to a seasonally adjusted annual rate of million, the Commerce Department said Friday. Permits, an indication of how much construction is in the pipeline, were down a milder 4.7% to million. Monthly housing figures are choppy, but the broader trend has been one of slow 1 of 5 12/18/16, 1:39 PM

2 growth. New single-family home construction has more than doubled to a rate of 828,000 homes in November after bottoming at 353,000 in early 2009, but overall activity remains muted. Adjusting for population growth, single-family construction is barely back to the prior troughs of recessions in 1981 and 1991, according to research from mortgage giant Fannie Mae. Even October s monthly readings, which showed single-family starts at the highest level in nine years, were more than 15% below long-run averages. Sparse construction of new houses remains one of the enduring legacies of the housing bust and is one of the biggest impediments to achieving a more balanced recovery, economists said. People have said to us on many occasions that housing is back to normal, said 2 of 5 12/18/16, 1:39 PM

3 Doug Duncan, the chief economist at Fannie Mae. It s definitely not normal from a supply perspective. The industry s inner workings broke down during the housing crash of the last decade and haven t fully recovered. Builders have faced difficulties finding skilled construction labor, while financing has been difficult for smaller builders and land developers. What s more, younger buyers remain on the sidelines, prompting builders to focus on a smaller group of upmarket buyers. Economists said most of the home price appreciation since the market bottomed in 2012 has been driven by low supply rather than booming demand. In August, the ratio of existing homes for sale compared to total U.S. households dropped to the lowest level since the data were consistently tracked starting in 1999, according to an analysis of data from the Census and the National Association of Realtors by real estate tracker Trulia. Single-family housing starts in November, which have accounted for about two-thirds of all residential building activity since the recession ended, slid 4.1% to 828,000. They peaked at more than 1.82 million in 2006, the height of the housing bubble. A construction worker frames a window in the upper floor of a two-story custom home being built in Orlando, Fla., on Feb. 13, PHOTO: PHELAN M. EBENHACK/ASSOCIATED PRESS Existing-home sales also have been slower than usual at this point in an economic recovery. The current level of resale transactions, adjusted for population, is about 10% below the level recorded from 1999 to 2003, before the onset of the housing bubble. 3 of 5 12/18/16, 1:39 PM

4 For prospective home buyers, poor job prospects kept young people on the sidelines throughout the recession, while ballooning student debt and tight mortgage-lending standards have presented stiff headwinds since. A study by the Pew Research Center this week found that 72% of renters said they would like to buy a home in the future, but mortgage applications are down sharply. Many of those prospective buyers simply assume they won t be able to qualify for a loan and don t apply, according to Pew. As a result, household formation, a key driver of housing demand, has been muted as millions of younger Americans double up with friends or family instead. The number of young adults under age 30 has increased by about 5 million over the last 10 years, but the number of households for that age group increased by only 200,000 over the same period, according to the Harvard Joint Center for Housing Studies. If those young adults formed households at the same rate as in 2005, there would be about 1.7 million more households under 30 today. Builders have been quite keyed in on the fact that household formation has been really lagging, said William Wheaton, an economics and real estate professor at Massachusetts Institute of Technology. Home builders have also faced a series of constraints that have affected the pace of production, particularly at lower price points. Overcoming them is possible but would raise prices so much that prospective buyers, particularly first-timers, would likely balk, they said. Tighter lending restrictions after the crisis have made it difficult for smaller private operators that build the bulk of U.S. homes to access the capital needed to develop land. The sharp and prolonged downturn in home construction also depleted the pool of construction labor, with many either retiring, moving to other industries or returning to Mexico and Central America. Local building restrictions, meanwhile, have added thousands of dollars to the cost of building so-called starter homes in recent years, builders said. The costs don t really work for the kind of housing that we need, especially for first-time buyers, said Jonathan Smoke, chief economist at Realtor.com. News Corp, owner of The Wall Street Journal, also operates Realtor.com under license from the National Association of Realtors. 4 of 5 12/18/16, 1:39 PM

5 Despite the increased costs, Doug Bauer, chief executive of the national builder Tri Pointe Group, is bullish on housing growth because of the demographic wave of potential Millennial buyers. He likens younger Americans potential to that of the Baby Boomers who drove sustained growth in the housing market through the 1990s and mid-2000s. Millennials under age 30 are expected to more than double their current number of households through 2025, growing from 16 million households in 2015 to 40 million in 2025, according to the Harvard Joint Center for Housing Studies. By comparison, Americans under the age of 30 in the earlier generation grew from 13.8 million households in 1995 to 36.2 million in People s attitudes and housing desires change over time, but you can t ignore the fact that there s a ton of them, Mr. Bauer said. For Tim Kane, president of California builder MBK Homes, the question isn t whether there is enough demand to support additional housing construction but what that demand will look like. Since the housing crash, his company has shifted from building exclusively single-family homes to doing a mix of apartments and houses. They re either going to need houses because they have kids, or they ve changed the way they look at real estate and renting is going to be fine, Mr. Kane said. Adds Mr. Bauer of Tri Pointe: They ve got to live somewhere. Jeffrey Sparshott and Laura Kusisto contributed to this article. Write to Chris Kirkham at chris.kirkham@wsj.com Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at or visit 5 of 5 12/18/16, 1:39 PM