Analyzing the Impact

National Association of Realtors Chief Economist Lawrence Yun cautions that a diminishing labor force does not mean a lessening demand for housing, as retirees are still in need of homes. However, rather than just buying or building, they may be opting to relocate.

“The desire is there,” Yun says. “This generation’s homebuying rate is historically low, but it’s related to their financial capacity.”

While he worked at the NAHB, Eisenberg analyzed the impact homebuilding has on a local economy. One such study was conducted on the Village of New Lenox. The report found that, should 100 new homes be built in one year, $29.5 million in local income would be generated, $4.4 million in taxes and other revenue for local governments collected and 361 jobs created. The housing starts would also have recurring impacts, including $4 million in local income, $1.3 million in taxes and other revenue for local government, and an annual creation of 54 jobs.

Data was based on an ideal figure of 100 homes as the model and sales data available at the time. The model also assumes there were unemployed or underemployed in the area that would fill new jobs created, creating no additional need for more homes.

“Reports like this help to tell the story and improve the quality of debate,” Eisenberg says. “It helps people understand that new construction brings a lot to the table and pays its way…to have a vibrant, growing community, you need all kinds of homes. You need a variety of stock. If you don’t have new construction, you’re cutting off an entire group who want to be new construction homeowners.”

Differing Perspectives on New Home Supply

In the last year, the pool of unemployment workers in the U.S. has dropped by 1.7 million, according to Census figures. According to NAR, though, homebuilding has not kept pace with that trend. Indeed, despite a 9 percent increase in housing starts in 2014 over 2013, Yun argues that to satisfy housing demand, starts should be more in the 1.5 million territory; the coastal communities, Yun says, would especially benefit from additional construction.

“In California, I think the housing shortage will persist, so it will continue to put (upward) pressure on prices,” Yun says. “In places like Florida and Utah, it is possible that builders could quickly ramp up, which means that home price growth in those states could tame down very quickly.”

But not everyone is as adamant about heavy building as Yun. David Crowe, the chief economist for NAHB, warns that while there is a certain need to boost building, NAR’s figures ignore a few contemporary realities that make the old standard, at least for the time being, obsolete, according to The Wall Street Journal. For one, recent job growth numbers are not as indicative of young, fresh people entering the workforce as they once were.

“The onset of the financial crisis and the resulting recession threw a lot of people out of work,” Neal says. “In the short-run, those people are going to re-enter the workforce and we’re going to have increases in job growth, but that doesn’t mean we’ll have new people looking to start a family and buy a house. Many of them are already covered in that regard, and the others may need time to build up the necessary assets.”

Both Eisenberg and Beaver agree with Neal’s sentiment, but point out that there were also several people who gained employment throughout the crisis and refrained from making a home purchase, hoping to weather the storm and buy when prices receded to a more reasonable rate. Still, it’s unlikely those figures would be enough to offset the 8.7 million jobs lost from 2007 to 2010.

Even Yun exercises caution, though, when discussing new home supply. “While we are barely scratching the surface of what is needed, I would be leery of oversupply, too,” he says. “If we reached 1.7 to 1.8 million new construction starts, that would raise some concern.”

NAHB’s Crowe and Neal, as well as Eisenberg, say that to reestablish a working balance between job growth and construction – which is still the most effective way to guide building – we should consider adjusting the homebuilding ratio from one house to every 1.5 jobs created to one single-family/multifamily residence for every two to three jobs created.

There are several factors internally and externally affecting new construction starts. Within the marketplace, builders are expressing a lack of qualified workers with the right skill set, despite the pay being above national average and unemployment still an area of concern for many. Also, smaller builders are facing difficulty obtaining construction financing due to various regulations.

Furthermore, there are other inventory misnomers causing some confusion for the need for housing starts. For instance, Yun points to formerly underwater homeowners who, having gained equity in their home in 2012 and 2013, are now listing their homes. Though they are adding to the housing inventory with their listing, they’re doing so to buy something else, so the net impact, Yun says, is a wash.

Shadow inventory, Yun explains, is a similarly murky concept; though many believe that a large supply of shadow inventory remains to access the market, in reality, that inventory has already seen great diminishment, and will not add much to housing inventory.