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Zoning, Home Depot and domestic production: What it will take to fix homebuilding in the US - INMAN NEWS

As the spring homebuying season goes into full swing, market analysts have already dashed homebuyers and real estate agents’ hopes of a boost in inventory.

“There were roughly 730,000 homes for sale nationwide in February, compared to 1.4 million in February 2020,” Zillow noted in its latest market report published on March 17. “Historically, inventory has generally bottomed out in December and then rebounded as sellers listed their homes in preparation for the busy spring shopping season, but this year, supply has continued to dwindle well into the new year and inventory was 11.9 percent lower in February than in January.”

Although some homebuyers are deciding to hold out for another year or two in hopes of a more balanced market, Dietz, Ratiu and Marr said it will take up to another decade to fix the deep-seated issues keeping homebuilders from closing the inventory gap.

“It’s gonna require years to fix everything because ultimately, we’ve got to address all the issues that are responsible for the lack of home construction,” Dietz said. “We need to get up to about 1.2 million single-family homes built a year to begin reducing the housing deficit.”

He added, “Even if we’re building 1.2-1.3 million single-family homes a year, that might reduce the housing deficit by 100,000 units in that year. So at that pace, it would take about 10 years to really catch up.”

Even if homebuilders are able to ramp up production and slow home price growth through added inventory, Dietz said homebuyers shouldn’t expect to see a dramatic decrease in the cost of a home.

“You can expect at some point an easing up of the growth rate, but that doesn’t mean that you’ll see a decline in the cost of building materials or homes,” he said. “The growth rate of home prices, I like to think, is going to slow here in 2022. The Case Shiller Index has been up 15 to 20 percent year over year and that’s unlikely to continue in an environment with higher interest rates.”

“But housing prices will ultimately be high as long as there’s a housing deficit,” he added.

Dietz said many of the solutions needed to help homebuilders close the gap will take years to enact, such as pushing local governments to adopt streamlined permitting practices and enabling homebuilders to diversify their projects through upzoning, which allows builders to construct multi-unit housing on land once zoned for single-family homes. He also said existing homeowners’ aversion to affordable housing models, also known as the “Not In My Backyard” (NIMBY) movement, isn’t helping.

“The ongoing trend [of tighter lending standards] and other rules that make [building] more expensive on the regulatory side, and a step up in NIMBY-ism, all create what Federal Reserve Chairman Jerome Powell a few years ago referred to as a perfect storm for homebuilders,” he said. “And, as I said before, the consequence of that is a fairly substantial housing deficit.”

Although the most substantial fixes are long-term, Marr and Ratiu said there are a few things the government and the homebuilding industry can do to help boost inventory and cool home price growth now.

“The Biden administration should remove the tariffs on Canadian lumber,” Marr said while noting that measure alone could cut five figures from the price of a new home. “There also are additional labor and educational policies to encourage more construction workers, but all of these things are an indirect way to remove additional challenges builders are facing beyond the immediate supply chain challenges as overseas shipping hits bottlenecks.”

Meanwhile, Ratiu said homebuilders can streamline their material sourcing process by relying on fewer companies to provide goods and begin relying on U.S.-based manufacturers for certain items. “You have so many different distributors, subcontractors and suppliers that it’s hard to coordinate, so being able to go to a company that provides all of these things in bulk can help streamline the process,” he said.

“The other thing, and I think this is worth mentioning, [is] some of the big box stores like Lowe’s and Home Depot. We actually saw builders that resort to these big box stores during this pandemic, when their suppliers couldn’t meet the need for appliances,” he added. “So I think the reason I’m bringing this up is not necessarily to highlight big box stores. But I think there is potentially a role that big box stores can play because they get preferred treatment simply based on the volume they purchase from manufacturers.”

As homebuilders attempt to unravel a decade’s worth of issues, Ratiu said there’s still a sliver of hope for homebuyers who can’t wait for builders to close the inventory gap.

“We surveyed homeowners and 26 percent said they are planning to list their home in the next 12 months,” he said. “In our February data, we saw about 13 out of the 50 largest cities in the country with price declines and it wasn’t the first month of price declines for some of those cities — it was the fifth month of price declines.”

“A more normal market is on the horizon,” he added.

For Buyers:
Buyers with budgets over $300,000 may be noticing that they have more listings to choose from compared to a few months ago. This is especially true in the price points between $400,000 and $800,000 where inventory has grown 92% since February. When a buyer has, for example, 4 or 5 homes available that meet their criteria instead of just one, they are less inclined to throw all of their ammunition into one home in order to win it. They may still offer full price or more but may not be under as much pressure to waive contingencies and shorten inspection periods.
As this subtle change proliferates with more inventory, the buyer experience will become less stressful. As the median sale price continues to rise, affordability is something to pay attention to. Not what’s affordable to you necessarily, especially if you’re out of state, but what percentage of the local population can afford your home if you need to sell right away or sometime in the future. A family making the median income in Greater Phoenix could afford 63% of what sold in the 1st quarter of 2021. That was within the normal range of 60-75%, indicating a good time to buy or sell. While we wait until August for the 2nd quarter measures to be released, we expect the new measure to land around 57%, slightly below normal. This does not indicate that the market will plunge into a buyer market causing prices to decline, but it does indicate a reason to expect prices to rise much slower going forward.
For Sellers:
The Greater Phoenix housing market continues to shift from an extreme seller market into a less extreme seller market. As prices continue to rise, more new sellers are motivated to put their home on the market and fewer buyers are able or willing to pay the higher price. Over the next 5 months, give or take, the market is expected to move into a weaker seller market, driven in part by dwindling affordability and buyer fatigue.
The first half of 2021 has been so insane with contingency waivers and exorbitant offers over asking price that many sellers may not know what a normal seller market looks like. Here are a few things to expect:
Sales price appreciation will not average 3.1% per month. April 2021 saw prices appreciate 5.1% within 4 weeks. May was 2.3%. June was 1.1%. From 2015-2019, a long-term seller market but much weaker than today, prices appreciated at an average of 0.5% per month with a range between 0.3% and 0.8%.
There will be more list price reductions. It’s important to remember that the sales price is the LAST thing to respond in a shifting market. One of the first things to respond is a list price, in the form of a price reduction. When a seller overshoots what the market can bear, they will get the silent treatment in the form of zero offers. That triggers a price reduction by the seller. Weekly price reductions have risen 112% since mid-February from 317 in a week to 672. In a weaker seller market, expect between 1,500-2,000 price reductions every week.
Sellers will get their price, but pay more in concessions. If a seller prices their home high in anticipation of excess demand but only gets one offer instead of multiple offers, they are more likely to accept home warranties, do repairs and offer concessions. Currently the percentage of sales involving concessions is very low at 4%, up from 2.7% the week prior. In 2019, a good seller market, 25% of closed sales involved seller concessions.
Commentary written by Tina Tamboer, Senior Housing Analyst with The Cromford Report ©2021 Cromford Associates LLC and Tamboer Consulting LLC
Be sure to call if you have any questions about this report or about how the market is performing.
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