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3 Ways to Solve the Housing Crisis

While a host of issues face the industry, the challenges can be overcome

 

BUILDER

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Sept. 20, 2023

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The housing crisis continues to plague global economies. Home prices are outpacing incomes worldwide as population and demand exceed available supply. The World Bank estimates that 1.6 billion people globally will be affected by the housing crisis by 2025.

Domestically, the housing shortage results from four primary factors: the labor shortage, cost of supplies, lengthy approvals, and rising interest rates.

 

Labor Shortage

The labor shortage is a consequence of two significant events: the Great Recession and the pandemic. Throughout the Great Recession, roughly 1.5 million jobs were lost, given the collapse in the housing market. The supply overhang in the late-2000s limited new construction for the decade following.

The prolonged contraction led some skilled workers to leave the industry. The smaller workforce remained a systemic issue but was seemingly manageable before running into new pandemic-induced obstacles.

The lifestyle changes brought on by the pandemic drove interest in housing to highs not seen in over a decade. Demand for skilled labor increased quickly, but the supply was stunted, partially due to retirements and partly due to changes in immigration.

According to the U.S. Bureau of Labor Statistics, 17.4% of the domestic labor force is migrant workers. Immigration into the U.S., however, slowed throughout the pandemic, perpetuating the labor shortage.

Cost and Availability of Supplies

Suppliers expected some growth in housing starts from 2019 to 2020 but were caught off guard when the housing market caught fire in the second half of the year. The supply-and-demand imbalance was exacerbated as global supply chains were overloaded. At the worst of times, some builders reported 15-plus months of construction cycle times with every day feeling like supply chain whack-a-mole; as one issue was resolved, a new problem would arise.

While supply chain issues have largely normalized, we are left with a more long-lasting problem—drought. As a result of the drought conditions, the Panama Canal Authority (PCA) decided to lower daily transits, a decision that directly impacts imports into America. More than 40% of U.S. container traffic travels through the Panama Canal annually, totaling $270 billion in cargo. Materials such as cement, steel, lumber, tiles, roofing, glass, paint coatings, and plumbing supplies rely heavily on the full operation of the canal.

Lengthy Approvals

Regulation has been a long-standing frustration from the home building community. Although these restrictions are often necessary to ensure neighborhood cohesion, preserve the environment, and control growth, the governmental process adds to the construction costs and the build cycle time. Both things negatively contribute to the affordability and availability of housing supply.

Interest Rates

Higher interest rates impact housing supply for both the resale and new-home industries. On the existing side, 80% of homeowners with a mortgage have a rate below 5%, while 60% have a rate below 4%. As market interest rates push past 7%, many are reluctant to sell and move, also known as the “lock-in effect.” While builders have been able to pick up some of the slack by increasing construction, including quick move-in supply, the higher rate environment has delayed or prevented some development projects.

So, how can we resolve the current housing shortage?

Despite the issues fueling the housing shortage, there are possible resolutions such as off-site construction, streamlined approvals, and lower mortgage rates.

Alternative Building Processes

The current labor shortage, high cost of materials, and long building process are contributing to high home prices and decreasing production speed. Companies such as Veev, Icon, Fading West, Plant Prefab, and others utilize a form of housing production known as off-site construction. Off-site construction is a streamlined approach to the building process that involves pre-building homes before they are placed onto land. The off-site process is a faster and more reliable construction approach that minimizes waste, but scale is the most significant limiting factor for now.

Incorporate Technology/AI to Help Streamline Approvals

The approval process for entitlements, zoning, and permits could be more convenient and affordable. As artificial intelligence (AI) continues to grow in ability and scope, it could provide some relief for the process, including quicker approval by automating some of the more tedious work. While incorporating AI could be expensive, the efficiency gains and long-lasting time savings could be a boon for housing.

Lower Mortgage Rates

High mortgage rates are encouraging homeowners to remain in their homes because the gap between their rate and the market rate is drastic. While it is unlikely that 3% interest rates will be widely available in the market anytime soon, there are reasons to believe interest rates could be back in the 5% range over the next few years. As such, homeowners looking to move up may unlock supply for potential buyers. Data from the Federal Reserve shows that more than 25% of homeowners younger than 50 plan to move in the next two years, but the conditions must be right. Lower rates allow for more mobility, sales, and new-home construction.

Christopher Meyers contributed to this article.

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