America needs more supply of homes – we know that – but without increased supply we are also risking a new housing bubble.
The warning from economists taking part in a session organised by Realtor University is that lack of supply could exacerbate a bubble if demand and supply continue to become unbalanced, contributing to a sharp rise in home prices.
"A best-case scenario is largely dependent on new home construction. An increase in inventory will provide some much-needed release," said NAR chief economist Lawrence Yun.
Yun was joined in the session at the 2018 Realtors Legislative Meetings & Trade Expo by Freddie Mac deputy chief economist Len Kiefer, and Ken Simonson, chief economist for Associated General Contractors of America.
Household formation is relatively low
On whether we are already in a housing bubble, Kiefer said not currently, citing the lack of signs of over-leveraging and that the ratios of household debt to income are low; unlike conditions before the crash.
"Those risky loans that contribute to the last bubble have largely gone away in the current market," he said.
However, he and his fellow economists said that a bubble could come. He also highlighted another issue.
"Young adults of today are forming households at a much lower rate than previous generations, and high housing costs contribute to that," he said.
According to Kiefer, one third to three quarters of U.S. markets have an elevated home price-to-income ratio and many major markets, such as Austin, Miami and Portland, are getting close to surpassing their 2008 ratio.
Construction challenges to supply boost
Speaking about the challenges for the construction industry in boosting the supply of homes, Ken Simonson noted low employment and the rising cost of materials.
"Construction saw a 30% drop in employment in the previous decade, the largest drop of any industry. They also began laying people off a year before the recession began and did not start hiring again until much later than other industries," he said.
He added that builders are having to hire unskilled workers and spend time and money training them.
The cost of materials is also rising with diesel up 42% since 2017, lumber and plywood up 11%, and ready-mix concrete up 7%.
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