Housing Affordability Constraints are Rising

NAHB Chief Economist Robert Dietz recently provided this housing industry overview in the bi-weekly e-newsletter Eye on the Economy.

The housing industry is being squeezed. While the sector was the bright spot of the economy for 2020 and possesses considerable momentum at the start of 2021, a number of external factors are restraining the industry as well as the nation’s overall economic recovery. For example, shortages of steel and semiconductors are slowing production of cars and other high-end manufacturing goods.

In the housing sector, a lack of lumber and other key building materials have sent softwood lumber prices soaring to all-time highs. NAHB determined the current run-up on lumber is adding more than $24,000 to the price of the average newly-built home. Builders anticipate these limiting factors will continue through 2021.

In fact, a recent NAHB survey revealed 89% of builders view building materials prices as their No. 1 challenge. Nos. 2 and 3 on the list were concerns over availability and delivery times of materials, and availability of labor, respectively. Combined with other supply-side limits such as regulatory burdens and lot supplies, housing will grow at a slower rate in 2021 compared to last year.

This is consistent with the recent pattern of the NAHB/Wells Fargo Housing Market Index (HMI). While still achieving a strong reading of 84 in February, the HMI is down slightly from its all-time high of 90 in November due to rising building material costs and policy change concerns.

And as a consequence of supply-side limitations, a rising share of permits and sales are connected to construction delays: The count of single-family homes that are permitted but have not started construction is up 28% from a year ago.

And because of strong demand, the count of new homes offered for sale that have not started construction is up 45% from a year ago.

These data reveal a market facing severe inventory constraints, particularly as the existing for-sale single-family homes market is down to less than a two-month supply, and the inventory of new homes for sale is down to just a four-month supply.

As a result, home prices are rising at an unsustainable pace, pricing out significant numbers of prospective home buyers — NAHB estimates that for every $1,000 increase in the price of an average new home, approximately 154,000 more households would be unable to afford it. Moreover, mortgage interest rates are rising, as economic growth expectations increase. On the bright side, demand remains strong and there is a growing number of households entering their key home-buying years.

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