On the other hand, you might be asking, “Why haven’t the builders simply built more homes? Shouldn’t the market get itself back to equilibrium?” The short answer of course is ‘yes’, but it is tricky. There are two primary issues facing new home construction, and they have been around for a while.
The first issue is that there has been a significant labor shortage. That means it’s harder to build homes faster (no one to build them) and it costs them more money to do so (affordability and profitability issues). The second issue is material shortages and increased costs for those materials. Which material has had issues seem to have varied over the last 10 years, but this year the primary source of pain: lumber. Lumber shortages have led to significant price increases, over 170% this year. The NAHB estimates that this year’s price increase has led to an additional $16,000 to build a home – just in lumber costs.
There are of course other issues at play, and I am definitely not a home building expert nor am I pretending to outline all the issues being faced. The bigger point I am making: what if our housing shortage does not go away any time soon? In fact, it seems very likely that the challenges in our market are here for a while. Even if interest rates doubled to the 5% range, for many people they will still be able to afford a home. There simply does not seem to be anything potentially on the horizon that is going to move the scales from housing shortage to housing glut.
If we stay in this housing shortage, prices have no where to go but either stay constant or go up. We would need a significant change in either the demand, supply or both. A decrease in demand for housing could show up as:
– Decrease in population – People stop moving here and/or people increase their migration out of Colorado.
– Decrease in affordability – Whether it shows up as loss of income or increase in borrowing costs. By the way, an increase in borrowing costs may not change demand enough if prices fell a little to offset the increased interest rate (but it could have reduced home values…maybe).
What about an increase in supply? If material and labor shortages lessened, and home builders built more homes at a faster pace, then possibly there could be enough inventory to level out the market. But, those homes would have to be built somewhere. Most of the new construction (or new net housing units) are typically built in the areas bordering the city. Then of course you have all the entitlement and infrastructure issues that come with new development.
I am beginning to wonder if we are entering a whole new reality. Not because I am wearing rose-colored glasses and I want to see continued real estate exorbitance. Instead, when looking at the fundamentals driving our situation I simply can’t see what is going to give any time soon. I keep waiting for the bottom to fall out, but I just don’t see where or when that is going to happen over the next 12 months. Especially in the part of demand: if our population continues to increase, where are all those people going to live? Increased population creates more demand, and the cycle continues.
Or maybe just as COVID-19 came out of nowhere (most of us did not see this coming), maybe there is something else on the horizon that I/we can’t see. Of course, for most of us we are grateful to have a roof over our head, food to eat, and toilet paper for…well, you know. This Thanksgiving is not what any of us had in mind, and I know many people are disheartened and frustrated. May you be safe and healthy, and ultimately grateful, for this week.