Why is there a SHORTAGE of new houses in The UNITED STATES?
UNITED STATES Since 30 years ago, have there been so few homes available for sale in the united states? It is now normal that once a home goes on the market, it only takes one or two days to sell after receiving twenty or thirty offers from buyers. There have even been some cases of clients offering one hundred thousand dollars too much for a five hundred thousand dollar house. UNITED STATES
Other cases are also occurring were a potential buyer is offering money to another buyer who is bidding on the same house to back out of the auction. There is an estimated supply shortage of 2.5 million homes and this supply and demand imbalance is expected to continue for several more years to understand why there is a shortage of new homes for sale in the united states. UNITED STATES
One must start with the monetary policy of the federal reserve, the central bank of the united states, with the coronavirus crisis, the fed faced the crisis by printing money and lowering interest rates to stimulate consumption, which is supposed to be good for the economy. Although interest rates for lending money should naturally fall when there is an excess of savings and not because a central bank wants to keep them artificially low for a long period. UNITED STATES
In any case, one of the consequences of having interest rates close to zero percent is that it encourages people to buy homes, and indeed the demand to buy homes. Has increased Americans see that since it is so cheap to borrow money to buy a home, they feel that now is the time to buy one. UNITED STATES
However, that same interest of so many people in buying homes, taking advantage of historically low rates, puts upward pressure on home prices. So it is no longer such a logical decision. It would be a good idea to buy a home when interest rates were low, but if, at the same time, home prices did not rise as much, which is not happening. UNITED STATES
In other words, the gain of paying a loan with a low-interest rate is lost by buying a house at a very high price housing prices in the u.s and almost everywhere else in the world skyrocketed during the pandemic. This graph shows a national index of u.s home prices and, as you can see, it has reached its highest level in 30 years. Not only did low-interest rates drive demand. UNITED STATES
The pandemic changed the landscape in housing preferences for a good percentage of the population, as workers moved away from their offices to work from home. Many decided they needed to rent an expensive apartment, downtown or near their offices. UNITED STATES
So they looked for homes in the suburbs. With more space and more green space, so this change in preferences and priorities generated a greater demand both for housing to be built and for land to be built on. UNITED STATES
So the question that arises is why simply aren’t more houses being built to meet the demand? In other words, why not increase the supply of housing if there is so much demand and therefore stabilize prices? There are several reasons why it is difficult to increase the supply and construction of new housing in the short term to meet the growing demand. UNITED STATES
The first is that, after the great recession of 2008, which began with a housing crisis, homes were losing value, and prices were falling as the number of buyers declined just as the federal reserve at that time, artificially kept interest rates close to zero percent, hundreds of thousands of people without good credit ratings started buying two three or even five houses per investment because it was so cheap to borrow.
So when the fed raised interest rates, many defaulted on their mortgages and when they put their properties up for sale to pay off their loans, they found no buyers. So there was no point in building more houses, so the sector stagnated and slowed its pace of construction.
Before this 2008 crisis, two million houses were being built per year after the crisis between five hundred thousand and nine hundred thousand were being built per year. Therefore, the current shortage has its origin more than a decade ago. Now the imbalance between supply and demand is more evident due to the pandemic and the factors we are about to see. UNITED STATES
The second reason why it has not been easy to increase new housing construction is the shortage of skilled labor in this sector. Let’s remember that after the 2008 crisis, the sector stagnated and one of the consequences was the loss of qualified workers it is estimated that the sector lost 1.5 million workers who were laid off or left their jobs after the crisis. UNITED STATES
These were plumbers: electricians, and carpenters, among others. This skilled labor force is difficult to replace in the short term and in addition to this, many of the jobs were filled by immigrants. But during the pandemic, the u.s borders were closed or severely restricted for several months, which made it even more difficult to hire labor and consequently, the pace of new housing.
Construction unemployment in the united states is supposed to be above the pre-pandemic level, so it would be relatively easy to find personnel for the construction sector. UNITED STATES
But the truth is that not only this sector but almost all economic activities have been seriously harmed because it is very difficult to find workers. A third reason for the housing shortage is that in many cities there are strict zoning laws that make it costly and difficult to build new housing projects.
Some of these laws are defended by residents who do not want apartment projects or complexes of certain characteristics in their neighborhoods. This makes sense from a homeowner’s point of view, the less housing in your neighborhood, the higher the value of your home, maybe. UNITED STATES
In addition, residents in some areas block the construction of more housing to avoid more traffic, more children in their children’s school, or that it changes in the atmosphere and tradition of the neighborhood. For such reasons, there is not enough land on which to build to meet the demand. In fact, in a city like San Francisco, for example.
where building restrictions are very strong, the cost of land has gone from representing 60 percent of total housing value to 75 from 2012 to 2020, which means that if a house in san Francisco is worth one million dollars, seven hundred and fifty thousand dollars correspond on average to the cost of land and finally, a fourth reason is the scarcity of construction materials, mainly wood. UNITED STATES
Such is the scarcity of lumber that its price increased by more than 200 percent in the last year, due in part to the interruption of global supply chains during the pandemic and the imposition of tariffs and greater trade restrictions by the united states on some countries.
In Canada, the world’s largest lumber exporter, wood is one of the most important materials for home construction in the united states. The reason why Americans have preferred wood are several, such as the speed of construction of a wooden house, the flexibility to make modifications compared to a brick and cement house, its ease of transportation, and because wood is more flexible to withstand earthquakes and low-intensity tornadoes. UNITED STATES
Although usually, the houses do have a basement built with cement and brick that serves as a shelter in case of a stronger natural disaster. In short, the scarcity of materials such as wood, the scarcity of available land for construction, and the scarcity of labor leads us to believe that the shortage of available housing in the united states is going to be a problem that will last for several more years.
Additionally, if the fed maintains its policy of very low-interest rates, the stimulus to buy homes will continue to grow among Americans. This may sound like a good thing until we realize that people with lower incomes are the ones who will be hurt.
The most by this policy, because the excess demand is driving up the minimum price of a home, making it more difficult for those who are planning to buy a first home to do so. The question that remains is whether the problem will be solved when the fed raises interest rates and restrictions on lumber imports from Canada, or whether the increase in demand will begin to ease when home prices reach a certain ceiling and supply and demand begin to balance.