Why Homebuilders Can’t — or Won’t — Meet Housing Demand

You’re finally ready to buy a house. Got a decent down payment in the bank, a solid credit history and even a preapproval from a lender. You’re golden.

Except you can’t find a house. At least not one you really love that’s in your price range. Something about a lack of inventory in your market. Apparently, there’s just not enough houses to meet the demand.

But why? If there are people looking to — and able to — buy, why won’t builders build?

It starts with lending

Robert Dietz, chief economist for the National Association of Home Builders, says that nationally, on average, there’s less than a five-month supply of single-family homes. That’s the number of months it would take for all the current homes on the market to sell. Redfin says four to five months’ supply is about average.

The thing is, in many metro markets, the supply of homes for sale is even tighter. For example, this year in San Francisco and Denver, inventory supplies have been less than three months and two months, respectively.

“The primary thing that’s holding back homebuilders is that they can’t get access to credit,” says Christopher Whalen, senior managing director and head of research for the Kroll Bond Rating Agency. “During the [housing] crisis a lot of banks around the country, especially in the Southeast from Georgia on down, got hurt very badly with construction and development loans on residential homes.”

That led to now-risk-averse lenders making fewer builder loans for land acquisition, lot development and construction.

“The predominant sector that the banks have been lending to, really since 2008, has been multifamily housing, which has done very well and has been relatively low-risk,” Whalen says. “[But] the developer that wants to do single-family homes really has a hard time — unless you’re in Texas, for example, where it’s been a boom. But other than that, in most areas of the country the banks just don’t want to lend on dirt.”

However, of all the factors hindering homebuilding, Dietz says lending is likely the most improved.

“Over the last few years, we’ve seen loan growth in excess of 15% on a year-over-year basis,” he says. While still challenging, strict lending conditions are easing.

But there are two other obstacles that builders need to overcome.

Land and labor are also issues

“It’s become more difficult and more expensive to develop land, and that’s restricted the pipeline for builders to buy in order to put up a home,” Dietz says. As proof, he points to an NAHB survey in which 64% of builders say lot supplies are “low” or “very low.”

Labor is another issue builders face. In fact, it’s the top business challenge for builders, according to NAHB surveys. Dietz notes the residential construction industry lost 1.5 million jobs during the Great Recession, and only 600,000 to 700,000 jobs have been replaced in recent years.

And the housing industry is struggling to replace an aging workforce. Dietz says the existing construction workforce has a median age over 40. He says the challenge is to attract the next generation of construction workers.

How long until we get back to normal?

So a shortage of lots, labor and loans are holding builders back, but things are getting better. The gap between available home inventory and demand is slowly shrinking.

“We’re effectively just shy of 60% of the way back to normal conditions,” Dietz says.

However, “normal” won’t be the level of building that existed during the pre-recession housing boom. Dietz says the housing industry will be in good shape when it hits 1.3 million single-family starts per year — but that might take another three to four years.

Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: hal@nerdwallet.com. Twitter: @halmbundrick.

This article was written by NerdWallet and was originally published by Redfin.

The article Why Homebuilders Can’t — or Won’t — Meet Housing Demand originally appeared on NerdWallet.