The answer to the affordable housing shortage no one wants to hear

Similar to a lot of challenges in today’s market, the history behind these barriers often points back to the Great Recession. “If you look at the historical downturns in home construction, you generally see sharp declines because housing is a particularly interest rate and business cycle sensitive sector, but then, you see quick rebounds,” Dietz said. “That did not happen this time.”

By 2015, Dietz said it was clear that a quick rebound was not going to happen, which is when NAHB started circulating the five Ls to explain the lack of building in the market and the supply-side headwinds. Since then, the industry has been working to solve for the lack of inventory and provide more affordable housing units.

THE HOUSING SHORTAGE FACTS

NAHB found that home builders would have to build 1 million to 1.1 million units a year to match what would normally be needed to meet population and homeownership preferences. The association thinks the industry will only start construction on about 920,000 single-family homes, which leaves a housing deficit of at least 100,000 units this year.

This number is based on demographics, which can be broken down to about 800,000 to 900,000 units for household formation growth, along with another 200,000 to 300,000 units a year for replacement housing purposes. Replacement housing covers homes that become unavailable because they were torn down or were impacted by natural disasters.

Dietz recently shared an in-depth breakdown on home building over the last decade where he measured production numbers in terms of starts per million population (averaged over the decade). From 1980 through the end of the 2000s, single-family construction averaged a little more than 41,000 starts per million of population, with the 2010s being the exception to this benchmark. Single-family construction over the last decade operated around 50% of the benchmark.

As the 50% drop in construction sank in over the last decade, the impact it had on all levels of the industry became glaringly obvious.

Going back to the growing list of Ls, Dietz explained that there are a lot of challenges that have really prevented housing supply on the construction side from being able to offset some of the inventory shortages. Some of them overlap with each other while others are consequences of each other.

“The two challenges that stand out at the top are the ongoing persistent labor shortages and the growth in legal and regulatory burdens, both on apartment construction and single family,” said Dietz.

Residential construction has significantly struggled to replace the 1.5 million workers lost during the Great Recession. However, the number of job openings is showing signs of improvement, dropping to 214,000 in November 2019 from 279,000 in November 2018, according to the U.S. Bureau of Labor Statistics. But this improvement in job openings isn’t being met with as much progress on the regulation side. NAHB found that 24% of the price of a typical newly-built single-family home is due to the broad set of regulatory burdens imposed by state, local and federal governments.

The scars from the Great Recession are still present in residential construction, but in the last 10 years, the industry has learned how to move forward, whether it was by forced adaptation or choice.

CHALLENGES TO AFFORDABLE HOUSING

Residential construction had to move on despite the challenges it was facing after the Great Recession. One of the most notable changes that came out of the recession was a shift in the types of homes being built.

From the recession up to 2015/2016, Dietz said that builders focused on the higher end of the market since at the start of the decade those were the buyers who either had access to cash or were more likely to get accepted for a mortgage. This period finally started to come to a close in 2015/2016 when the median new home size stopped increasing.

Over the last three years, he said that the median new home size has “grudgingly” come down, as builders started to turn their attention away from the higher-end homes. While he noted that it’s not all builders in all locations, NAHB has watched some builders find ways to build and provide smaller home inventory to the market.

Justin Webb, owner of Dallas-Fort Worth-based homebuilder Altura Homes, has led his own company through the transition toward more affordable housing options. “We’ve been in business since 1979, and we’ve gone through several different market cycles,” he said. “About a year or so ago, there was definitely the feeling that the market was shifting from the $500,000/$600,000 space to more of the $300,000 and below area.”

Looking at the entire market, Webb said, “The country as a whole has been underserved at the affordable housing price point for several years now.” While the transition to more affordable homes takes month, when the market started to shift, Altura Homes decided to stop looking for more opportunities at the higher price point.

“I think all successful production home builders have to find out where the market is and stay with the market. You can’t make your own market. It doesn’t work that way,” he said.

Even though the quality of the home being built is still very high, Webb said that the square footage is decreasing as a way to save money, so builders are developing less 3,000-square-foot houses and more 2,000-square-foot houses as an example.

Another density option Webb pointed out was cutting the lot size. “Generally speaking, if you can produce more lots or more units per acre, the cost goes down,” he said. “In the Dallas area, five to 10 years ago, a 50- or 60-foot lot, which would mean 50 to 60 feet of frontage along the street, was kind of the normal everyday life that everybody was producing. Today, you see people trying to do a 40-foot lot or even a 35-foot lot.”

Both Dietz and Webb also highlighted the uptick in townhouse construction as a way to build more affordable housing options, which makes up about 13% of single-family starts right now. Dietz added that townhouse construction is a great way to build density, along with a slightly more walkable product that still supports a suburban feel.

This is still only a small glimpse into how to get more affordable homes into the market. Each of NAHB’s Ls create different challenges that when solved, will help grow entry-level housing options.

THE ANSWER TO AFFORDABLE HOUSING  

Before the industry can understand the answer to building affordable housing, they must realize the top misconceptions.

In his position, Dietz regularly travels to the same places across the country and watches firsthand the changes that are happening. As he travels, he often hears two versions of critiques about the housing market.

The first critique is that “there’s not a significant or a measurable amount of under building, this is just where we are.” But to Dietz, when people look at things like the homeownership rate or various kinds of market share measurements, people wrongfully assume the number of households is a fixed number just based on population profiles. People have a choice in whether they rent or own or whether they double up with roommates or live with their parents.

“That choice is going to be determined by basic economics: your income, budget constraints, the cost of renting and the cost of owning a home versus living with your parents. So the deficit of housing I think is very real,” he said.

The second critique he hears is that this is the new normal and the industry is going to get back to the 2005 levels of production at some point. But, on the other side of this, the answer that a lot of people would rather not hear is that the industry is in a long recovery. 

“We are going to see incremental gains in housing production, but they’re going to be slow,” he said. Residential construction is limited by lack of labor, lots/land, lumber/materials, lending for builders and laws/regulatory burdens, but this doesn’t mean it’s stagnant or not moving.

Late last year, homebuilder confidence reached a 20-month high, a promising sign for the future of residential construction.

Dietz summed up the theme of the last decade, stating that there are no silver bullets. “There are lots of significant challenges. As markets respond and try to solve one or you get some help from policymakers on another, there’s yet another challenge,” he said. “So the momentum is there. We are increasing production, but it’s going to be a slow process as we go forward.”