America needs more homes. But there aren’t as many home builders out there making them as there used to be.
The Commerce Department said on Friday that construction of 1.74 million homes began in March, at a seasonally adjusted annual rate. This was a big step up from 1.46 million housing starts in February, when winter storms choked construction, and marked the highest level since July 2006, when the housing bubble was in the process of unraveling.
The acceleration in construction reflects a remarkable resurgence in the housing market that the Covid-19 crisis sparked, as low interest rates and city dwellers flocking to the suburbs significantly boosted demand. There could be bumps ahead, as rates tend to go up and some of the demand has likely been pulled forward by families who would have eventually left the cities anyway.
But the combination of a growing economy, more Millennials building families, and changes in where people and businesses can locate as a result of the work revolution. remotely suggest that the need for new homes will only increase. Freddie Mac estimates that at the end of last year, the country had 3.8 million single-family homes below what is needed to meet long-term demand.
Before the housing bubble burst, this demand would have been easier to meet. There were many more home builders then, especially speculative builders who build homes without a guaranteed buyer. In the census of US companies that it conducts every five years, the Census Bureau in 2007 had 32,158 specification builders operating in the country. In 2017, there were 15,483.
Today, large public builders have a much larger footprint, particularly in the suburbs surrounding large metropolitan areas, including those seen as the beneficiaries of any remoteness from larger cities. According to data collected by Builder magazine, the top 10 builders in the metro area that includes Austin, Texas, accounted for 57% of the new housing market in 2019, up from 40% in 2005. The top 10 in the Denver area accounted for 61% of the market, compared to 52% in 2005.
Even with growing demand, it might be difficult for new entrants to gain a foothold in many markets. Banks remain less willing to give loans to entry-level builders than they were previously, giving large builders – especially large public builders with access to capital markets – a substantial advantage when it comes to to secure the land.
Large builders are generally more risk averse than the speculative small builders who fueled past construction booms. On the positive side, it makes busts less likely. It also means that the big builders won’t rush to build every house possible, choosing instead to ride what could be a lucrative wave of demand for a long time to come. This in turn suggests that housing won’t become much more affordable anytime soon.
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