Construction workers building a house

When 36-year-old Mae Perez was shopping for her first home, she knew she had major hurdles to clear. First, she lives in Los Angeles, one of the most strained markets in terms of affordable housing, and second, she wasn’t a cash buyer. It took Perez a few rejected offers and months of house hunting to find a place she could afford.

“The challenge was finding a house that would be available to us. The inventory is just not here,” Perez says. “We had to compete with cash buyers who didn’t have to jump through the hoops we had to as mortgage buyers.”

What Perez experienced is normal for new homebuyers throughout the country — not just in high-priced markets. Inventory for entry-level houses isn’t expanding fast enough to keep up with demand. Heavy competition on available homes is leading to higher prices, and pricing out many new buyers as a result.

Homebuilders, meanwhile, are facing challenges preventing them from meeting demand, despite an increase in hiring for residential construction jobs.

Construction jobs climb, but it’s not enough

Residential construction jobs increased 5.1 percent from December to January, according to the latest jobs report from the Bureau of Labor Statistics, and have increased 3.3 percent year over year. This increase, however, is not enough to make up for the tremendous lack of skilled labor, which is just one of several obstacles facing the residential construction market.

Generally, the nationwide average for new home construction is 1.3 million new houses per year. But housing completions in January were at an annual rate of just 850,000, according to census data.

That number signals a real scarcity, says Robert Dietz, chief economist and senior vice president for economics and housing policy for National Association of Home Builders (NAHB).

Headwinds for homebuilders

Dietz says there are five major problems facing homebuilders, nicknamed the “5 Ls”: labor, land, lending, lumber and local regulation.

  • Labor: After the housing crisis, many builders were out of work or left the industry altogether. As construction jobs disappeared, so did the young workers developing the skills needed to build. Today, there are jobs but no workers.
  • Land: Economic growth and demand are strong, but in many communities, there’s a shortage of lots.
  • Lending: Builder financing has been significantly reduced, Dietz says.
  • Lumber: Lumber prices are up significantly over the past two years, Dietz says.
  • Local regulations: Regulatory burdens have stymied growth, Dietz says, citing NAHB surveys conducted in 2011 and 2016 about required procedures and costs that go into home construction. “What we found was that costs between 2011 and 2016 went up 29 percent,” Dietz says. “During that period, builders shifted more to building expensive homes. It was easier to pass those burdens down into the higher end of the market than it was in the entry level.”

When will there be relief?

It’s going to take consistent, high levels of output to compensate for the dearth of new homes, says Paul Bishop, vice president of research for the National Association of Realtors (NAR).

“We’re quite a ways away from where we need to be to satisfy all that pent-up demand,” he says. “The subpar level of building we’ve seen accumulates year after year. It’s going to take strong construction growth to make up for all those years when we weren’t building nearly enough homes.”

Adam DeSanctis, national media manager at NAR, says that, although this year will likely be dominated by big-ticket homes, first-time buyers might start seeing a slight uptick in entry-level construction.

“We do anticipate a slow, gradual shift to the entry level end of the market, but the higher cost of building a home will keep building activity more skewed this year to that middle to upper end of the market,” DeSanctis says.

As for Mae Perez, she ended up with a house she likes in the San Fernando Valley, but it’s farther from her work than she wanted and more than 15 miles outside of the major centers of Los Angeles.

“We were finding that we were compromising a lot of things,” she says. “At one point, we just wanted to get our foot in the door. We didn’t care if the house was a fixer-upper or not. Our hope was that one of our offers would be accepted. We figured we’d deal with the house’s problems after.”