The collapse of the US housing bubble in 2008 triggered a deep global recession that still isn’t fully behind us. Perhaps unsurprisingly, residential construction has been one of the last sectors of the economy to recover—the glut of underwater mortgages has finally receded, but a relatively small amount of new homes are being built. Although the population continues to grow, housing starts sit at the same levels seen in the early 2000s.
Now that full employment is on the horizon and home values have recovered their losses from the recession, pent-up demand could finally invigorate residential construction. Americans still aspire to home ownership—after years of decline, the ratio of homeowners to renters has stabilized at around 64 percent of households. This is down from a pre-recession peak of 69 percent, but well within historical norms.
Estimates of vacancies show a tightening national real estate market, and rising home prices are making new construction more attractive. After years of lagging behind the broader economic recovery, housing may finally begin to catch up. Four trends are combining to sustain demand for new housing stock:
During the recession, more than 2 million unemployed young adults grew discouraged and gave up on searching for a job; this pushed the labor force participation rate for 20- to 34-year-olds down by nearly 3 percentage points. Instead of moving out and forming new households of their own, these discouraged young adults continued living with their parents or roommates, awaiting a stronger job market.
In recent years, however, approximately half of these workforce dropouts have returned to employment. An additional million are expected to resume their job search as the labor market continues to tighten. As the purchasing power of this cohort grows, they should release a surge of pent-up demand for new housing arrangements.
A stronger labor market should also encourage a higher influx of skilled immigrants. Population flows have always fluctuated with the business cycle—people are more likely to seek a better life in the US when demand for labor is strong and good jobs appear readily available for new arrivals to the country. As the peak of the business cycle approaches, immigration is once again accelerating.
New immigrants provide a nearly instant boost for housing demand. Many green card and H-1B visa holders arrive mid-career, ready to establish themselves in their new country. For these new arrivals, the housing search is a top priority.
The steady migration away from expensive coastal cities is encouraging new construction in hot inland markets like Denver, Chattanooga and Austin. For generations, Midwestern cities have been shrinking as their citizens seek warmer climates and better opportunities in the South. Snowbirds are being joined by residents priced out of the real estate market in cities like New York and San Francisco, where jobs are plentiful but housing has become unaffordable for many.
Recent tax reform legislation will likely increase this trend. The Tax Cuts and Jobs Act of 2017 limits deductions for state and local property taxes, effectively making homeownership more expensive in higher-tax states like New York and California. Since people cannot bring their housing with them when they relocate, regional rebalancing will create demand for new construction in cities throughout the US.
The economic case for new construction is growing stronger. Residential real estate values have climbed 46 percent since the market bottomed out in 2009, and home prices are once again rising more quickly than nominal income. With the market tightening and fewer vacancies, there’s more incentive for new construction.
Construction costs have been rising far more gradually than housing values, which means that most houses now sell for a price significantly higher than their replacement cost. In the coming years, demand for housing is likely to surge. After years of restraint, a combination of demographic forces and regional migration may finally create the conditions for a revival of the housing sector.
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