Politicians are promising housing help. Homebuilders say the problems are many and the solutions scant.

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September 22, 2024 at 7:00 AM
A home under construction in Tucson, Ariz., on Sept. 16.

In the suburbs of Wichita, Kansas, local homebuilder Carl Harris used to charge homebuyers around $330,000 for one of his new-construction homes aimed at growing families. Now, he’s selling that same house for $450,000 — putting it out of reach for the typical household there.

“The payment on that home two and a half years ago was about $1,700. Today, it is just over $3,000,” said Harris, who also serves as chair of the National Association of Home Builders. “That continues to lock a number of people out of the market, and that’s where the true concern is.”

The additional $120,000 added to the price tag of his homes isn’t going into his pocket, he says — he’s making the same 6.5% profit margin — but rather to cover the higher costs of building materials, labor and land, which have increased by double digits over the past three years.

Homebuilders across the country echo his frustrations as they have struggled to keep up with the growing demand for more affordable housing amid rising costs, a shortage of workers and increasing building restrictions from local, state and federal governments. Those factors, along with the lingering effects of the subprime mortgage crisis, have limited the number of new homes they say they can build, creating a supply and demand imbalance that has driven prices higher across the housing market.

“From a homebuilder’s perspective, if we could build more houses in more places at more attainable prices, we would be doing it in a heartbeat,” said Mike Forsum, president and chief operating officer of Landsea Homes, which sold around 700 homes nationwide in the second quarter. “I don’t think people realize and appreciate how many factors are involved in doing what we do.”

Estimates for how many additional homes the U.S. needs vary, but the National Association of Home Builders and mortgage buyer Freddie Mac have found an additional 1.5 million housing units are required to rebalance the market. That scarcity has contributed to a 50% rise in home prices over the past five years, making housing affordability a top issue for voters in the upcoming presidential election.

Vice President Kamala Harris has proposed offering $25,000 in down payment assistance to first-time homebuyers and incentives to homebuilders to construct more housing for first-time homebuyers. Former President Donald Trump has said he would lower housing costs by opening federal land to development, rolling back regulations and reducing overall inflation.

But homebuilders say they face a web of challenges that have been nearly two decades in the making and will likely take years to resolve.

“There’s no single simple, scalable solution,” said Robert Dietz, chief economist for the National Association of Home Builders. “It took us about a decade to get into this situation. It’s probably going to take us about a decade to get out.”

The origins of the current housing shortage trace back to the subprime mortgage crisis that began in 2007, which led to an overabundance of homes built for buyers who ultimately couldn’t afford them. The resulting rise in foreclosures and plummeting home values nearly halted new-home construction in many parts of the country.

“We have underbuilt housing for the last decade,” said Dietz. “Coming out of the Great Recession, you had a glut of homes because there was bad mortgage underwriting and builders built to demand that wasn’t really there. But once that excess inventory had been burned off, the industry was in a much weaker position.”

The industry had been slowly getting back to where it was prior to the housing market crash when the pandemic hit, driving up building material costs, disrupting supply chains, and creating labor shortages.

“I know nobody loves this answer, but it’s real: The Covid effect drove the prices of supplies and labor up significantly,” said Sheryl Palmer, CEO of homebuilder Taylor Morrison.

Single-family home construction was down 6% last year, and the number of new homes being built in July was on par with levels last seen in March 2017. But despite the ups and downs for the industry, the population has continued to steadily grow — fueling continued demand for homes, especially from millennials entering their peak homebuying years.

One major barrier to driving down prices and increasing supply has been a shortage of workers, homebuilders said. The construction industry lost more than 2 million workers following the subprime mortgage crisis, with an average of 300,000 to 400,000 unfilled construction jobs each month over the past several years, according to the Bureau of Labor Statistics. That shortage has contributed to a 42% rise in residential construction wages since 2019.

“We can only deliver so much housing because of the labor constraints, and so we’ve got to continue to figure that out,” said Palmer, whose company is selling three-bedroom townhomes in the Atlanta suburbs for around $400,000, two- to three-bedroom single-family homes near Las Vegas for around $300,000, and larger 3,000-square-foot homes near Raleigh, North Carolina, for $500,000.

Like Palmer, Forsum said he is also limited in how many housing communities Landsea can build because of a shortage of workers — many of whom have immigrated to the U.S. and could be affected by changes to immigration policy.

“I’m not advocating anything illegal, but the immigrant labor in the construction industry are literally the backbone of what we are and what we’re about,” said Forsum. “They’re amazing people, they’re incredibly hardworking, they are doing some of the toughest jobs under the toughest conditions, and we need more of them, and we need them to feel more comfortable in the places that we need them to be to build the houses.”

Along with the labor shortage, the cost of building materials spiked during the pandemic when supply chains were disrupted and demand increased. The cost of bricks has increased 29% over the past four years, concrete is up 33%, and steel products are up 77%, according to the National Association of Home Builders.

Homebuilders also say they regularly encounter opposition from homeowners and local officials when they propose building lower-cost homes, like those that are smaller, closer together and have a more simplistic design.

“If you have a $700,000 house in Dallas and I buy a piece of property next door and I want to build a $300,000 house on it, the natural response would be to worry that is going to potentially bring down the value of your house,” said Palmer. “That might not be true, but you can’t help but think it.”

Local building fees can also significantly add to the price tag. In Sacramento, California, Palmer said it costs Taylor Morrison more than $100,000 in fees and permitting costs to start construction on a home, compared to $25,000 in parts of Texas.

To lower the prices, builders say they have been moving their developments farther out from city centers where land is cheaper and there are often fewer building restrictions. They’ve also been scaling back the size and features of their homes — shrinking square footage, building more townhomes and condos, and downgrading the quality of finishes, like countertops, cabinets and flooring.

“Your trade-off on price is being closer, more densely packed, and that’s a lifestyle change, and that’s not what everybody wants,” said Forsum, whose company has reduced the average price of its homes from $850,000 four years ago to $550,000 this year. “If you want the dream of what every kindergarten child draws when they think of a house with the side yard, the front yard, smoke coming out of the chimney, the front door, it’s a difficult thing to do.”

Landsea is selling a 1,600-square-foot three-bedroom, two-bathroom home in Fort Worth, Texas, for around $350,000, a slightly larger three-bedroom, two-bath home for $420,000 in the Phoenix suburb of Buckeye, and a four-bedroom, 2,500-square-foot home for around $650,000 in Orlando, Florida.

In Wichita, Harris said about 40% of the increase in the price of his new homes has been from higher labor costs, with 25% of the added costs coming from building material increases and another 25% from developing the lot.

Along with building custom homes, Harris builds two standard models of homes: a five-bedroom, three-bath home with a finished basement and a home geared toward empty nesters with two master bedrooms, a safe room, an entertaining area and an upgraded kitchen.

Harris said he sees some relief in sight as labor shortages and building material costs ease, but ultimately there needs to be more efforts at the local, state and federal levels to remove barriers to building more affordable homes and increase the overall supply — something he said homebuilders are eager to do.

“It’s almost like trying to increase egg production by strangling the chicken. You can’t ask for more production and then choke off the means of production,” Harris said. “It’s not a housing crisis, but a housing policy crisis, and if we can get those who make policy to correct policy, then maybe it can bring down some of the costs and lessen the fighting over existing homes.”