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New Home Builders Optimistic but Cautious
Friday, October 23, 2015 6:35 AM

The National Association of Home Builders reported its housing-market index showed optimism among builders reached its highest level this month since October 2005. However, the Commerce Department’s report on building activity showed total construction starts on single-family homes were at 740,000 in September. That was up from 661,000 a year earlier, but well below October 2005’s pace of 1.74 million. The median level of single-family starts since 1959 has been about 1 million.

One reason builder optimism is high, despite the low level of starts, is survivorship bias: there aren’t nearly as many firms in business now as during the bubble. So while the pie is smaller, it is getting cut into fewer slices. Another reason for the optimism is that their homes have been fetching high prices and, until, recently, costs have been contained.

In the 12 months ended August, the median price for a new home averaged $290,300, according to the Commerce Department, 35 percent higher than the average median price for an existing home reported by the National Association of Realtors over the same period. And because construction-worker wages were so soft following the recession, those higher selling prices have been falling to the bottom line.

But attracting workers has become a problem. Competition for labor has resulted in increased costs and longer construction times. The main reason for the labor shortage is the residual affect from the recession. Many home construction workers left the industry and found jobs elsewhere.

Hiring more workers without stepping up pay is probably a nonstarter. And, given the competition on price with existing homes, builders can’t easily pass rising labor costs on to customers.

Also holding back the industry is a cautious approach to housing demand, construction financing, mortgage lending, the process of securing land, preparing land for construction, and the skyrocketing cost of construction materials.

Source:  The Wall Street Journal, 20 October 2015