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Why is the new-home market is still lagging?

NEW YORK – Sept. 10, 2015 – The rebounding housing market still isn’t contributing much to overall economic growth as new construction of single-family homes remains near levels typical of the recession of the early 1990s, The Wall Street Journal reports.

The housing market has made many strides in recent months with foreclosures that have fallen to pre-crisis levels, rising home prices that are making owners feel more confident, and existing-home sales that have risen to the pace of the early 2000s.

But some industry analysts say that until construction of new homes ramps up, the housing market’s progress isn’t going to translate into a boost for economic and job growth, which the sector has been traditionally known for. The construction of one single-family home supports three full-time jobs for a year in construction and ancillary services, according to the National Association of Home Builders.

In the past year, single-family construction has added 1 percent of gross domestic product, which is about half its contribution in the 1990s, the WSJ reports.

New-home sales are moving higher: Sales are more than 20 percent higher than last year’s pace. But that pace remains well below every year of the 1990s. In the 1990s, single-family home sales, on average, comprised 16 percent of the annual unit volume of all single-family home sales. Last year, sales were at 9.2 percent.

Housing analysts blame lagging new-home construction on sluggish entry-level demand. Profit margins are lower on less-expensive starter homes, and many builders say the demand for starter homes isn’t robust enough yet to take the risk. Also, they say the tightening of mortgage credit in the past years has crippled the new-home market.

“Before the bust, builders relied on no-money-down programs to put new buyers into homes,” the WSJ reports. “Now, those programs are gone. Even though lending standards aren’t as tight as commonly assumed, perceptions of tight credit can also dissuade would-be buyers from looking.”

Labor costs have also risen as many construction workers left the industry after the housing crisis. Land costs also rose, which has translated into higher home prices for new-home buyers.

Some industry analysts say it’s crucial the new-home supply issues be addressed.

“We are on the cusp of a serious housing shortage,” says investor Aaron Edelheit, who sold his company this year that had about 2,500 rental homes in Atlanta. “Everyone keeps focusing on rates or qualifying for loans. They need to pay attention to supply.”

Source: “Why a Stronger Housing Sector Isn’t Boosting the U.S. Economy That Much,” The Wall Street Journal (Sept. 8, 2015)

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Source: Florida Realtors Feed

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