To understand the slow-motion trends in single-family housing, start by looking at the oil market: It took years of oil priced around $100 a barrel to spur the investments that drove higher production, leading to the current supply-driven glut and prices closer to $50 a barrel. The levers of supply and demand worked, but they worked slowly – as is happening in the housing market.

Every year since 2009 we’ve been running a housing deficit: More housing for sale has been absorbed than built. With a glut of housing left over from the housing bubble and the great recession, it’s logical that construction of new supply was subdued for a few years. But vacant inventory for sale normalized in 2012, and currently stands at a 12-year low. So why aren’t builders building more? The pace of construction remains far below the rate of household creation.

Part of the blame can be attributed to a shortage of construction workers. After the housing bust, many construction workers either left for other industries, such as the then-booming energy sector, or retired. They’ve been slow to return, and current immigration policy makes it difficult to bring in new workers from other countries.

As a result, the unemployment rate for construction workers is at its lowest level since 2000. If current trends continue, by next summer the construction labor shortage may be approaching the severity seen immediately after World War II.

In response to a nearly generational low in housing inventory and construction worker shortage, one might expect that there would be booming wage growth for construction workers, drawing labor away from other industries. Yet we don’t have conclusive signs of that. Year-over-year wage growth for construction workers is currently 2.7 percent, nearly a full point lower than it was at the same time in the year 2000.

The lack of growth in new construction jobs is sobering. Despite a need for more housing, and despite the labor shortage and the wage growth, construction industry employment fell 6,000 in April and 16,000 in May and showed no growth in June. This is the first time in more than five years that construction employment has shown no growth for three months.

This is all the more perplexing because the cyclical conditions for real estate have rarely been better. In addition to the low level of inventory and rising secular demand as millennials are ready to buy homes, the economy has been enjoying rising wage growth and historically low levels of interest rates.

While the signals from the economic data are very strong, the market signals have been more muted. What’s clear is that 2 to 3 percent construction wage growth and 5 to 6 percent house price appreciation isn’t anywhere close to creating strong enough price signals to encourage the market to build all the housing we’re going to need over the next decade.

So what will create the same incentives for housing that $100 oil created for energy production? Will it take another 30 to 50 percent increase in house prices and sustained 6 to 8 percent construction wage growth to make it happen? If so, it’s quite a nice gift to baby boomers: a surge in their home values right when their kids are ready to start their own families.

 

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