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Ask the Economist: Robert Dietz, Ph.D.

DSN-story (3)Robert Dietz, Ph.D., is Chief Economist and SVP for the National Association of Home Builders (NAHB), where his responsibilities include housing market analysis, forecasting and industry surveys, and policy research. Prior to joining NAHB in 2005, Dietz worked as an economist for the Congressional Joint Committee on Taxation, where he was the committee’s real estate expert. He has testified before Congress and published academic research on housing, economic, and tax issues.

In December, your housing market index indicated that builder confidence was at its highest level in more than 11 years. What is the significance of high builder confidence for the housing market?

According to the NAHB/Wells Fargo Housing Market Index (HMI), builders experienced a surge of market optimism following the election. As you noted, the index jumped significantly, rising from 63 to 70 in December on the hope of more efficient regulatory policy. And higher market confidence will translate into more building and more inventory in 2017.

The industry has a number of supply-side challenges that are limiting the growth rate for home building. One of the key concerns is the rise in regulatory burdens that adds to the baseline cost of a home. Earlier this year, NAHB released a paper that estimated that regulatory costs associated with land development and residential construction have increased 29 percent over the last five years and make up nearly a quarter of a home’s final sales price.

Builders nationwide expect the election results to result in a reduction of these costs, enabling more construction, more housing inventory and a reduction in cost burdens for buyers and renters alike.

What other factors have been holding builder confidence back in the last year or so?

Besides regulatory costs, the most important challenges for home building have been on the supply side of the market. Demand is positive, rates are low, and jobs gains continue. But the industry’s infrastructure was much reduced by the Great Recession. And in particular, there are simply not enough workers and building lots in the pipeline to allow home building to grow faster in what is a tight inventory environment. The industry is adding workers, more than 120,000 over the last 12 months, and lots are coming (64 percent of builders report low or very low lot supplies), but it will take some time.

Some analysts have pointed to new construction as the key to overcoming the single-family inventory shortage. What needs to happen in order for new single-family construction to pick up?

Pick up is the key phrasing. We expect single-family construction to grow 10 percent next year. That’s a positive growth rate, but it is below what is necessary to offset the shortage of both new and existing homes. What’s needed is an industry-wide effort (builders, other housing stakeholders, community colleges, and high schools) to attract the next generation of construction workers.

And local governments, in coordination with state and federal rulemaking, need to examine the interaction between policies that limit or increase the cost of land development and local housing affordability challenges. Many large metros in the U.S., places where job growth is strong and wages are high, also suffer from housing affordability problems. The answer is simple—more housing supply. Getting the right policies is more complicated, but there is a strong agreement among housing economists that land use policies are a key problem for housing affordability.

Do you think price appreciation will slow or will demand keep upward pressure on prices?

The rise in interest rates is the most important challenge on the demand-side of the market. I expect rising rates to diminish price appreciation for housing, but for positive growth to continue due to lack of inventory.

However, it is important to keep in mind two things. First, rates are rising because the labor market is tight and unemployment is low. Further, most economists have increased their growth expectations for the next few years. To that extent, rising rates reflect a more positive economic environment, and that is good for housing demand.

Second, the primary challenge for most homebuyers, and especially for renting members of Generation Y, is accumulating sufficient savings for a downpayment to purchase a home. That remains true in today’s tightening rate environment, and highlights the importance of programs like FHA-backed mortgages.

We just completed the best year for home sales in a decade. What needs to happen in order for sales to have an even better year in 2017?

Well, the easy answer is we need more GDP and job growth. One potential source of that growth is clearly residential construction. Home building and remodeling currently make up about 3.5 percent of GDP. To get back to a sustainable level, based on population growth and the need to replace older housing, I’d like to see that share grow back to 5 percent. That would mean jobs and economic benefits. And more inventory would mean higher levels of both new and existing home sales

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