Carl Harris, a home builder outside Wichita, Kansas, used to charge buyers looking to build a growing family about $330,000 for a new home. But now he’s selling the same house for $450,000, putting it out of reach for most local families.
“Two and a half years ago, you would have paid about $1,700 on that home. Today, it’s just a little over $3,000,” said Harris, who also serves as president of the National Association of Home Builders. “That keeps a lot of people out of the market, and that’s a real concern.”
He says the $120,000 added to the home’s price won’t go into his pocket, but will go to cover the rising costs of building materials, labor and land, which have risen double digits over the past three years, at the same 6.5 percent profit margin.
His frustrations are echoed by homebuilders across the country who are struggling to meet growing demand for more affordable housing amid rising costs, labor shortages and tougher building regulations from local, state and federal governments. These factors, along with the lingering effects of the subprime mortgage crisis, are limiting the number of new homes that can be built, creating an imbalance between supply and demand that is driving up prices across the housing market.
“From a homebuilder’s perspective, if we can build more homes in more places at more affordable prices, we’d do it in a heartbeat,” said Mike Forsom, president and chief operating officer of Landsea Homes, which sold about 700 homes nationwide in the second quarter. “I don’t think people realize or appreciate how many moving parts go into our business.”
Estimates vary on how many more homes the U.S. needs, but the National Association of Home Builders and mortgage buyer Freddie Mac say 1.5 million more are needed to rebalance the market. The shortage has caused home prices to rise 50% over the past five years, making home 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 offering incentives to homebuilders to build more homes for first-time buyers, while former President Donald Trump has said he would lower housing costs by opening up federal land to development, removing regulations and curbing overall inflation.
But homebuilders say they face a set of challenges that have been building for nearly two decades and will likely take years to resolve.
“There’s no one simple, scalable solution,” said Robert Dietz, chief economist at the National Association of Home Builders. “It took us about 10 years to get into this situation, and it’s probably going to take us about 10 years to get out of it.”
The current housing shortage dates back to the subprime mortgage crisis that began in 2007. The crisis led to an over-construction of homes for buyers who could not afford them. As a result, new home construction came to a near halt in many parts of the country as foreclosures increased and home prices plummeted.
“We’ve had a shortage of homebuilding over the last decade,” Dietz says. “We were coming out of the Great Recession when poor mortgage underwriting led builders to build homes that weren’t actually in demand, creating an oversupply of housing. But once that excess inventory was liquidated, the industry was in a much weaker position.”
The housing industry was slowly returning to where it was before the housing market collapsed, but then the pandemic hit, raising the cost of building materials, disrupting supply chains and creating labor shortages.
“No one’s going to be happy about that answer, but it’s true: COVID has caused prices of materials and labor to rise significantly,” said Cheryl Palmer, CEO of homebuilder Taylor Morrison.
Single-family home construction fell 6% last year, with the number of new homes built in July falling to the lowest level since March 2017. But despite the housing industry’s ups and downs, the population has continued to grow steadily, leading to continued demand for housing, particularly from millennials who are in their peak home-buying years.
Homebuilders say one of the biggest obstacles to lowering prices and increasing supply is a labor shortage. The construction industry lost more than 2 million workers after the subprime mortgage crisis and has left an average of 300,000 to 400,000 construction jobs unfilled each month over the past few years, according to the Bureau of Labor Statistics. That shortage has led to a 42% increase in homebuilding wages since 2019.
“There is a limited supply of housing due to labor constraints, so we have to continue to look at that,” said Palmer, whose company is selling three-bedroom townhouses outside Atlanta for about $400,000, two- and three-bedroom single-family homes near Las Vegas for about $300,000 and a larger 3,000-square-foot home near Raleigh, North Carolina, for $500,000.
Like Palmer, Forsom said Landsea is limited in the number of housing communities it can build because of a shortage of workers, many of whom have emigrated to the United States and who could be affected by changes to immigration policy.
“I’m not advocating illegal activity, but immigrant workers in the construction industry are literally the backbone of our existence and purpose,” Forsom said. “They’re amazing people, incredibly hard-working, doing the toughest jobs in the toughest environments. We need more of them, and we need them to be more comfortable working in the places we need them to build homes.”
In addition to the labor shortage, disruptions to supply chains and increased demand during the pandemic have caused costs of building materials to soar: The cost of brick has risen 29% in the past four years, concrete 33% and steel products 77%, according to the National Association of Home Builders.
Homebuilders also say proposals to build lower-cost housing – smaller, denser homes with simpler designs – frequently face opposition from homeowners and local authorities.
“If there’s a $700,000 house in Dallas and I want to buy the land next door and build a $300,000 house on it, the natural reaction would be to worry that it could lower the value of my house,” Palmer says. “That may not be true, but that’s the way it feels.”
Local construction costs also play a big role in the price: In Sacramento, California, it costs Taylor Morrison more than $100,000 in fees and permitting fees to start building a home, compared with $25,000 in parts of Texas, Mr. Palmer said.
To lower prices, builders say they are developing in suburban areas, away from cities where land is cheaper and zoning regulations tend to be fewer. They are also scaling back on the size and features of homes, reducing floor space, building more townhouses and condominiums and lowering the quality of finishes such as countertops, cabinets and flooring.
“The trade-off on the price side is that you’re going to have more densely packed housing, which is a lifestyle change and not something that everybody wants,” said Folsom, whose firm has lowered the average home price to $550,000 this year from $850,000 four years ago. “If you want to achieve that kindergartener’s dream of a house with a side yard, a front yard, smoke coming out of the chimney and a front door, it’s going to be a challenge.”
Landsea is selling a 1,600-square-foot, three-bedroom, two-bathroom home in Fort Worth, Texas, for about $350,000, a slightly larger three-bedroom, two-bathroom home in the Phoenix suburb of Buckeye for $420,000, and a four-bedroom, 2,500-square-foot home in Orlando, Florida, for about $650,000.
In Wichita, Harris said about 40 percent of the price increase for new homes is due to rising labor costs, 25 percent of the additional costs are due to higher prices for building materials and the remaining 25 percent is due to land development.
In addition to building custom homes, Harris is building two standard model homes: a five-bedroom, three-bathroom home with a basement and a second home with two master bedrooms, a safe room, entertainment area and upgraded kitchen for a couple who have finished raising their children.
Harris said some relief is on the horizon because of easing labor shortages and building material costs, but ultimately, more work needs to be done at the local, state and federal levels to remove barriers to building more affordable housing and increase overall supply, which she said homebuilders are eager to do.
“It’s like strangling chickens to increase egg production. You can’t increase production while strangling the means of production,” Harris said. “This is not a housing crisis, it’s a housing policy crisis. If we can get policymakers to get the policies right, we can potentially bring down some of the costs and ease the competition for existing housing.”
