Builders are likely to ramp up the construction of single-family homes in the next two years, driven by a growing economy, improving unemployment rates and an increase in household formation, it's being reported.
The National Association of Home Builders projects a 10 percent increase in single-family home construction in 2017, up from 1.16 million starts the year before. Meanwhile, in 2018, housing starts will grow by 12 percent.
Despite the positive forecast, the NAHB warns that builders still face challenges in order to achieve this growth.
"While positive developments on the demand side will support solid growth in the single-family housing sector in 2017, builders in many markets continue to face supply-side constraints led by the three Ls — lots, labor and lending," said NAHB chief economist Robert Dietz. He was referring to recent NAHB findings that show some 64 percent of builders report "low" or "very low" supplies of building lots available, and warns that securing more available land to build on will be a time consuming process.
The NAHB says the biggest challenge for builders lies in $200,000-range entry-level homes. That's because regulatory requirements eat up around $25,000 of the costs of a new home in that category, which makes their construction less appealing. Still, Dietz said that townhome construction, which generally appeals to younger buyers, has already shown solid growth in the last year. Town homes represented 12 percent of all single-family home starts in 2016, Dietz said.
While higher mortgage rates may soften demand this year, builders remain upbeat. NAHB forecasts mortgage interest rates to average 4.5 percent in 2017 and then 5.3 percent in 2018. "Higher mortgage rates will be offset by stronger wage gains and job growth, which suggests that housing demand will increase this year," says David Berson, chief economist for Nationwide Mutual Insurance Co. "The question is: How much will supply go up?"
Many metro areas nationwide are seeing solid job growth, dropping mortgage delinquency rates, and strong housing price gains, Berson notes. He says demand has been exceeding supply and likely will continue to do so in 2017. That could put more pressure on home prices, however. "If there aren't enough homes on the market, that will be a problem," Berson syas. "Price gains need to moderate. We can't have 6, 7, or 8 percent gains. That is not sustainable."