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The United States has a deep, decades-old housing shortage. Also, at the moment, homebuilders across the country are pulling back on development because they can’t sell enough homes.
How can both of these things be true? That riddle is at the heart of the boom-bust nature of housing, where an excess of regulation and the mixed incentives of the market mean there is never a supply that lines up with demand. One way or the other, solving it will require more building during downturns, and, most likely, some sort of public program to subsidize it.
Consider what the past few months have visited on Hayden Homes, a regional homebuilder that is based in Redmond, Ore., and builds about 2,000 houses a year throughout the Pacific Northwest. At the beginning of the year, Hayden’s biggest problem, shared by almost every other U.S. homebuilder, was figuring out how to supply enough houses for everyone who wanted one.
The company couldn’t find enough land, workers were scarce, lumber prices were exploding, and the faltering supply chain turned the search for everything from dishwashers to garage doors into a kind of corporate scavenger hunt.
The one thing builders were not short on was qualified buyers, who were in abundance because of low interest rates, high household savings and the sudden ability for millions of workers to set up home offices wherever they wanted. To deal with the crush of demand, builders like Hayden began choosing buyers from waiting lists or conducting elaborate lotteries to pick a “winner” from the crowd.
Now, in the space of a few weeks, the situation for Hayden, and the housing market, has reversed. Interest rates on the average 30-year mortgage have jumped to about 5.5 percent, from about 3 percent at the start of the year. That has added hundreds of dollars a month to the typical house payment and disqualified many buyers. At the same time, a broader slowdown in home sales and price gains have caused many would-be purchasers to pull back for fear of buying at the market’s peak.
Following a steep decline in sales for June, and after watching its waiting lists dissipate, Hayden is rejiggering its inventory to emphasize smaller, cheaper dwellings, and ratcheting back the number of already-built “spec homes” it produces. All of this is happening even though the ranks of prospective buyers are still broadly employed, still sitting on a down payment and still dreaming of a new home.
“We would rather forgo a few sales in the future than be stuck with homes we are unable to sell now,” said Deborah Flagan, a vice president at Hayden.
The problem facing Hayden and other builders is simple: Sales of new homes are falling — down 15 percent this spring from a year earlier — at the same time that a wave of homes, begun before the jump in interest rates, are hitting the market. The number of homes that have been completed but not yet sold hit a 15-month high in May. Redfin, the real estate brokerage, recently reported that buyers are trying to back out of sales agreements at the fastest pace since the early weeks of the pandemic.
“Demand has slowed enough that builders are finding themselves with homes and no buyers for them,” said Ali Wolf, chief economist with Zonda, a housing data and consulting firm. “That is a problem we haven’t faced in years.”
Developers are responding the way Economics 101 says they should: by cutting prices on the houses they have already built, and by pulling the plug on virtually any project that wasn’t already too far along to be abandoned. Builders started construction on about 93,000 single-family homes in June, down 16 percent from a year earlier.
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John Caravella Esq., is a construction attorney and formerly practicing project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration across New York and Florida. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached by email: John@LIConstructionLaw.com or (631) 608-1346.
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Conor Dougherty is an economics reporter at The New York Times and the author of “Golden Gates: Fighting for Housing in America.” His work focuses on the West Coast, real estate and wage stagnation among U.S. workers. Mr. Dougherty has covered economics and real estate on and off for a decade at both The Times and The Wall Street Journal. Before that he worked at The San Diego Union-Tribune and The Los Angeles Business Journal. He lives in Oakland, Calif., and is a Bay Area native.
