While the recent reports and data in the housing industry sure look promising, analysts are still sceptical that it will contribute much to the overall economic growth of the country. Kris Hudson and Nick Timiraos of WSJ give us the reasons why:
1. The new construction of single-family homes, which packs an outsize economic punch, has stalled as new households rent and building costs have risen. Likewise, they remains to be stuck in levels that are close to the hit during the recession in the early 1990s.
2. There is soft entry level demand. New-home sales are more closely linked to household formation compared to existing home sales, which are more dependent on churn. The total number of households generally needs to be expanded to support new construction and increase the pool of potential buyers.
3. While household formation may be picking up, majority of these new households are renters. The increase in rental households explains why the homeownership rate has fallen to a 48-year low. Rental vacancy rates have been at their lowest level in 30 years.
4. Households need to qualify for a mortgage. Before the bust, builders depended on no-money-down programs to put new buyers into homes. Such programs are gone. And even if lending standards are not as tight as commonly assumed, perceptions about tight credit can also discourage would-be buyers from looking.
5. Living preferences have likewise shifted from homes in far-flung suburbs where land is cheapest to apartments that are closer to where they work and socialize. These places also happen to be more crowded and the land is more expensive. Home building has become low because "the places where people want to live are not that buildable," said Hui Shan, an economist at Goldman Sachs.
6. Labor costs have also increased because many construction workers left the industry after the bust and the builders' largest raw material that is land, has shot up in terms of pricing.
7. Previously, policy makers have focused on boosting demand by maintaining low interest rates and easing credit standards. But analysts say other approaches will need to focus on supply bottlenecks such as improving the permitting process.
"We are on the cusp of a serious housing shortage. Everyone keeps focusing on rates or qualifying for loans. They need to pay attention to supply, " said Aaron Edelheit, an investor who earlier this year sold his company that had amassed some 2,500 rental homes in Atlanta beginning in 2009.
