The Importance of New Construction on the Housing Market

​With growing population across the United States and an aging infrastructure, new construction homes are becoming more and more important to meet housing demand.  Residential New Construction Starts is a primary indicator that economists use to determine the health of current and future housing markets.  From years 2010 to 2020 the US population has grown by over 2 million  people each year.  Combine that with only 1.29 million new construction housing starts for 2019 (most recent data available), you can see how population is outpacing available homes.  Of the 1.29 million homes built in 2019, only 888,200 were single family units. 
 The rest were multi family units.  

The new construction deficit is nothing new.  It is over a decade old now.  At the height of the real estate market in 2006, the US housing market reached over 2 million new construction starts per year.  Following the housing market crash and global financial crisis, US new construction starts dropped all the way to below 500,000 by the end of 2008, and had only recovered to around 1 million per year.  Nearly half of what it was over a decade ago.  It's true that much of the increase in new construction was speculation and artificially inflated real estate prices, but the 2 million unit figure from 2006 appears to be more in line with the demand than our current 1 million unit figure.

A reduction is new construction starts can have a significant impact on the house market as a whole.  When supply of housing is lower, it can most commonly cause a rise in prices across the US.  There are currently three major drivers of the current real estate market that we find ourselves in.  First, there is still a lack of new construction homes hitting the market to meet demand for population growth.  Second, the COVD-19 virus has caused a lot of home owners that would normally be listing their home for sell in 2020 to hold off until 2021.  While other home owners have decided to hold off indefinitely due to other external factors, such as job security or increased risk of infection due to a comorbidity.  This has also caused a significant decrease in housing inventory and added to rising prices.  Lastly, the artificially low interest rates and availability of money in the housing market has contributed to an abnormally high demand for housing in a market that is lacking supply.  Basic economics would tell us that such a drastic decrease in supply and a moderate increase in demand will lead us to rising prices.

Unfortunately the COVID-19 virus is out of our control and there is nothing we can do to eradicate it just yet so we must look at addressing the other two factors.  Increased buyer demand is a good thing, even if it is due to artificially low interest rates aimed at stimulating the market.  There isn't any action to be taken there either, especially in the short term.  The one obvious solution is to increase the new construction starts so the US housing market can begin to chip away at this housing supply crisis.  There could possibly be pent up supply of housing that will rush on the market in 2021, but that will likely fizzle out by 2022 and we will still be left with an unhealthy deficit in new construction starts relative to population growth.  We simply need to build more homes.

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