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Why Aren’t New Homes Going Up That Millennials Can Afford?

All across the country, home prices are shooting up, driving buyers to slug it out in bloody bidding wars. And those feeling the punches the hardest: first-time home buyers. Cut me, Mick!

One of the main factors pushing up prices also happens to be one of the most intractable: There just aren’t enough newly constructed homes that are affordable for sale. Yet home builders, who could swoop in heroically and save cash-strapped millennials by creating a new wave of entry-level homes, aren’t coming to the rescue any time soon.

Much like home buyers themselves, builders are still struggling to recover from the housing crash of ’08—dealing with lenders who don’t want to lend and higher costs for all things housing-related.

Construction on single-family homes is expected to be up about 15% this year over the previous one, says Robert Dietz, chief economist at the National Association of Home Builders. About 968,000 new, single-family homes were completed in 2015, according to the U.S. Department of Commerce.

But don’t expect to score a bargain-basement deal on a brand-new starter home. Not anytime soon, anyway. That rose-colored American dream of moving into a gleaming new first home made just for you—well, it’s fast fading into scratchy black and white.

“Builders are creating larger, more expensive homes for older buyers” with the money to burn, Dietz says. Sorry, millennials! Those target older buyers are typically existing homeowners who want to move up into bigger homes.

So first-time buyers are caught in a classic bind. They don’t make up a significant share of the new-home market—only 11% of those 35 and under bought new, never-occupied homes, according to a recent National Association of Realtors® report. They’re just too darn expensive, and so not many new homes are being built for them. Can anyone say “chicken vs. egg”?

For example, the median price of a new home was $301,400 in February, according to the U.S. Department of Commerce. That’s a big contrast from the median cost of an existing home at $210,800 in February, according to NAR.

Homebuilders’ costs skyrocketed

The reason that new construction is more expensive isn’t just because you’re getting shiny new appliances and rooms that have never been lived in before. It’s everything that goes into developing a brand-new residential area.

“In some large metro areas like New York and San Francisco … it’s difficult to obtain land to build on,” Dietz says.

Builders in most markets must contend with zoning, securing permits, and taking care of any environmental issues, as well as installing the infrastructure on newer developments, including sewers and roads, he says.

And the longer it takes to prep the land and put up the houses, the more costly it is for builders—and therefore for buyers, too.

“If you buy the land, and it takes you 10 months instead of two months to get all the permits and agreements from utilities … [that] raises the cost for the builder and reduces the number of potential buyers willing to wait around a while until they can move in,” says Ken Simonson, chief economist for the Associated General Contractors of America.

There are more cost-effective ways to build. By fitting more residences such as townhouses into smaller lots in new developments, builders can charge less per home.

Residences are generally cheaper to build—and therefore cheaper to buy—farther from city centers. But many people want to avoid long commutes to work, says Susan Wachter, a real estate and finance professor at the Wharton School of the University of Pennsylvania. So those homes may end up being a harder sell.

Labor ain’t cheap either

The burst of the housing bubble in 2008 was catastrophic for the residential construction industry—about half of builders went out of business as buyers and financing dried up. Laborers who got laid off went on to other industries or careers.

Some builders are now just beginning to get back into the market. But even when they do, they often can’t find the skilled workers essential to constructing homes—the industry remains down about 900,000 laborers, says NAHB’s Dietz.

In addition, some contractors were burned during the financial crisis by builders who, once their own businesses began to suffer, stiffed contractors on their fees or paid them less than promised for labor, says Jonathan Smoke, chief economist of realtor.com.

Those enterprising contractors who stayed afloat by moving into home remodeling or commercial construction may be understandably reluctant to go back into business with the same builders who are now knocking on their doors.

Loans are tough to come by

It isn’t just hopeful home buyers who have to run the gantlet with newly strict lenders to get the necessary cash for a new home. The bulk of residential construction around the country is done by smaller builders who typically go to local lenders such as banks and credit unions for financing.

But after the crisis, lenders became way more cautious about doling out loans. This means developers and builders have a harder time getting the financing needed to embark on new projects and that limits the amount of new construction.

“There are limits to how fast the industry can grow, given the industry has to rebuild its workforce, rebuild the building lots supply, and also have an increased access to lending for builder loans,” Dietz says.

Glimmers of hope

But first-time buyers shouldn’t necessarily despair. There is hope!

Given the raw numbers of younger home buyers entering the market, it’s likely that builders will wake up to the opportunities they represent and start addressing it head-on. Eventually. Home designers can look at cheaper materials or construction to put up a quality home for less, says residential building consultant Tony Callahan, president of Kennesaw, GA–based Callahan Consulting Group.

For example, instead of installing a wooden banister along a staircase, a half-wall could go up instead, he says. Formica countertops in kitchens can be used instead of granite just as linoleum, instead of tile, can be laid down in the bathrooms. And not every room needs several windows.

“It’s really looking at all parts of the home,” Callahan says.

Smoke has also begun to see some of the bigger builders such as D.R. Horton put up more attractively priced dwellings.

“But it’s just not enough,” he says.

The country is losing more affordable homes each year and very few similarly low-priced residences are going up to replace them, Smoke warns.

Some are lost through simple wear and tear over time, others succumb to environmental disasters (such as storms) or are torn down so that bigger ones can go up in their stead, Smoke says. Investors have also swooped in in recent years and turned many of these less expensive abodes into rentals.

“You can’t have an increase in first-time buyers if the first-time buyers don’t have homes to purchase,” he says.

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Related: Should You Buy a New or an Old Home?

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Source: Real Estate News and Advice – realtor.com » Real Estate News