Will the Private Sector Close the Housing Gap?
New Housing Starts the Strongest in 15 Years
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Will the Private Sector Close the Housing Gap?
Problems abound for buyers and renters in the current housing market. Prices of homes for sale have skyrocketed over the 24 months and rents are rising too. Moderate to low income buyers and renters, in particular, are in a really tough spot between not being able to afford a new home but, increasingly, also not being able to afford rent. This is unsustainable.
In October I wrote about how government can help close the housing gap. Public/government solutions include incentivizing new construction particularly in the middle and lower tiers of home prices, adjusting regulations to allow for the construction of more units and the addition of things like Accessory Dwelling Units (ADU’s), modernizing code requirements to allow for more smaller homes (e.g. tiny homes, etc.), and trying to loosen up supply chain issues that have led to rapidly rising material prices on everything from lumber to bathtubs, all of which increase the cost of building a new home. I’d further add that policymakers at all levels of government including local school districts can help the cause by supporting trades programs that train plumbers, electricians, and homebuilders as there has been a significant aging of the workforce in the trades over the past several decades and there are simply not enough tradespeople to meet the current construction and renovation demand.
But if you believe in capitalism and free markets, which I do, you might also recognize these days that the private sector is pretty actively working to close the housing gap on its own. It is a principal of economics that when a profit opportunity exists (i.e. demand among consumers is strong), the market will respond to meet it (i.e. businesses will create new supply of what is demanded). Right now demand for new homes and rental units is roaring. And the forces of supply is responding. Consider the chart of new housing starts over the last ten years:
The chart shows a clear upward trajectory over the last ten years, which means the pace of new-home construction is accelerating. In November 2021, which is the most recent month of data, new housing starts were at a seasonally adjusted number of 1,679,000, up from 1,502,000 in the month of October. This is the highest level since September 2006, which had 1,720,000 housing starts. Incidentally the narrow gray area represents the only recession our economy has experienced in the last ten years, which was a brief one at the outset of COVID, during which time new housing starts markedly dropped.
The problem, however, is that not even the November 2021 peak of 1,679,000 housing units is enough to fully close the housing gap. Estimates range on what the sustained building rate would need to be in order to close the housing gap, but most economists put the rate between 2.5-4.0 million at least over a five to ten year period for supply to fully catch up to demand. Is that possible?
In my work as a commercial lender, I am seeing homebuilding proposals come across my desk nearly every single day. (I am broadly categorizing homebuilding as both new single-family home construction and the construction of new rental units; both types of housing are homes even though the traditional way we think of a home is as a single-family owner-occupied dwelling). The velocity is new home construction is increasing, which, again, I believe is a clear response to robust demand.
The proposals I am seeing include many different types of projects, too. Here is just a sample of what I have worked on over the past month for some of the borrowers I work with:
Construction of a new single-family home on an empty parcel of land
Construction of a new duplex after demolishing a dilapidated and vacant building on an existing parcel
Conversion of a two-unit rental property into a three-unit
Rehabilitation of a dilapidated and vacant three-unit property into three refurbished and fully rented units
Construction of a new multiunit (5+ units) property on land that was previously wooded land (of which we have a lot here in Maine)
Construction of 16 new rental units on previously wooded land
If demand persists, the homebuilding industry will continue to respond, which is why I am optimistic that eventually it will start to become evident that the housing gap will actually start to close.
Maine Projects
Here is just a sample of high-profile housing development projects that are in the works here in Maine. These are not all projects I am involved with directly, but the list does highlight just how much activity is going on. A lot of new housing will come online here in Maine over the next year or two:
Via Bangor Daily News: two new housing projects in Belfast will bring 49 new units to the market targeted towards low income senior citizens: https://bangordailynews.com/2020/01/14/news/49-new-units-in-belfast-could-ease-citys-affordable-housing-crunch/
Via MaineBiz: 48 new luxury units are being built in Auburn: https://www.mainebiz.biz/article/luxury-48-unit-apartment-complex-breaking-ground-in-auburn?utm_source=Hootsuite&utm_medium=twitter&utm_term=&utm_content=540a07dc-a92d-46a1-a2cd-8128019a3f16&utm_campaign=mainebiz
Via MaineBiz: construction has begun on a project in Portland that will include 171 new studio, one-bedroom, and two-bedroom apartments: https://www.mainebiz.biz/article/port-propertys-52-hanover-st-development-starts-construction
Via WGME: 250 new affordable rental units are planned for Biddeford and 128 for Auburn: https://wgme.com/news/local/new-affordable-housing-developments-planned-for-biddeford-auburn
Per Bangor Daily News: a number of Downtown Bangor buildings have been renovated into middle to upscale residential units over the past several years including, “99 Franklin St., redeveloped by Vance Aloupis; 29 Franklin St., redeveloped by Abe and Heather Furth and Roy Hubbard; and 28 Broad St. and 31 Main St., redeveloped by Telford Allen III and Louie Morrison.” Two buildings in Downtown Bangor that are in the process of being rehabbed by developer Dash Davidson and his business partners are 2 Hammond Street and 33 State Street: https://bangordailynews.com/2021/09/09/news/bangor/former-bangor-hydro-building-in-downtown-bangor-has-been-sold-to-ny-developer/
Public Policy Still Matters
I do not think the private sector alone will fully close the housing gap, however, or if we only demand on the private sector it will take quite some time for the gap to be fully closed. Roadblocks and impediments include the aging workforce in the trades (i.e. there are just not enough private sector workers to fully respond to all of the demand) and the fact that market forces do not necessarily guarantee fully positive outcomes at all points on the price spectrum. Profit margins for builders right now, for example, are typically the greatest for high-priced construction of top level homes. On the one hand, the creation of new housing stock at any point on the price spectrum is a positive thing in that it boosts total supply, but on the other hand, to meet the immediate and more pressing need for lower-income housing more targeted public/government efforts will be required. In Maine, for example, Low Income Housing Tax Credits were recently awarded to a mix of private and quasi-public developers to incentivize the construction of 332 new rental units, 281 of which are specially for low-income older adults or families. This is a great example of using policy and tax incentives to stimulate private construction of something that is sorely needed.
One thing is clear however: housing is on a lot of people’s minds. From policymakers including elected officials to housing advocates to private builders and business owners, everyone seems to recognize that there are serious problems in the housing market. I am optimistic that it is exactly for this reason, that so many people have identified and are aware that there are issues, that the issues will begin to sort themselves out over the next few years and we might eventually find some sort of equilibrium in the housing market. Not least among the reasons why the housing gap will close is that there are a lot of homebuilders and developers flooding the market to take advantage of the opportunity. Their impact will start to be felt even as demand continues to hold at very high levels.
Ben Sprague lives and works in Bangor, Maine as a V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Follow Ben on Twitter, Facebook, or Instagram and make sure you are subscribed below to receive future articles.
Weekly Round-Up
The potato crop was so strong in Maine this year that they needed to use trains to ship them out for the first time in over 40 years: https://bangordailynews.com/2022/01/15/news/aroostook/maines-potato-crop-is-so-big-railroads-are-being-used-for-1st-time-in-40-years-to-transport-it-joam40zk0w/
Via The Wall Street Journal, many artists including The Beach Boys, Bruce Spingsteen, Fleetwood Mac, and others have been selling their music catalogues, sometimes for hundreds of millions of dollars: https://www.wsj.com/story/why-are-so-many-rock-stars-selling-their-music-catalogs-a64667cd?mod=hp_featst_pos3
One Good Read
Ben Adam blogs about his process of getting hired at Amazon: the good, the bad, etc. It is an interesting read with some helpful perspective to consider when going through a job interview process or significant life change: https://benadam.me/thoughts/my-experience-at-amazon/
Got story ideas, news tips, or suggestions? Email me at ben.sprague@thefirst.com or bsprague1@gmail.com. Have a great week, everybody.