Markets that are seeing the greatest rebound in home prices are also seeing the biggest lag in construction activity, the latest data from Trulia (TRLA) revealed.
Asking home prices rose 11.0% on an annual basis and 1.2% on a monthly basis in august. However, when taking a deeper look at the data, it is obvious that construction activity isn’t back to normal levels quite yet.
In 2013, construction permits are running at only about 60-70% of their average level between 1990 and 2012. Las Vegas, Sacramento, Riverside-San Bernardino, Warren-Troy-Farmington Hills and Detroit are among the housing markets where asking home prices increased more than 20%. These markets saw construction activity at less than half the normal level.
According to Trulia Chief Economist Jed Kolko, there is a very obvious explanation for this: Investors and builders have bet on different markets.
“Investors have bought in the boom-and-bust metros, helping push prices up more than 20% year-over-year in Las Vegas, Sacramento, and Detroit,” said Kolko. “Builders, however, are betting on markets that avoided the worst of the crash, like Boston, much of Texas, and the expensive California coast, where job growth is strong and few homes are vacant,” he added.”
The Trulia report comes a day after the National Association of Home Builders revealed a shortage of buildable lots, specifically in the most desirable locations.
The shortage has translated into higher prices for builders who are able to get their hands on developed lots to build on. Eventually, higher lot prices are passed on to buyers in the form of higher house prices.
NAHB Chief Economist David Crowe believes there is still a substantial pent-up demand for housing waiting to be unleashed as the overall economy and labor situation improves.
"Lot shortages are one of several barriers that have arisen, restraining builders from responding completely to increased demand,” said Crowe. “Other barriers include a shortage of labor in carpentry and other key building trades, limited availability of loans even for credit worthy home builders and home buyers; and, more recently, an uptick in interest rates."
Sterne Agee analyst Jay McCanless said the speed at which consumer demand returned to the market has taken many homebuilders by surprise. "One of the things that I think many builders in certain cases may have underestimated is how quickly that consumer demand come back," he noted.
McCanless added builders are also facing a delay right now. "The majority of the deals that they are buying are raw land that is going to need some development work before they can start building homes," said the analyst. It will take time for this land to be developed enough that it becomes buildable.
For many homebuilders, it's just a waiting game. However, as consumer demand picks up in the most desirable markets, the land that is available will become more valuable, and builders will be able to charge buyers more. It's likely that home prices will continue to rise based off of the shortage in land supply alone.
