COVID and the Long-Lasting Consequences on Housing
It’s obvious. I know it’s been said before, but it bears repeating. The cost of new homes will never go below the cost of constructing them. No matter what happens in the stock market, or the laws of supply and demand, new homes will never fall below basic construction costs. Those waiting for the perfect time to get a deal on a newly constructed home will never find it. Material prices and labor costs will continue to rise over time and wipe out any special market pricing buyers are seeking.
Of course, there are exceptions to every rule. Existing homes, and newly repossessed homes, are a different matter. They will sell for whatever fluctuating prices exist at that time and in that specific geographic location.
We’ve heard of several housing developments that run out of funding and are halted mid-construction. When a bank takes back possession of a project before it’s completed, and then resells it to another developer at a lower price, the bank absorbs the loss. In essence, the bank is reducing the prices of the homes in that project by inadvertently subsidizing them. This is at the bank’s loss. Any new real estate developer buying into a repossessed project is starting their funding and base value from a different, and lower, financial burden.
But even existing homes and repossessed projects will not sell below market value when the laws of supply and demand are factored in. It’s estimated that the housing market is currently short 3.2 million homes nationwide. Individual markets will vary, and the worst areas, such as Austin, Texas, and Nashville, Tennessee, currently have a glut of homes on the market. Excessive home inventory is also starting to appear in the downtown areas of cities that are experiencing an exodus to the suburbs.
This move from urban cities began with COVID when people started working remotely. This hurt the downtown areas of many metropolitan regions. While more than a few companies are now demanding that their workforce return to the office, they have only been partially successful. Less workers in the major cities means an excess of office space, driving building prices down. Less office workers also means less support businesses in the area such as restaurants, coffee shops, and other stores. This phenomenon has been called a death spiral. It’s hard to reverse and yet it’s becoming more and more common. As more businesses in downtown areas shutter their doors, it encourages other businesses to do the same. Nobody wants to be the last venture on a deserted street.
Many areas in the West have seen the once-steady increase in housing prices slow dramatically. There are a few areas, particularly in California, where prices have gone down. The dream of working from your home in a resort town overlooking the lake suddenly seemed possible just a few years ago.
The Lake Tahoe region, for example, was besieged during COVID by people seeking the perfect lifestyle. Today, home prices in that area are falling fast and people are finding themselves upside down, with owing more on their mortgages than their home is worth. If a homeowner doesn’t sell and can ride it out, that’s fine. However, this situation makes requesting a second mortgage for home improvement and repairs, like a new roof, a difficult sell to a bank.
But it’s not all bad. In fact, the Associated General Contractors (AGC) recently reported that not only did the construction industry hire over 2,000 new workers just before the end of the year, but that wages also increased. When worker wages increase, that obviously indicates that demand is also increasing. The AGC also noted that the slowing of new construction earlier this year has been reversed and projects are on the rise. Additionally, the American Institute of Architects has stated that their members are reporting an increase in business the last half of 2023. These requests for new designs will translate to new construction projects in the coming months. We can only hope.