According to CBS News, one of the nine key trends in U.S. real estate for 2017 is that costs of new construction are expected to hit an all-time high. First-time homebuyers who strongly favored new construction nearly 2-1 over existing homes (Trulia, 2014) are now considering used homes as an alternative, setting up potentially ideal opportunities for banks to release some of their shadow inventory on the market.
Shadow inventory consists of homes that are held off the market by banks because they are in some stage of foreclosure, or the market is too saturated, or sometimes they are simply held to appreciate in value. For the latter two cases, banks are now facing favorable circumstances for profiting on these shadow properties in the face of higher construction costs.
There are two major factors recently affecting the uptick in prices of new construction:
1. Labor shortage. The current shortage of skilled workers is forcing builders to offer higher wages. A survey by the National Association of Home Builders (NAHB) in 2016 found that 56% of construction companies reported being short-handed. This was up from just 21% in 2012. These costs are then directly reflected by the median home price over roughly the same timeframe, which skyrocketed from $151,000 to $196,500, far faster than the rate of inflation.
Making up an estimated 40% the labor force, many foreign-born workers returned to their countries after the recession of 2009. Many of those that remain face uncertainty and even threatened deportation under the current administration, that can only work to further exacerbate the shortage and drive prices higher.
2. Lumber tariffs. Home construction requires a massive amount of wood. And much of this wood comes from our neighbors up north. A recent tariff of up to 24% on Canadian lumber translates to the equivalent of $1236 increase for the average single-family home, according to the NAHB.
The largest populations of homebuyers on the market now are Baby Boomers and the older segment of Millennials looking to put down roots. All of these rising expenses culminate in these groups exploring all options, including fixer-uppers. Banks holding shadow inventory that can be released may just end up the being the biggest de facto beneficiaries of this climate.
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