A decade ago, the housing sector was in a mess. The mistakes of easy subprime lending resulted ultimately in the catastrophic collapse of the housing sector. Home values collapsed by a third nationwide, and the inventory of unsold homes spiked to unprecedented heights. Miami, for example, at one point was said to have 30 years of housing inventory.

Fortunately, after many years of sobering up, with proper lending and consistent job creations in the economy, the housing market has regained some health, with higher home sales and a very low foreclosure rate. However, the industry today is facing a different kind of crisis: not enough homes for sale.

The inventory of homes on the market last year in 2017 was one of the tightest ever. In early 2018, it is even worse. In the first quarter, the number of homes on the market averaged 1.59 million, which is down 8.4% from the same period one year ago. Strictly focusing on single-family home listings, this is the lowest inventory since the tracking of the data from the early 1980s.

This acute housing inventory shortage has fired up home prices. The median home price has risen by 40% in the past five years and is still rising strongly, with a 6% annualized gain in March. Such a rapid gain in home values at a time when wages are rising by only 2% to 3% a year is measurably cutting into affordability. With the Federal Reserve set to raise its short-term interest rates several more rounds over the next two years and unwind some of its prior asset purchases, longer-term interest rates, including that of mortgages, will surely rise and hence further hamper affordability.

Interestingly, though, home-buying demand remains super-robust. The steady build-up in household formations following the recession continues. Many of the new households have not purchased a home, as evidenced by the still historically low homeownership rate.

Pent-up housing demand, therefore, is large. That is why newly listed homes are finding buyers quickly. Multiple bids are happening in many parts of the country. In March, half of the newly listed homes found a buyer and signed a contract within a month – a very speedy market.

What is needed to satisfy the growing housing demand fully, without choking consumers with even faster home price appreciation, is simply to have more supply. It is possible to have more supply if some of the institutional investors of single-family homes begin to unload their holdings. After all, the rent growth rate appears to be slowing down. Rather than the super-fast 4% gain of one year ago, the latest rent gain was 3.6% in March. This rate is still rising solidly, but the future rent growth will be less spectacular, particularly given the active building of apartments over the past five years. Any unloading of single-family rental homes onto the market for sale will be highly welcomed.

In order to truly get more inventory, however, homebuilders need to construct more new single-family homes and condominiums. Yet there have been several reasons that homebuilders have been slow to add new inventory. What can be done to address this? Here are some policies that can help in boosting homebuilding.

1. Provide regulatory relief to small-sized community banks.

The big builders do not generally need construction loans as they tap Wall Street funds, but the small-sized (often family-owned) homebuilders need community banks as these banks were the major source of construction loans in the years before the new banking regulations. The only new workers the small banks hired were not loan officers but compliance officers because of the complexity of the many rules imposed by Washington. They did not cause the subprime loan mess. Just let them get back to the business of lending.

2. Remove lumber tariffs.

The price of softwood lumber has shot up by 30% over the past two years. Part of the gain is due to global economic recovery and the consequent demand for all commodities, but any unnecessary cost added to the lumber hinders homebuilders.

3. Relax land use and zoning rules.

These issues are very locally specific, but if a community pursues an adamant “not-in-my-backyard” policy in the guise of overly strict zoning and environmental rules that stretches widely over a metro area, then inventory squeezes down to a bare minimum, and home prices will shoot up sky high (think San Francisco).

This is not to say there should be no regulation, but rather balance out the costs of limited development with the high cost of housing. As with everything in life, some moderate middle ground is likely to be a winner. A few places where land is difficult to obtain (think Hong Kong and Singapore) are building vertically along transit centers. More building can be achieved even in limited, land-restricted areas.

4. Throw out condo construction defect frivolous lawsuits.

As was mentioned above, apartment building activity has been robust. The construction of condominiums would not be much different. Yet in places like Seattle and Denver where there would be a great benefit in having more condominiums – that is, in living in walkable communities in the city, which many millennials desire – the construction is not happening because of the fear of lawsuits placed on builders. Using an extreme anecdotal story: If one new condo owner is unsatisfied, even if the rest are satisfied, not only does a lawsuit against the builder require attending to that one dissatisfied owner, but all the rest of the condo owners have to be compensated as well. No wonder builders are shying away from condominiums while actively constructing apartments.

5. Train more workers in the skills required in construction.

A typical construction worker in a non-supervisory role earns approximately $60,000 a year. That easily qualifies as a solid middle-class income. Currently, however, there is an acute shortage of construction workers. A bidding-up of wages is happening at many construction sites, and this may induce some new workers to come into the industry, but more clearly needs to occur. Trade schools and community colleges can develop curriculums to provide training in an industry that needs workers.

In Tennessee, for example, any worker who loses a job at a factory can get training at community colleges in trade skills that are currently in short supply. The training is free of charge. Other states should consider this kind of free training, or the federal government should assist in the funding of what clearly appears to be an effective program to aid people in finding jobs with good salaries.

There is no doubt in many more micro-level policies that can tilt local economies in favor of more construction, but just accomplishing the above five changes will bring about a measurable boost to inventory. That, in turn, will take home price growth, which will be a big relief to homebuyers and lead to much healthier housing market growth into the future.

Courtesy of forbes.com and credit to Lawrence

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