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Homebuilders Turn Sour

Posted: May 28, 2024

On May 15, the National Association of Homebuilders and Wells Fargo released their monthly Housing Market Index (HMI) indicating that homebuilder sentiment had fallen to a four-month low. The index registered a 45, which as a diffusion index on a scale of 0-100, points to a negative outlook for homebuilding. At a time when housing affordability is increasing salient to the economic outlook, any indication of future supply constraints is troubling. 

The Federal Reserve’s contractionary monetary policy has pushed mortgage rates up sufficiently to tamper home sales, but given that housing construction is hardly instantaneous, diminished builder sentiment spells trouble in the future. Layered on top of these market forces is a patchwork of state, local, and national policies that conspire to make housing construction as difficult and inefficient as possible. 

Among the most conspicuously misguided national policies are tariffs on housing construction inputs. The Trump and Biden administrations have serially rediscovered misguided trade policies that will only make Americans poorer. Both administrations have raised trade barriers, often under the guise of national security. Yet U.S. national security is plainly not at stake with respect to Canadian lumber. Nevertheless, the Trump Administration imposed tariffs on lumber imports from our northern ally at a time when lumber prices were already up over 300 percent. Now, with housing affordability an increasing challenge in an inflationary environment, the Biden administration is reportedly planning to increase them

These national policies are bad, but more local policy antipathy to housing is worse. Examples abound of state and local zoning and land-use restrictions and other policies that artificially restrict housing supply. California is often front and center in this debate, as housing costs in the state substantially outstrip national norms. From prevailing wage laws to “green energy” mandates, California imposes a regulatory regime sufficient to substantially inflate home-ownership and rental costs. A recent story identified state policy as a key contributor to Los Angeles’ distinction of having the most unaffordable housing in America

More locally, land use and zoning restrictions that impede the growth in housing supply work to the further detriment of affordability. In Texas, which saw a surge of population growth over the pandemic, some localities are coming to grips with local supply constraints. One recent study surveyed policy changes across a number of jurisdictions designed to increase housing density. The study found that in general, “homes in cities with lower minimum lot sizes were more affordable and more resilient to price increases.” Indeed, Austin, which has seen its population swell over the recent past, has met increased demand with increased supply and seen rents actually fall. Increased homebuilding has been paired with improved zoning laws to hasten this market response. 

The combination of multiple layers of policies that restrict supply has incentive effects on building, and indeed on the building industry. Compared to other industries, productivity in the construction industry is a laggard, meaning the industry is inefficient relative to other industries. Recent research has found that U.S. homebuilders have higher costs than other nations, and that these costs are higher still in more heavily regulated areas. The upshot is that higher regulations reduce firm size and efficiency, which raises costs. This dynamic compounds the deleterious effects of restrictive land-use policies on housing supply. 

As housing affordability comes increasingly to the fore in the public policy debate, it is unsurprising that some of those responsible for contributing to the problem would look to shift the blame elsewhere. The reality is, as ever, where there is excess demand, policy should shift incentives to provide supply.