The disinformation and uniformed opinions disseminated on social media are stunning and those who have no understanding of the construction industry and housing are spewing that Florida and America are heading to a repeat of the 2005-2008 housing boom and crash. Just because housing prices are rising and inventory is low does not mean there is a pending boom or crash, for the reason that the fundamentals in the housing market are totally different.
First, look at the numbers in the current economy.
30-year mortgage interest rates are around 3.3 percent compared to 6.4 percent in 2006.The consumer is getting more house along with a more affordable payment because interest rates are nearly half of those during the boom. Today’s inflation is 1.68 percent compared to 2.54 percent in 2006 and a whopping 4.08 percent in 2007, which means the consumer’s money is not devalued with higher pricing. Today’s unemployment rate is 6.2 percent compared to 4.7 percent in 2006. This number indicates the economy has room to grow and expand. Finally, housing starts in February 2021 were 1.42 million units compared to 2.3 million starts in 2006. Based on population growth, we are underbuilding supply instead of overbuilding.
If you include durable goods, orders are down 13.4 percent from 2006. This suggests the country is not producing products domestically like it once did. This reinforces the narrative that a good portion of the country’s supply chain is now dependent on foreign trade.
Then there are the intangible differences in this impending boom/crash versus 2005-2008. Lenders learned a bitter lesson and banking regulations have been tightened significantly since that time. With the Biden administration’s toughness on banks, do not expect there to be predatory lending like last time. Plus, appraisals were laughable during the earlier boom. This time, appraisers are not lifting valuations until they have verifiable comparisons. This means despite the huge runup in material and labor costs, until housing starts actually sell for more do not expect increased appraisals. This will force larger down payments by homebuyers, and in some cases open the door to cash buyers who do not need an appraisal to make a purchase.
The next big factor are the supply chains. The trade policies of the last few years have devastated much of the building supply industry and America is no longer the premier trading partner in the world. Developing countries like China and India who dwarf the population of America and Europe are competing heavily for the world’s resources and supplies. Foreign companies are finding buyers elsewhere and America simply does not currently have the manufacturing capabilities to supply a new housing boom. Therefore, pricing will remain high with longer lead-times to build a home.
Labor is also a significant factor. In the previous housing boom, there were thousands of Hispanic and foreign crews across the country building homes and commercial buildings. The anti-immigrant policies of the last few years have driven most of this labor force elsewhere. The country does not have the labor or crews to support the production of a new housing boom. Unless the politicians in Washington, D.C. reach a compromise for guest workers, this situation will only worsen.
In my view, we are going to see an elongated housing boom like America experienced after World War II when all the soldiers returned home. Lumber and most products were rationed for years and housing growth was limited because of supply. At that time, the rebuilding of Europe was taxing the world’s resources of building materials. Housing starts were significantly stronger in America from 1948 through 1979 as compared to its population. With millennials entering the housing market as a result of the pandemic, unrest, and working from home, we could be in a transformational time in housing demand. The problem is simple: housing supply cannot keep up with housing demand.
Don Magruder is the CEO of RoMac Building Supply and host of Around the House, which can be seen at aroundthehouse.tv.