From Home Furnishing Business
Statistically Speaking: Housing Industry Struggles to Keep Up with Consumer Work/Lifestyle Demands
The furniture industry is driven by housing: new household formations, changes of residences of existing households, and replacement or upgraded furniture within existing residences. But nothing sparks a furniture purchase quite like a move. However, in many metropolitan areas, critically low inventories and subsequent skyrocketing home prices and rental rates are locking out new home buyers and stymieing moves at a time when the economy is growing, employment is high, and Millennials are fully entering their home buying years. (See separate section on metropolitan areas.)
Fewer homes are being built per household than at almost any time in U.S. history and home construction per household, a decade after the recession bust, remains the lowest level in 60 years of record-keeping. Adding fuel to the flame, the housing industry is not able to provide the work/lifestyle preferences of ballooning Millennial households nor affordable housing to first-time home buyers.
Table A shows the key economic indicators since 2010 when the recovery from the recession began in full swing. Since that time, the furniture industry has been consistent, averaging around 4.7 percent growth. And while the growth in housing starts appears stronger on paper compared to the lackluster growth in new household formations, the actual numbers are about the same, 6.2 million units each over the last five years, not enough to keep up with demand (Figure 1). Building shows signs of picking up based on first quarter starts this year (up 9.3 percent), but economists say this will do little to ease the crisis in many cities.
The most critical result of the lack of new housing starts is falling housing inventories which in turn drive up prices (Table B). The number of rentals and homes for sale has been falling consistently since coming out of the recession when inventories were high. During the four-year period 2010 to 2014, rental inventories fell at an annual rate (CAGR) of 7.5 percent and housing for-sale inventories declined 10.2 percent. During the following three years, 2014 to 2017, rentals and housing inventories fell again but at a smaller annual rate of 0.4 percent and 4.8 percent respectively. This year, based on an annualized first quarter, rental inventories are down another 3.4 percent and houses for sale have declined 7.2 percent.
As shown in Table C, home prices have increased dramatically since the bottom of the recession in 2009 – jumping 46.1 percent from 2009 to 2018. With a current median home price of $328,000 (2018 April YTD), prices are 34.1 percent above the pre-recession peak of $244,950 in 2007. Since 2010, home price increases are averaging 5 percent a year (CAGR). Paired with ballooning home prices, stricter lending polices are keeping many first-time buyers out of the market.
As inventory stays low, prices will continue to go up due to many builders turning away from starter and mid-priced home and choosing to build high-end homes with better profit margins.
Numerous factors have converged to create the housing shortage, one of which is the lack of construction labor. Due to a combination of many workers leaving the industry during the recession, fewer people attending trade schools and a decline in immigrants and undocumented workers, builders struggle to find workers. The amount of construction workers in residential construction fell 44.8 percent from 2006 to 2011, losing almost half of the total workers (Table D). The industry has slowly gained employees back since 2011, increasing by 39.6 percent in seven years, but is still 23 percent shy of the one million construction workers in 2006.
Along with the labor shortages, high land costs in desirable living areas are impacting the ability to build affordable housing. Younger people are unwilling to deal with long commutes and choosing to live close to work. They also seek the lifestyle of more urban living and access to services it provides. Unfortunately, there is a mismatch between affordable/available places to build and where people want to live.
A study by the Cato Institute last October points to what the report considers the main contributor to the housing problem. The report says, “Local zoning and land-use regulations have increased substantially over the decades. These constraints on land development within cities and suburbs aim to achieve various safety, environmental, and aesthetic goals. But the regulations have also tended to reduce the supply of housing, including multifamily and low-income housing. With reduced supply, many U.S. cities suffer from housing affordability problems.”
Many economists also point to the abuse of government land-use regulations and building permit delays to keep away new building in desirable cities. High regulatory costs, delays, and opposition from neighboring homeowners make it difficult for new multi-family housing to be built in many urban areas.
The “not in my backyard” or NIMBY sentiment prevalent in urban areas used to be a problem faced solely by big cities, but the rising rents, displacement and unwillingness to restructure is spreading to middle-size cities.
According to the Cato study, the best solution to the housing shortage and the affordability problem is an easing of regulatory zoning and building constraints by local governments. But homeowners say this poses an undue tax burden as existing residents who must then belly up for the increased costs for traffic solutions, infrastructure expansions, more schools, etc. Therefore the U.S. continues to segment geographically according to income.
The improving economy with rising wages and low unemployment should be impacting the furniture industry more positively than sales are reflecting. But the housing shortage and rising rent and home prices could be the thing holding the industry back from the high growth many have long been predicting.