As we end 2016, I can’t help thinking back seven years to 2009 to a conversation I had with some folks at the National Association of Home Builders.
We were talking about the tight credit standards the Fed was imposing on banks for anything that had to do with housing and difficulty builders were having finding money for land development.
Seven years ago, the country and the world were in throngs of the great recession caused in large part by the collapse of housing markets that had been fueled by easy money and irrational exuberance.
During the recession, we saw the typical reaction from lenders, borrowers, and the bank regulators. With their future uncertain, people cut back on their borrowing. In an effort to avoid any more problem loans and to meet the conservative requirements of their regulators, banks tightened their lending standards. Only those with impeccable credit could get a mortgage. Funding to builders for land development was pretty much non-existent.
As we end 2016, the economy and consumer confidence has generally recovered since the depths of the recession. Interest rates are low. Foreclosure victims have rebuilt their credit. A new generation of millennials who have come of age during the recession have entered the housing market. The demand for housing is up.
What’s not going up fast enough is the supply. The absence of funding for land development for seven years is beginning to show up in housing prices.
The National Association of Realtors reports that supply is down 9 percent from last year while prices are up 6.8 percent. Supply and demand are once again out of balance.
It takes several years to bring a property through the land development process, and because of the funding shortage, many builders were not able to get their projects started until this year or last. It should be another few years before we see supply of new houses catching up with the demand.