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Housing Starts and the effect on the Market

There's no question that demand has picked up significantly in the last 6 months. Inventory is way down and more and more homes are selling than are being put on the market every day. Now think about what's happened to the new construction housing starts in the last 5 years. They have plummeted to record lows for both condos and single family houses. (see chart from calculatedriskblog.com)

Housing Starts - CalculatedRiskBlog.com small
In recent months housing starts have started to slowly climb, but not very much. Will this solve the housing shortage problem. Don't count on it! And let me tell you why. Housing is not like other manufactured goods and doesn't fluctuate in the same supply-and-demand way. Housing takes a significant time to ramp up and get to the market. Think about it: From the time developers decide to get back into building homes, they have to 1) Find and acquire property. 2) apply for and acquire building permits 3) apply for and receive financing. 4) ramp up employment of qualified construction workers. 5) actually build the homes. 6) get marketing plans and real estate brokers in place to sell the homes. This means from the time they realize there's a shortage and they take action to fill the demand there is a huge lag-time! But what if during that lag-time demand just keeps growing? That's right, prices rise! And sometimes significantly if supply is already low. And resale homes have a hard time filling the gap because so many homeowners have lost too much equity to sell without taking a major loss, so even with prices rising somewhat it's not enough to motivate them to sell. This may be a bottleneck in the market for a while to come.