Mary Park Durham

Research Analyst

Published: 10/23/2024
Listen now
00:00

Hi, my name is Mary Park Durham and welcome On the Minds of Investors and today's post is titled "Why is housing supply still so low?" Housing inventories remain near record lows, yet builders are not increasing construction volumes enough to sufficiently meet demand. Why aren't builders ramping up activity? Several factors are keeping housing supply limited:

  • Chronic underbuilding post-2008: Following the housing crisis of 2008, the U.S. experienced a period of chronic home underbuilding. The number of residential construction firms fell from 98,067 in 2007 to 48,557 in 2012, representing a 50% decline. It took a while for the industry to recover, with single-family housing starts finally returning to pre-GFC levels in 2020.
  • Elevated mortgage rates: The housing market cratered in late 2022 due to the Fed's rate hikes, resulting in a 16% y/y drop in existing home sales. Although sales are now slightly below long-term average levels, elevated mortgage rates and home prices continue to dampen sentiment. In October, the housing market index increased by 2pts to 43, yet it remains below the neutral mark of 50. The Fed's rate cutting cycle should help lower mortgage rates over time, but it is more impactful for short rates. Long rates, which inform 30-year fixed mortgage rates, typically move according to growth and inflation levels, so these may take longer to decline.
  • High costs for builders and homeowners: Since the pandemic, a tornado of factors has pushed up costs for homebuilders and homeowners. These include higher material costs, zoning laws, and labor shortages, which have led to higher home prices as well as maintenance and insurance costs for buyers. Inputs for residential construction, as measured by the PPI, rose 14.6% y/y in 2021 and 15.0% in 2022. Although prices grew more moderately in 2023, the rapid increase after the pandemic has made building homes less affordable. The construction industry also faces persistent labor shortages. Total job openings have fallen by 14% over the past year, but construction job openings have declined by only 4%. Due to these factors, home prices are up 30% and are 20% more expensive to insure since 2020. At the national level, builders are still hesitant to invest in new units due to concerns there aren’t enough buyers that can afford them.

Despite these challenges, there is potential for improvement. In fact, building activity has already increased significantly in some cities, particularly along the Sunbelt. For other areas, lower rates should spur more housing demand, which could boost builder confidence to increase construction volumes. Additionally, zoning reform efforts are taking place in more than 100 municipalities across the U.S., which could help reduce costs for builders1. While it will take time for supply to meet demand, the recent improvement in homebuilding activity is expected to continue.

1 https://belonging.berkeley.edu/zoning-reform-tracker 

The Fed's rate cutting cycle should help lower mortgage rates over time, but it is more impactful for short rates.

Housing inventories remain near record lows, yet builders are not increasing construction volumes enough to sufficiently meet demand. Why aren't builders ramping up activity? Several factors are keeping housing supply limited:

  • Chronic underbuilding post-2008: Following the housing crisis of 2008, the U.S. experienced a period of chronic home underbuilding. The number of residential construction firms fell from 98,067 in 2007 to 48,557 in 2012, representing a 50% decline. It took a while for the industry to recover, with single-family housing starts finally returning to pre-GFC levels in 2020.
  • Elevated mortgage rates: The housing market cratered in late 2022 due to the Fed's rate hikes, resulting in a 16% y/y drop in existing home sales. Although sales are now slightly below long-term average levels, elevated mortgage rates and home prices continue to dampen sentiment. In October, the housing market index increased by 2pts to 43, yet it remains below the neutral mark of 50. The Fed's rate cutting cycle should help lower mortgage rates over time, but it is more impactful for short rates. Long rates, which inform 30-year fixed mortgage rates, typically move according to growth and inflation levels, so these may take longer to decline.
  • High costs for builders and homeowners: Since the pandemic, a tornado of factors has pushed up costs for homebuilders and homeowners. These include higher material costs, zoning laws and labor shortages, which have led to higher home prices as well as maintenance and insurance costs for buyers. Inputs for residential construction, as measured by the PPI, rose 14.6% y/y in 2021 and 15.0% in 2022. Although prices grew more moderately in 2023, the rapid increase after the pandemic has made building homes less affordable. The construction industry also faces persistent labor shortages. Total job openings have fallen by 14% over the past year, but construction job openings have declined by only 4%. Due to these factors, home prices are up 30% and are 20% more expensive to insure since 2020. At the national level, builders are still hesitant to invest in new units due to concerns there aren’t enough buyers that can afford them.

Despite these challenges, there is potential for improvement. In fact, building activity has already increased significantly in some cities, particularly along the Sunbelt. For other areas, lower rates should spur more housing demand, which could boost builder confidence to increase construction volumes. Additionally, zoning reform efforts are taking place in more than 100 municipalities across the U.S., which could help reduce costs for builders1. While it will take time for supply to meet demand, the recent improvement in homebuilding activity is expected to continue.

Homebuilder sentiment could improve as rates move lower

NAHB/Wells Fargo Housing Market Index, SA, monthly

Homebuilder sentiment could improve as rates move lower

Source: National Association of Home Builders, Wells Fargo, J.P. Morgan Asset Management. This index helps gauge builders' confidence in the market and can signal future trends in homebuilding activity. A reading above 50 indicates that more builders view conditions as good rather than poor, reflecting positive sentiment in the housing market. A reading below 50 suggests that more builders see conditions as poor rather than good, indicating negative sentiment.
Data is as of October 21, 2024.

1 https://belonging.berkeley.edu/zoning-reform-tracker 
09uw242210162040
Mary Park Durham

Research Analyst

Published: 10/23/2024
Listen now
00:00

Hi, my name is Mary Park Durham and welcome On the Minds of Investors and today's post is titled "Why is housing supply still so low?" Housing inventories remain near record lows, yet builders are not increasing construction volumes enough to sufficiently meet demand. Why aren't builders ramping up activity? Several factors are keeping housing supply limited:

  • Chronic underbuilding post-2008: Following the housing crisis of 2008, the U.S. experienced a period of chronic home underbuilding. The number of residential construction firms fell from 98,067 in 2007 to 48,557 in 2012, representing a 50% decline. It took a while for the industry to recover, with single-family housing starts finally returning to pre-GFC levels in 2020.
  • Elevated mortgage rates: The housing market cratered in late 2022 due to the Fed's rate hikes, resulting in a 16% y/y drop in existing home sales. Although sales are now slightly below long-term average levels, elevated mortgage rates and home prices continue to dampen sentiment. In October, the housing market index increased by 2pts to 43, yet it remains below the neutral mark of 50. The Fed's rate cutting cycle should help lower mortgage rates over time, but it is more impactful for short rates. Long rates, which inform 30-year fixed mortgage rates, typically move according to growth and inflation levels, so these may take longer to decline.
  • High costs for builders and homeowners: Since the pandemic, a tornado of factors has pushed up costs for homebuilders and homeowners. These include higher material costs, zoning laws, and labor shortages, which have led to higher home prices as well as maintenance and insurance costs for buyers. Inputs for residential construction, as measured by the PPI, rose 14.6% y/y in 2021 and 15.0% in 2022. Although prices grew more moderately in 2023, the rapid increase after the pandemic has made building homes less affordable. The construction industry also faces persistent labor shortages. Total job openings have fallen by 14% over the past year, but construction job openings have declined by only 4%. Due to these factors, home prices are up 30% and are 20% more expensive to insure since 2020. At the national level, builders are still hesitant to invest in new units due to concerns there aren’t enough buyers that can afford them.

Despite these challenges, there is potential for improvement. In fact, building activity has already increased significantly in some cities, particularly along the Sunbelt. For other areas, lower rates should spur more housing demand, which could boost builder confidence to increase construction volumes. Additionally, zoning reform efforts are taking place in more than 100 municipalities across the U.S., which could help reduce costs for builders1. While it will take time for supply to meet demand, the recent improvement in homebuilding activity is expected to continue.

1 https://belonging.berkeley.edu/zoning-reform-tracker 

Copyright 2025 JPMorgan Chase & Co. All rights reserved.

This website is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. By receiving this communication you agree with the intended purpose described above. Any examples used in this material are generic, hypothetical and for illustration purposes only. None of J.P. Morgan Asset Management, its affiliates or representatives is suggesting that the recipient or any other person take a specific course of action or any action at all. Communications such as this are not impartial and are provided in connection with the advertising and marketing of products and services. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax and other professionals that take into account all of the particular facts and circumstances of an investor's own situation.

 

Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors.

 

INFORMATION REGARDING INVESTMENT ADVISORY SERVICES: J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. Investment Advisory Services provided by J.P. Morgan Investment Management Inc.

 

INFORMATION REGARDING MUTUAL FUNDS/ETF: Investors should carefully consider the investment objectives and risks as well as charges and expenses of a mutual fund or ETF before investing. The summary and full prospectuses contain this and other information about the mutual fund or ETF and should be read carefully before investing. To obtain a prospectus for Mutual Funds: Contact JPMorgan Distribution Services, Inc. at 1-800-480-4111 or download it from this site. Exchange Traded Funds: Call 1-844-4JPM-ETF or download it from this site.

 

J.P. Morgan Funds and J.P. Morgan ETFs are distributed by JPMorgan Distribution Services, Inc., which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the funds. JPMorgan Distribution Services, Inc. is a member of FINRA FINRA's BrokerCheck

 

INFORMATION REGARDING COMMINGLED FUNDS: For additional information regarding the Commingled Pension Trust Funds of JPMorgan Chase Bank, N.A., please contact your J.P. Morgan Asset Management representative.

 

The Commingled Pension Trust Funds of JPMorgan Chase Bank N.A. are collective trust funds established and maintained by JPMorgan Chase Bank, N.A. under a declaration of trust. The funds are not required to file a prospectus or registration statement with the SEC, and accordingly, neither is available. The funds are available only to certain qualified retirement plans and governmental plans and is not offered to the general public. Units of the funds are not bank deposits and are not insured or guaranteed by any bank, government entity, the FDIC or any other type of deposit insurance. You should carefully consider the investment objectives, risk, charges, and expenses of the fund before investing.

 

INFORMATION FOR ALL SITE USERS: J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.

 

NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

 

Telephone calls and electronic communications may be monitored and/or recorded.

 

Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://www.jpmorgan.com/privacy.

 

If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance.

 

READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

 

The value of investments may go down as well as up and investors may not get back the full amount invested.

 

Diversification does not guarantee investment returns and does not eliminate the risk of loss.