WHAT HAPPENS NOW?
Regardless of who won this election, one thing was evident; The housing market, which accounts for roughly a fifth of GDP and has been booming during the pandemic, will no-doubt play a key role in aiding the US economic recovery.
In 2012, the cost of construction started to increase significantly. What drove these higher costs? One of the big factors was the Basel 3 regulatory capital rules, which introduced the concept of high volatility commercial real estate and increased the risk weighting for these loans from 100% to 150%. This increased borrowing costs for developers.
During the pre-Trump era, laws that increased zoning regulations and permit laws also increased carrying costs . For example, a 2015 fair housing rule issued by HUD required cities and counties that receive federal housing funds to assess longstanding fair-housing problems, then propose a plan to fix them. This plan did not offer clarity and left interpretation to local regions which often led to complexity and costs for developers.
Homebuilders routinely cite the costs of regulatory compliance as a mandatory expense that inflates the costs of their projects. A recent study by Housing First Minnesota, a trade group that represents builders, found that regulations can contribute up to a third of the cost of building a home in the twin cities.
When President Trump took office, his platform called for lightening the regulatory load. An executive order in 2017 mandated the elimination of two regulations for every new one created. He rolled back the 2015 fair housing rule that HUD Secretary Ben Carson characterized as “complicated, costly and ineffective.”
At the same time he was decreasing regulation, President Trump was also imposing tariffs on lumber from Canada as well as steel and aluminum. This resulted in an increase in materials cost. Additionally, stricter immigration laws drove up the cost of labor. Consequently, as seen by the chart above, the overall cost of housing construction has continued to rise.
Despite the higher costs, homeownership has risen under President Trump. Home ownership in Q3 has increased in each of the last four years going from 63.4% in 2016 to 63.8% in 2017 to 64.3% in 2018, 64.6% in 2019 and 67.2% in Q3 2020.
Our economy doesn’t respond well to uncertainty, the kind of uncertainty that comes from a trade war with China and, more recently, the Covid-19 epidemic. In response to this uncertainty interest rates have been driven down to record low levels, thus reducing borrowing costs. The reduced borrowing costs have offset the higher cost of housing resulting in increased home ownership rates.
So, what happens now?
According to Harvard University’s Joint Center for Housing Studies, it would take 1.5M new housing units to meet future household creation estimates. This is well above current construction levels. Regardless of who takes office, they would have to consider policies designed to increase construction levels.’
One thing for sure, interest rates will be on the rise and in order to keep housing prices stable and sustain a growing economy the cost of housing development will need to reduce to a large enough degree that it offsets the high costs of borrowing.