Fiberlite Technologies, Inc.

Sales of new single-family homes are rebounding with a 6.4% increase in April to an adjusted annual rate of 433,000 units, according to the Commerce Department reports. This is the first upswing in new-home sales following two consecutive months of decline.

Builders are showing signs of increasing their inventories of homes for sale.  New-home inventories reached a three-and-half-year high in April, with 5.3 month supply at the current sales pace.  Still, the stock of new houses for sale remains more than 50 percent below its pre-recession level.

“Builders are adding inventory in anticipation of further release of pent-up-demand,” says David Crowe, chief economist for the National Association of Home Builders.  “We are only about halfway back to what could be considered normal market, but relatively low mortgage rates and affordable home prices are other factors that should help keep starts and sales on a slow trajectory in the months ahead.”

With rising inventories, the median price of new home dropped 1.3 percent in April compared to a year ago, averaging $275,800 nationwide.

Regionally, new-home sales rose the most in the Midwest by 47.4 percent in April compared to March.  Followed by a 3.1 percent gain in the South and the West held steady and the Northeast posted a 26.7 percent drop.

Builders are gradually increasing sales, but tight credit for first-time home buyers are impeding a more robust recovery.

A growing economy, pent-up demand, competitive mortgage rates and affordable home prices will keep housing on an upward path through 2015.  However, several obstacles including tight consumer credit, shortage of lots and labor and rising material prices are hindering a more robust recovery, according to economists.

“Housing needs an improved economy,” said NAHB Chief Economist David Crowe, adding that the economy is expected to respond as payroll employment continues to grow and the unemployment rate slowly declines.

Consumer confidence is back to pre-recession levels and the purchase of motor vehicles and home furnishings are on the rise, indicating that consumers are increasingly willing to buy big-ticket items such as houses.

Reflecting an increase in credit demand and economic growth, mortgage interest rates are projected to rise to 5 percent by the end of 2014 and 6 percent by the end of next year.  These rates are still low by historical standards and this would not be a significant deterrent to expansion in the housing market.

However, builders continue to face a number of headwinds.  Supply constraints related to lots and labor and rising lumber, gypsum and OSB prices are hurting the ability of builders to meet demand.  Moreover, creditworthy borrowers, particularly younger families and first-time home buyers, are having difficulties in getting home loans.

The National Association of Realtors reports first-time buyers are a shrinking share of the market, only 27 percent of buyers, compared to 40 percent in more normal market. It’s not that young households don’t want to buy.  It’s that desire is not matching up with their ability.  Many young households are saddled with student loan debt while job creation and wages have been heading up only slowly.  And the qualified mortgage rule that took effect this year to ensure lenders don’t make bad loans won’t help, since it tightens how much student loan and other debt loan applicants can carry.

This situation is worrisome, because all of the recent growth in household formation has been among renters.  Unless a healthy portion of today’s 40 million renter households become homeowners, the housing market will continue to struggle.

There are two issues to be tackled if first-time buyers are to get back to more normal levels.  First, we must monitor the impact of the Qualified Mortgage Rule to see if lenders are being to risk averse. There is reason to think they are, because mortgage default rates have been at historic lows in the last few years.  That suggests lenders have restricted underwriting too much.  Second, builders need to step up home building, bringing construction levels closer to historical norms.  More inventory helps tame price growth, and it gives buyers something they don’t have much of now: selection.

The housing market continues to struggle.  In 2000, when the market was rather boring, with no bubble and no crash, there were 5.2 million existing-home sales and 1.6 million housing starts.  Today, home sales are struggling to reach 5 million annually and new starts total only about 1 million, yet the country has 34 million more people and mortgage rates remain historically low.

Subcontractors are an often over looked but essential part of the home building industry.  Many outside the industry do not understand how large a part subcontractors have in the construction of a home.  Home builders and remodelers subcontract a large portion of their construction work out to trade contractors who can more efficiently deliver individual pieces of the construction process.  Specialized subcontractors perform much or even all of the actual labor.

About 71 percent of those employed in the home building industry are subcontractors.  Total employment in the home building industry stands at 2.231 million with 647,000 consisting of builders and the remaining 1.584 million subcontractors.

During the past 40 years, the use of subcontractors significantly accelerated.  In 2012, 68 percent of home builders subcontracted 75 percent or more of the construction costs, whereas in 1959 on 31% was subcontracted.  A major reason for this trend is due to the increasing complexity, features and amenities supplied with new homes.

There continues to be a shortage of subcontractors. After the housing bust, many were forced to find other lines of work.  Some builders are seeing delays in construction up to 60 days due to the lack of skilled subcontractors.  However, home builders are hoping a stronger housing industry outlook will bring workers into the field in 2014.