March Home Construction Booms, But is There a Bubble?

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Robison Wells
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U.S. housing construction grew at the fastest pace since 2006 in March as builders recovered from the February weather-related slowdowns. Builders began construction on new homes at a seasonally adjusted rate of 1.74 million units in March, up 19.4% over February when building fell 11%. As the fastest boom in growth since the 2006 housing craze, some economists are pleased while others are wary.

A new report from Freddie Mac concluded that the housing market is still 3.8 million homes short of what is needed to meet demand, up 52% since 2018.

“We expect the pace of housing starts to moderate slightly over the balance of 2021 but still look for starts to increase more than 6% this year,” Nancy Vanden Houten, lead economist at Oxford Economics, said in a research note.

Builders continue to combat high materials costs, which more than tripled in some areas in 2020. Supply chains also exist for items like appliances.

As rated by the National Association of Home Builders/Wells Fargo, builder confidence saw an increase of one point to 83 in March. Any rating over 50 shows builders’ optimism about the future.

Growth appeared in all areas of the country except the West, which declined 12.6%. The largest region of growth occurred in the Midwest at 122.8%

Some economists remain wary, pointing out the similarities to the 2006 bubble, but the mainstream consensus maintains that there is no bubble behind the current growth and that solid demand exists.

However, last week Forbes reported dangerous signs of a bubble. For example, in markets like Nashville, Sacramento, and Boise, contracts that waive all contingencies are now standard as frantic buyers are, in Forbes’ estimation, over-reaching. Also, many people own 2 or 3 homes (creating a so-called “shadow-inventory”) hoping for more price hikes before selling.

Still, the lead economist at real estate website Redfin, Taylor Marr, says that the current market doesn’t meet the qualifications of a bubble—yet. “The fundamentals of the current housing boom are relatively, structurally sound even in markets where prices ostensibly seem like they’re spiraling out of control.”

“Prices can’t keep going up forever,” says Redfin’s Marr, “Even when the fundamentals are sustainable like they are now. Strong increases in mortgage rates, which are likely coming soon, will inevitably cool home appreciation and bring prices back in line with wages.”

Amid increasing demand for homes at already exorbitant and rising costs, analysts debate over the possibility of a looming real estate bubble.

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