Single-family housing construction is down. What's hampering supply?

Single-family housing starts at the beginning of this year were down 2.8% compared to December, according to data released Thursday by the U.S. Census Bureau.

There are several reasons why new home building has been a slog, including affordability constraints, the high cost of labor and materials, a rise in the 10-year yield for mortgage rates, and construction lending.

Odeta Kushi, deputy chief economist at First American, said mortgage rates have been trending down a little bit, despite the recent spike due to the war in Iran. But for buyers on the demand side, the situation is still difficult.

“When we zoom out, we can still see it's a very challenging affordability environment,” Kushi said.

For builders on the supply side, she said things are expensive too.

“You have, labor issues, so skilled trade shortages and wage pressures. Lots, so scarcity of lots. Laws, so zoning constraints and permitting delays. Lending… and lumber, but really just materials, construction materials, more broadly,” Kushi said.

To cover these costs, National Association of Home Builders chief economist Robert Dietz said private, single-family home developers typically get loans.

Builders say if they could get more access to more financing at a lower cost, hey could build more, according to Dietz.

“(The cost of that financing) is much more strongly connected to Federal Reserve policy and those short-term interest rates,” he said.

But trying to predict what the Fed will do is complicated.

Now, there’s the conflict in Iran and the resulting jump in oil prices to consider, said Stephen Buschbom, head of applied research and analytics at Trepp.

“All else equal, if prices go up, typically that means that our interest rates are going to go up to combat that inflation,” he said.

If the economy slows, Buschbom said things could change to try and stimulate growth.

“That could mean that we have to cut interest rates to combat a weakening economy,” he said.

If the Fed rate saw a cut, construction loans could too.

Dietz said for now, he is still expecting the Fed to cut rates twice this year, though he thinks those could happen later than initially forecast.

“That would be an unambiguously positive development for the housing market,” he said.

Lower Fed rates mean lower construction loan rates, which would potentially mean more supply, and lower prices, for buyers.