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Robert Dietz, chief economist at the National Association of Home Builders, speaks at the 2019 International Builders’ Show in Las Vegas.

Housing affordability concerns will likely limit single-family-home building from making any significant gains in 2019, said economists at a Tuesday session during the 2019 International Builders’ Show in Las Vegas.

“This is a crisis,” Robert Dietz, chief economist at the National Association of Home Builders, told attendees about the rising costs of homeownership that are pricing many buyers out. Home price appreciation has outpaced wage gains over the last few years. Only a third of new homes are now affordable to households earning the median income, Dietz said.

With demographic shifts, more housing is needed to meet future demand. But home builders say several headwinds are limiting their ability to add greater inventories—such as labor and land shortages and tariffs on key building material costs that have increased construction costs. The rising costs for builders have forced them to cater to the higher-end buyer over the last few years.

But there’s a rising call from the housing industry and the public for more entry-level homes.

“We need to find more ways to build more with less,” Dietz said. “We have ongoing challenges with labor shortages. We need to attract more workers to the industry. This becomes part of the affordable housing challenge, too, because without enough workers, prices will continue to rise” for building. 

Still, builders are starting to make strides in entry-level housing, including an uptick in townhouse construction. Townhouse starts are up 24 percent on an annual basis over the past four quarters, Dietz noted. Townhouse construction now makes up 14 percent of all new-housing starts. “If we can find a way to zone greater density in communities, townhouses could be a good way to bridge renters into homeownership. We feel this market will continue to expand.”

Additional highlights from Tuesday’s housing forecast at the 2019 Builder Show from Dietz, Frank Notaft, chief economist at CoreLogic, and David Berson, chief economist at Nationwide Insurance, include:

New-housing starts: The NAHB projects 1.26 million total housing starts to round out 2018 and suggests production this year will inch up just 0.8 percent to 1.27 million units. Single-family starts are forecast to reach 876,000 units in 2018 and increase 2 percent to 894,000 this year. However, that is well below the 1.1 million to 1.2 million units that demographics would support, Dietz noted. “Ongoing job creation and solid household formations will keep demand firm, but builders will continue to grapple with supply-side headwinds that will dampen more vigorous growth in the single-family sector,” Dietz said.

Mortgage rates: After taking an initial breather at the start of 2019, interest rates will likely gradually rise over the year. The NAHB projects the 30-year fixed-rate mortgage to average 4.81 percent in 2019 and 5.08 percent next year.

Multifamily: The NAHB projects multifamily starts to reach 386,000 units in 2018 and fall 2 percentage points to 379,000 this year.

Remodeling activity: Residential remodeling activity is on the rise, as more homeowners stay in their homes longer and realize equity gains. The average homeowner has increased their equity wealth by $12,400 from September 2017 to September 2018, Notaft said. “That wealth effect has added $50 billion to consumer spending over the next two to three years,” he noted. More homeowners are using that equity to invest in sprucing up their homes, particularly among owners of 15 years or more.

Regions to watch: The South and West are seeing some of the biggest increases in new-home construction. ”Metros with good affordability, good job growth, and good weather have had the highest growth in new-home sales over the last year,” said Nothaft. New-home sales are rising the fastest in Houston, Dallas, Atlanta, Phoenix, and Austin, Texas.

No recession yet: Berson discounted any recession fear rumblings. He said economic growth is slowing, but he sees a very low risk of a near-term recession. “It’s showing a yellow light, but it’s certainly not flashing red,” Berson said. Berson expects the Federal Reserve to tighten interest rates twice this year, which could prompt the 30-year mortgage rates to rise slightly. But he says the economy continues to post strong growth. In fact, he said, this is the second longest economic expansion in U.S. history. Should it continue to June, it will be the longest on record.