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Analysts: Labor Shortage Biggest Hurdle for Homebuilders

Though residential construction ""is keeping the economy on an expansionary path,"" ""Moody's Analytics"":http://www.moodysanalytics.com/ suggests in its latest ""ResiLandscape"" report that homebuilders are having a tough time shouldering the burden of growth on their own.

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In its analysis, Moody's echoed two of the most common concerns voiced by builders today: lack of labor and rising building costs.

""Homebuilders are finding it difficult to rebuild the industry and, in particular, to find skilled labor,"" wrote Celia Chen, senior director of economic research at Moody's. ""The Great Recession decimated the homebuilding industry, with a 42 percent decline in residential construction jobs from peak to trough, a loss of 1.4 million jobs. To date, only 8 percent of these jobs have come back.""

Chen explained that many jobless construction workers went on to other industries or relocated to other regions, while many immigrants (who make up a large share of the construction labor force) elected to return to their home countries.

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Adding to the problem is the fact that earnings improvements for residential construction workers have proceeded at an annualized pace of only 0.5 percent compared with the 2.4 percent average for all private employees.

The other major problem for builders--inflating construction costs--is more ""manageable,"" Chen says. While prices for structural panel and framing lumber have run up 52 percent year-over-year, total input inflation is more modest, with the homebuilding producer price rising at a 2 percent pace. In addition, with new home appreciation rising at a faster rate than construction costs, builders are able to pass the cost along.

""Furthermore, input cost inflation will moderate as rising prices and the prospect of stronger homebuilding encourage building material suppliers to bring shuttered plants back on line,"" Chen went on. ""Expansion is already starting. Employment in veneer, plywood and engineered wood, for example, is up nearly 7 percent above this time last year.

While capacity constraints may weaken the homebuilding sector--and thus, housing as a whole--there is one upside, Chen noted: price growth.

""To be sure, it may be too soon to see the full force of rising costs and labor constraints in the reported data. Furthermore, the national data may obscure tight conditions in regional markets, for which little construction industry specific data are available. Also, frictions that may occur in hiring and in ramping up factories may slow the pace of homebuilding below expectations,"" she wrote. ""In this case, fewer homes would be built over the next couple of years than in our baseline forecast, and the consequent tighter supply would result in stronger than expected house price appreciation.""

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