In this blazing-hot housing market of severe home shortages and rapidly rising prices, many buyers around the country have found themselves left shivering in the cold. But while builders would love to swoop in, construct a bunch of homes, and save the day (while making bucketloads of cash), they can’t. They simply don’t have the manpower.
Construction workers have become an increasingly rare and precious commodity in today’s housing market. The national labor shortage is dramatically slowing down builders—many of whom already have their hands full with remodeling homes for baby boomers planning to age in place, and rebuilding thousands of homes ravaged by last year’s hurricanes and wildfires. Combined with overall rising construction costs, it means an influx of new homes to ease the housing shortage and tame runaway prices isn’t coming anytime soon.
Skilled workers such as home framers, electricians, plumbers, masons, carpenters, and HVAC installers are especially in demand, builders say.
But builders are partly to blame for the crisis, which is helping to drive up home prices across the nation. They were some of the first to lay off workers during the financial crisis as development stalled, and many of those workers have since moved on. The crackdown on immigration and the opioid epidemic have siphoned off laborers. Meanwhile, many potential workers simply don’t want to toil outside in the heat and the cold when they could work in a climate-controlled office.
In other words, it’s a perfect storm for both builders and aspiring home buyers.
“We’ve got rising housing demand at the same time that the residential construction industry lacks workers,” says Robert Dietz, chief economist of the National Association of Home Builders. He predicts about 900,000 single-family houses will be built this year—whereas 1.2 million are needed to keep up with demand from those hoping to purchase a home of their own.
How bad is the labor shortage?
To put the problem into perspective, there were 250,000 unfilled construction jobs at the beginning of the year, according to an NAHB analysis. The unemployment rate for the industry, reflecting unfilled positions, was 7.4% in March, according to a government data analysis by the Associated General Contractors of America, a trade group for commercial builders. That’s significantly higher than the national unemployment rate of just 4.1%.
The dearth of construction workers is slowing down all stages of the business, says Jason Scott, owner of North Star Premier Custom Homes in Westlake, OH, and president of the local Home Builders Association.
“It takes me twice as long now to do an estimate as it used to,” he says.
Instead of being able to find workers that day, he now waits eight to 10 weeks. Delays due to overbooked contractors slow the pace of homebuilding, amplifying existing shortages.
The shortage is also inflating costs for buyers and homeowners. Scott has had several subcontractors (siding, roofing, concrete) raise their prices by at least 10% since the new year. He’s paying double what he was 10 years ago for framing.
“I know builders who haven’t factored these [worker pay] increases in, and they’re watching $10,000 to $15,000 come off their bottom line,” Scott says.
With no relief in sight, builders may just have to rely on ingenuity, perhaps by using more prefabricated components.
“We’re going to have to build more with less with the current workforce,” NAHB’s Dietz says. “Builders have to find a way to be more efficient.”
The hangover some never recovered from
The burst of the housing bubble a decade ago was an A-bomb, flattening just about all of the construction work in sight. Residential home construction employment peaked at more than 5 million in 2006, but in postrecovery 2016 it was just 3.8 million, based on the NAHB’s data.
That’s because many workers didn’t have the luxury of waiting out the bad times. With bills still coming in, they were forced to move on to other gigs.
“The recession 10 years ago took a lot of people out of the construction industry,” says Brian Turmail, vice president of public affairs and strategic initiatives for AGCA. “We were the first to lay off and the last to start adding [back].”
The opioid epidemic and immigration policy take a toll on labor force
Some issues that have been in the national spotlight have also had major repercussions for housing business. This includes the opioid crisis.
Construction work is physically tough, and the rate of injury leaves some open to developing an addiction to prescription opioids, an epidemic sweeping the nation. The crisis has also likely kept many potential workers out of the labor pool.
The White House’s harsh stance on illegal immigration is also likely impacting the construction labor supply, housing experts say. About a fourth (24%) of all construction workers are immigrants—and 13% of those are living in the U.S. illegally, according to a Pew Research Center analysis of 2014 U.S. Census Bureau data.
As construction economist Ed Zarenski points out, immigrant laborers not only add to the workforce, but also help increase productivity because they are typically paid less. This may help to keep prices for the final homes down.
Immigration from Mexico, the largest source of U.S. immigrants, has been declining steadily since 2004, according to Pew, thanks to improving conditions south of the border and, more recently, anti-immigrant rhetoric in the U.S. that has made many feel unsafe or unwelcome.
“Some of the slowdown in immigration has affected the labor pool,” NAHB’s Dietz says.
The need to develop the next generation of laborers
So where is the next generation of potential laborers? The short answer: doing other stuff.
“A lot of people who would have gone into construction years ago are now going into computers or the IT field,” says Corey Dean, general manager of Bel Arbor Builders, which puts up about 18 to 20 custom homes annually in the Richmond, VA, area. “[They’re] not outside sweating or freezing.”
Plus, the decline of vocational educations has led to fewer young people today prepared for those skilled trades—and fewer that would be inclined to take the years needed to learn them. Those with bachelor’s degrees typically earn about $17,500 more annually than those who lack them, according to a 2014 report from the Pew Research Center.
So blue-collar workers are retiring, and fewer people are waiting in line to take their place.
“We made these cultural changes the last 30 years for all the right reasons: We wanted kids to go to college, we appreciated the economy was transitioning,” says AGCA’s Turmail. “But like [with] so many things in this country, we over-corrected for one problem and created another problem in its wake.”
Builders step up their outreach
The construction industry has begun to take action to feed its need for workers. That should give the home buyers of tomorrow a sliver of hope.
For example, the Home Builders Association in Colorado Springs, CO, recently partnered with the local school district to start a vocational program in six schools. Called Careers in Construction, it instructs over 350 kids in carpentry, plumbing, HVAC, and electrical trades.
“We’re giving them a choice because not all of us are meant for college,” says George C. Hess III, CEO of Vantage Homes Corp., a Colorado Springs–based builder, and chairman of the Home Builders Institute, an educational trade group.
On a grander scale, Home Depot recently pledged $50 million for HBI to support a Pre-Apprenticeship Certificate Training program. It provides vocational education not just in schools but also on military bases.
“We know the younger generation is where we start to overcome perception and make the trades cool again, if you will, so we can have that pipeline continue over the next several decades,” says Shannon Gerber, executive director of the Home Depot Foundation.
Women, who make up about 9% of the field, are another potential source of untapped workers. Compared with other fields, there’s relatively less inequality in construction (women make 95% what male construction workers make), but the industry is still 200,000 female workers short of the precrisis peak of 1.13 million, according to U.S. Bureau of Labor Statistics and National Association of Women in Construction data.
“The worker shortage is severe,” says NAHB’s Dietz. “The industry is going to have to recruit the next generation of construction workers—or we’ll continue to underbuild houses, there won’t be enough houses, and home prices will continue to rise faster than incomes.”
With all the mayhem and misconceptions flying around, we’re here to set the record straight, by highlighting the top tax myths that might dupe even the financial Einsteins among us—both for this filing year (which is still under the old IRS rules) and next, once the new tax code takes effect.
So whether you want to enter this filing season with clear-eyed confidence or just test what you know, check out this list and ask yourself honestly: How many of these fake tax facts did you believe were true?
Tax myth 1: The mortgage interest deduction is gone
On the contrary: If you bought your home before Dec. 15, 2017, you’re in luck: You are grandfathered in under the old tax laws and can still deduct all of the interest on loans of up to $1 million, says Tom Wheelwright, CPA and CEO of WealthAbility.com. Yes, even when the new tax codes go into effect next year.
And for those who bought a home after Dec. 15, 2017, or plan to in the future, it’s not as bleak as many think. Starting next year, mortgage interest is still deductible; it’s just that the deductible amount is capped at $750,000.
Tax myth 2: Property tax deductions are gone, too
In the past (and for the last time this year), most taxpayers could deduct state, city, and property taxes in their entirety. Under the new tax plan next year, these taxes are still deductible, but there’s a cap—of $10,000 per year, says Mario Costanz of Happy Tax.
In other words, property tax and mortgage interest deductions are far from gone … but one thing to consider is that next year, the standard deduction nearly doubles—to $12,000 for single filers and $24,000 when filing as married. As such, it may not make sense for as many people to itemize their deductions unless it amounts to more than this high new bar. Here’s more info on how to tell whether you should take the itemized vs. standard deduction.
Tax myth 3: If you work at home, you can deduct a home office
Some people mistakenly think that anyone who fires up a laptop at the kitchen island has a “home office.” But to take a home office deduction, that area must not only be used regularly and exclusively for business, it has to be the primary site of the business. So if you turned a spare room into a dedicated work space, you can claim it. But if you occasionally work in the living room, that’s not deductible, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York-based accounting firm with offices in Manhattan and Long Island.
Plus, things get even stricter under the new tax codes.
In the past, office employees who occasionally worked from home could claim eligible home office deductions that might include, say, business expenses that were not reimbursed by your employer (here’s more about how to take a home office tax deduction this year). But starting in 2018, only self-employed people can deduct their home office in any way. So if you own your own business, you’re fine; if you’re paid by W-2, you can kiss this deduction goodbye when you file next year.
Tax myth 4: You can deduct all of your home renovations
Sorry, DIYers: Home improvements are generally not tax deductible unless the residence also serves as a rental property. But there are a few exceptions where homeowners can cash in.
The first is if modifications were made for medical purposes that don’t increase your property value, which might include installing railings or support bars, building ramps, widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts. Note: You’ll need a letter from your doctor to prove the modifications are medically necessary to claim these deductions. Plus, those expenses must exceed 10% of your adjusted gross income in 2017, which drops to 7.5% in 2018.
The other time you can deduct renovations is if they were made in order to sell your home. You can deduct those expenses as selling costs, as long as the home improvements were made within 90 days of closing.
Tax myth 5: All home equity interest is deductible
Homeowners can turn to a home equity loan or line of credit (HELOC) for cash to either make home improvements or for more general expenses, like paying for a child’s college tuition or wedding. And in past years, the interest on these loans was tax-deductible.
Not so for next year: While the IRS has not yet issued any formal guidance, it appears that with the new tax law, HELOC interest is only deductible if the loan is used for a “substantial home improvement,” says Professor David Reiss of Brooklyn College. Also keep in mind that next year, your total deductible mortgage and eligible home equity debt must be less than the $750,000 cap.
Tax myth 6: You can always deduct your moving expenses
Up until this year, taxpayers could only deduct a portion of moving expenses when they relocated for a new job that’s at least 50 miles farther from their former home than their old job location. And per the new 2018 tax bill, no moving expenses of any kind are deductible. The only exceptions are for members of the armed forces on active duty.
We’re living in expensive times—when a bottle of fresh juice can run you $5, rents and home prices are soaring, and the bills never seem to stop piling up. But aspiring homeowners might soon get a break as it becomes a little easier for those with student, credit card, and car loan debt to qualify for a mortgage.
Fannie Mae plans to increase its allowable debt-to-income ratio from 45% to 50% on July 29. This means that more borrowers on the cusp of getting a loan (e.g., millennial, first-time, and lower- to moderate-income borrowers carrying more debt) could potentially qualify for a mortgage backed by Fannie.
The debt-to-income ratio is calculated by taking a potential borrower’s monthly gross income and dividing it by the borrower’s recurring debts such as monthly car payments. Lenders use this ratio to figure out if borrowers can afford to make their mortgage payments each month.
Fannie made the change after analyzing years of data that looked at the ability of borrowers to make their monthly payments. After this analysis, Fannie can “more accurately predict the risk of default among potential borrowers,” and it determined that increasing the ratio “will enable more qualified borrowers to get a mortgage loan,” said spokesman Pete Bakel in a statement.
“They’re trying to make more loans available,” says mortgage loan originator Don Frommeyer of Marine Bank, in Indianapolis. “When interest rates go up, the debt ratios go up. And that limits the number of people who can buy a house.”
Fannie, which purchases and guarantees mortgages, was already granting ratios of up to 50% with certain conditions—such as if the borrowers had deeper cash reserves, underwent financial counseling, or had higher incomes. The change opens the door to borrowers with more debt who can’t meet those conditions.
Your bank might have its own debt-to-income ratios
However, not everyone will be benefit from the change. Fannie Mae insures mortgages, but it’s still banks, credit unions, and other financial entities that make the loans—and those lenders have their own criteria.
But the increased debt allowance could encourage more lenders to make changes to their debt-to-income ratios. And that could help more buyers on the brink.
“The best thing the consumer can do is ask the lender if they underwrite to Fannie Mae guidelines,” says longtime mortgage broker Jeff Lazerson,based in Laguna Niguel, CA. If they don’t, “you [might] just have to find another lender. Or maybe you push back on that lender” to see if it’ll raise the limits.
Lower debt-to-income ratios won’t help everyone
A higher debt ratio isn’t a silver bullet for loan seekers, though.
“Mortgage borrowers need to keep in mind, it’s the person’s whole application that will determine whether or not they get approved,” says Eric Tyson, co-author of “Mortgages for Dummies.”
“If you don’t have a good credit score, if you don’t have a sufficiently large down payment, it won’t change the outcome of your application.”
Buyers who can’t qualify, even with the higher ratios, should consider other alternatives.
“Most people are looking to buy at the high end of their budget. They want to qualify for as much house as they can get, partly because homes are so expensive to begin with,” says Lazerson, who is also a mortgage columnist.
“They could look for a smaller-sized property [with a] lower sales price. They could find a co-signer, someone who they trust, usually a family member or a close friend,” Lazerson says. “Or [they could] come up with more down payment money.”
The information is not guaranteed and a prospective buyer should verify information with the appropriate party. Windermere Stellar and MJ Steen Group assume no liability for any errors in this information.