Lag In New Home Building ‘Eroding Affordability’ Of Metro Areas

Posted by Patrick Barnard on September 16, 2015 No Comments
Categories : Residential Mortgage

Despite the recent labor market improvements, current new home construction is insufficient in a majority of metro areas and is contributing to housing shortages and unhealthy price growth in a number of markets, according to new research by the National Association of Realtors (NAR).

NAR's study analyzed job creation in 146 metropolitan statistical areas (MSAs) from 2012 to 2014 in relation to single-family and multifamily housing starts over the same period in order to determine whether home-building construction has kept pace with increasing job growth.

The research found that home-building activity for all housing types is underperforming in approximately two-thirds of the measured MSAs.

Historically, the average ratio for the annual change in total workers to total permits is 1.2 for all housing types and 1.6 for single-family homes. The study's findings revealed that 63% of the MSAs had a ratio above 1.2 and that 72% had a ratio above 1.6 – indicating an unsatisfactory level of new construction activity.

NAR's chief economist, Lawrence Yun, says, ‘In addition to slow housing turnover and the diminishing supply of distressed properties, lagging new home construction – especially single family – has kept available inventory far below balanced levels. Our research shows that even as the labor market began to strengthen, home building failed to keep up and is now contributing to the stronger price appreciation and eroding affordability currently seen throughout the U.S.’

Yun says that the disparity between housing starts and employment will continue to widen as more and more jobs are added in several of the MSAs.

The average ratio of single-family permits to employment jumped to 3.7 just in 2014 alone, while the ratio for total permits increased 50% to 2.4.

‘Affordability issues for buying and renting because of low supply are already well-known in many of the country's largest metro areas, including San Francisco, San Diego and New York,’ says Yun. ‘Additionally, our study found that limited construction is a widespread issue in metro areas of all sizes.’

Markets with the largest disparity of jobs versus single-family home construction and that are currently facing supply shortages include San Jose, Calif., at 22.6; San Francisco, at 22.4; San Diego and New York, both at 13.9; and Miami, at 11.1.

‘While construction is limited in some markets – such as Trenton-Ewing, N.J., and Rockford, Ill. – they aren't facing inventory shortages despite having high ratios because their job gains are more moderate,’ adds Yun.

Single-family housing starts are seen as nearly adequate to local job growth in Jackson, Miss.; Colorado Springs, Colo.; Chattanooga, Tenn.; Amarillo, Texas; and St. Louis.

Looking forward, Yun says the home-building industry will undoubtedly continue to face many challenges, including rising construction and labor costs, limited credit availability for smaller builders, and concerns about the re-emergence of first-time buyers. However, the strong job growth seen so far this year combined with the muted gains in single-family housing starts implies that sustained price growth will keep putting pressure on affordability.

‘The demand for buying has drastically improved this year and is propelling home sales to a pace not seen since 2007,’ says Yun. ‘As local job markets continue to expand, the pool of home buyers will only increase. That's why it's crucial for builders to begin shifting their focus from apartments to the purchase market and make up for lost time. If not, severe housing shortages and faster price appreciation will erode affordability and remain a burden for buyers trying to reach the market.’

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