Despite positive improvements in the labor market in recent years, new home construction is currently insufficient in a majority of metro areas and is contributing to persistent housing shortages and unhealthy price growth in many markets, according to new research from the National Association of REALTORS®.
NAR measured the volume of new-home construction relative to the number of newly employed workers in 146 metropolitan statistical areas1 (MSAs) throughout the U.S. to determine whether homebuilding has kept up with the steadily improving pace of job growth in the past three years2. The findings reveal that homebuilding activity for all housing types is underperforming in roughly two-thirds of measured metro areas.
Lawrence Yun, NAR chief economist, says low inventory has been a prevailing headwind to the housing market in recent years. “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,” he says. “Our research shows that even as the labor market began to strengthen, homebuilding failed to keep up and is now contributing to the stronger price appreciation and eroding affordability currently seen throughout the U.S.”
NAR’s study analyzed job creation in 146 metro areas from 2012 to 2014 relative to single-family and multifamily housing starts over the same period. 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 research found that through 2014, 63 percent of measured markets had a ratio above 1.2 and 72 percent had a ratio above 1.6, which indicates inadequate new construction.
According to Yun, with jobs now being added at a more robust pace in several metro areas, the disparity between housing starts and employment is widening. In 2014 alone, the average ratio of single-family permits to employment jumped to 3.7, while the ratio for total permits increased 50 percent 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.”
The markets with the largest disparity of jobs versus home construction (single-family) and currently facing supply shortages are San Jose, Calif., at 22.6; San Francisco, 22.4; San Diego and New York, at 13.9; and Miami, 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 (a ratio of 1.6) in Jackson, Miss.; Colorado Springs, Colo.; Chattanooga, Tenn.; Amarillo, Tex.; and St. Louis.
Looking ahead, Yun says there’s no question the homebuilding industry continues 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 in 2015, and only muted gains in single-family housing starts, suggests that sustained price growth will continue to put 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 homebuyers 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.”
1Areas are generally metropolitan statistical areas as defined by the U.S. Office of Management and Budget. NAR adheres to the OMB definitions, although in some areas an exact match is not possible from the available data. A list of counties included in MSA definitions is available at: http://www.census.gov/population/estimates/metro-city/List4.txt.
2NAR’s study analyzed homebuilding permits and employment data during the years of 2012 through 2014.
Information about NAR is available at www.realtor.org.