Single-family home construction is currently lacking in 80% of measured metro areas, and the lack of home building activity is creating a housing shortage that is curtailing affordability and threatening to hold back prospective buyers in many of the largest cities in the country, according to new research from the National Association of Realtors®.
NAR’s study reviewed new-home construction relative to job gains over a three-year period (2013-2015) in 171 metropolitan statistical areas (MSAs) throughout the U.S. to determine the markets with the greatest shortage of single-family housing starts. The findings reveal that single-family construction is underperforming in most of the U.S., with markets in the West making up half of the top ten areas with the largest deficit of newly built homes.
NAR analyzed employment growth in relation to single-family housing starts in the three-year period from 2012 through 2015. Historically, the average ratio for the annual change in total jobs to permits is 1.6 for single-family homes. The research found that 80% of measured markets had a ratio above 1.6, which indicates inadequate new construction in most of the country. The average ratio for areas examined was 3.4.
Using each metro area’s jobs-to-permits ratio, NAR then calculated the amount of permits needed in each metro area to balance the ratio back to its historical average of 1.6. The higher the number of permits required, the more severe the shortage was in each market.
The top 10 metro areas with the biggest need for more single-family housing starts to get back to the historical average ratio are:
· New York (218,541 permits required)
· Dallas (132,482 permits required)
· San Francisco (127,412 permits required)
· Miami (118,937 permits required)
· Chicago (94,457 permits required)
· Atlanta (93,627 permits required)
· Seattle (73,135 permits required)
· San Jose, California (69,042 permits required)
· Denver (67,403 permits required)
· San Diego (55,825 permits required)
“Inadequate single-family home construction since the Great Recession has had a detrimental impact on the housing market by accelerating price growth and making it very difficult for prospective buyers to find an affordable home – especially young adults,” said Lawrence Yun, NAR chief economist. “Without the expected pick-up in building as job gains rose in recent years, new and existing inventory has shrunk, prices have shot up and affordability has eroded despite mortgage rates at or near historic lows.”
According to Yun, most of the metro areas with the biggest need for increased construction have strong appetites for buying, home-price growth that outpaces incomes and common instances where homes sell very quickly. Their healthy job markets continue to attract an influx of potential homeowners, only fueling the need for more housing.
“Although a few small cities with high ratios did not make the national rank for absolute permit shortages, their supply shortages are still meaningful at the local level and could become a bigger issue if job gains hold steady and the current pace of construction remains at its nearly non-existent level,” adds Yun.
Looking ahead, Yun said the ratio in many areas moved downward, albeit slightly, in 2015 compared to 2014 as builders started to respond accordingly to local supply shortages. However, he added that it will likely take multiple years before inventory rebounds in many of the markets because home builders continue to face a plethora of hurdles, including permit delays, higher construction, regulatory and labor costs, difficulty finding skilled workers and the exhausting process many smaller builders go through to obtain financing.
“Recent NAR survey data show an overwhelming consumer preference towards single-family homes, including among millennials, who are increasingly buying them in suburban areas,” concluded Yun. “A mix of new starter-homes for first-time buyers and larger homes for families looking to trade up is needed at this moment to ensure home ownership opportunities remain in reach to qualified prospective buyers at all ages and income levels.”