Study: New Home Construction Trailing Job Growth in Majority of Metro Areas

WASHINGTON—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 areas MSAs throughout the U.S. to determine whether homebuilding has kept up with the steadily improving pace of job growth in the past three years. 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 said. “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% of measured markets had a ratio above 1.2 and 72% 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% 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, CA, at 22.6; San Francisco, 22.4; San Diego and New York, at 13.9; and Miami, 11.1.

Looking ahead, Yun said 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.

John Jordan
Editor, Real Estate In-Depth