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NAR Reports

Insufficient new home construction is hurting housing by reducing affordability

As new home construction lags behind job growth, affordability in America is taking a hit, so what happened and will it adjust naturally?

home sales

When comparing the volume of new home construction to the number of newly employed workers, the National Association of Realtors has uncovered that homebuilding activity is underperforming in roughly two-thirds of measured metro areas. This means that despite improvements in the labor market, NAR reportes that “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.”

In other words, homebuilding has not kept up with the improving pace of job growth, and when any sector isn’t in step with the others, it is problematic.

New home sector is now hurting affordability

In recent years, low inventory levels has been a prevailing headwind, says NAR’s Chief Economist, Dr. Lawrence Yun.

“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.

Dr. Yun added, “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.”

Affordability is taking a big hit

NAR analyzed job creation and housing starts in 146 metro areas from 2012 to 2014, and while the average ratio for the annual change in total workers to total permits is 1.2, for the period studied, fully 63 percent of markets were above that rate, indicating inadequate new construction. We’re seeing the biggest supply shortages in San Jose, CA; San Francisco, San Diego, New York, and Miami. In other areas like Trenton, NJ and Rockford, IL aren’t facing inventory shortages because their job gains are moderate.

The gap between housing starts and employment is widening, says Dr. Yun. 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 Dr. Yun. “Additionally, our study found that limited construction is a widespread issue in metro areas of all sizes.”

So what is the answer?

Dr. Yun notes that builders will continue to face challenges from rising labor and construction costs to limited credit availability (for smaller builders).

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 Dr. 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.”

#NewHomeConstruction

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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