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Some New Home Construction Markets Like It Hot

The hottest homebuilding markets of 2015 include New York, Boston, Philadelphia, and Los Angeles for multi-family homes, and Austin, Houston, Charleston and Nashville for single-family homes.

Selma Hepp, Chief Economist
August 18, 2015

In tracking the housing recovery, we have followed construction activity with a keen eye as it has lagged behind other key indicators, such as home sales and home prices, but also job growth. That’s because homebuilding is both a signal of where builders feel most confident about future housing demand and where new jobs are being created. In the last year, homebuilding across the country has been ramping up, but it continues to do so at an uneven pace. At first glance, the housing markets that are struggling with tight inventory still appear to remain tight as most of the new construction has focused on multi-family units for the rental market.

So to better understand what’s really going on, we looked at Census building permit data in the 100 largest U.S. metros to find out which homebuilding markets are hot and which are not. To do this, we first projected the level of building activity for all of 2015 based on the data for the first half of 2015. We then compared each metro’s estimated 2015 activity with its own historical annual average level of building permits from 1990 to 2014.

Where New Construction Is Booming: Metro New York
Compared to last year, many of the same housing markets where new construction was highest above normal-New York, Boston, Los Angeles, San Francisco, Houston, Orange County, and Dallas-are still building a lot. The new kids on the block to the top 10 list this year are Philadelphia, Newark, and Seattle, where the increase in permits is at least 50% to 75% higher than their respective historical norm. In fact, 27 of the 100 largest metro areas are now building more than their historical average with the growth in most having picked up markedly.

Among the top 10 U.S. metros where new construction activity is highest above average, metro New York ranks highest with 2.5 times the historical average. We were a little surprised by the number, so we dug a little deeper and found that the construction activity in the New York metro area is very cyclical and has ranged from about 20,000 permits a year to 50,000. Comparing the preliminary permit data for the first six months of 2015 to the same period last year shows an increase of almost 150%. Comparing it to the first half of 2013, it shows a 242% increase. It seems that metro New York today is again reaching a cyclical peak and thus the levels are so much higher than the average. Cyclicality is in the nature of the home building construction and many of the growing markets are on the upward slope of the current cyclical upswing.

Top 10 Metros Where New Home Construction Is Highest Above Normal
# U.S. Metro 2015 annualized permit activity relative to metro historical norm Year-over-year asking home price change, July 2015 Multi-unit building share of 2015 permits 2015 annualized multi-unit permit activity relative to metro historical norm 2015 annualized single permit activity relative to metro historical norm
1 New York, NY-NJ 255% 6% 94% 423% -50%
2 Boston, MA 94% 5% 84% 295% -50%
3 Philadelphia, PA 75% 4% 70% 138% 5%
4 Los Angeles, CA 74% 12% 81% 161% -44%
5 Newark, NJ-PA 71% 3% 78% 290% -50%
6 San Francisco, CA 69% 18% 89% 102% -36%
7 Houston, TX 56% 20% 36% 114% 60%
8 Seattle, WA 56% 8% 74% 153% -24%
9 Orange County, CA 53% 7% 67% 136% -24%
10 Dallas, TX 47% 12% 45% 103% 30%
Sources: Census and Trulia.

No Where To Go But Up
Throughout much of the recovery, builders have focused more of their efforts on multi-family homes than constructing single-family homes. So to better understand how hot multi-family construction actually is, we looked at where the share of multi-family buildings has been booming. Turns out, it’s very hot everywhere. Since last year, the share of multi-family buildings has increased in most of the metros that topped last year’s hottest homebuilding markets list.

We then took it a step further and compared the estimated 2015 multi-family permit activity to each metro’s historical norm. In some of the top 10 markets, multi-family construction was higher than the historical norm by several fold. For example, New York’s activity is more than four times higher, while both Boston and Newark are almost three times higher.  Even in Dallas and San Francisco where the multi-unit increase was lowest among the top 10, it is still more than double the historical norm. Single-family construction, on the other hand, has been cold. Among the top 10 metros, only three metros had above-average single-family home construction activity, including Houston, Dallas, and Philadelphia, which are markets predominately made up of single-family homes.

Where Homebuilding is Sluggish: Detroit
At the other side of the spectrum are the housing markets where construction activity has not returned to their historical norms. When looking at the housing markets with lowest activity, we only focused on the top 50 of the 100 largest metros to focus on the homebuilding trends in larger markets.

Detroit climbed to the top of the list of the slowest new construction markets with homebuilding activity at two-thirds below historical norms. Last year, Detroit was the second slowest market behind Fort Lauderdale. Other markets that made the list again include Cincinnati, Riverside, and Las Vegas. New comers among the lowest construction activity markets are Milwaukee, Montgomery County-Bucks County-Chester County, PA, Long Island, and West Palm Beach. Riverside and Las Vegas, at 49%, are seeing some improvement in activity relative to normal, but are still growing slowly. In these slower markets, the share of multi-family home building permits is smaller than in the hot markets, and is running well below historical norms.

Top 10 Metros Where New Home Construction Is Lowest Below Normal
# U.S. Metro 2015 annualized permit activity relative to metro historical norm Year-over-year asking home price change, July 2015 Multi-unit building share of 2015 permits 2015 annualized multi-unit permit activity relative to metro historical norm 2015 annualized single permit activity relative to metro historical norm
1 Detroit, MI -65% 1% 26% -70% -59%
2 Cincinnati, OH -57% 5% 18% -65% -51%
3 Milwaukee, WI -53% 6% 50% -45% -58%
4 Montgomery County-Bucks County-Chester County, PA -51% 3% 24% -11% -61%
5 Long Island, NY -51% 7% 19% -48% -61%
6 West Palm Beach, FL -50% 2% 26% -59% -57%
7 RiversideSan Bernardino, CA -49% 4% 26% -6% -61%
8 Las Vegas, NV -49% 15% 24% -59% -36%
9 Cleveland, OH -49% -2% 14% -55% -45%
10 WarrenTroyFarmington Hills, MI -48% 0% 27% -10% -53%
Note: among the 50 of the 100 largest metros. Sources: Census and Trulia.

Home Prices and New Construction Finally in Tandem
Another interesting development over the last year is the positive relationship between construction activity and home prices. Where new construction is booming relative to historical norm is where home prices are on an upward trajectory. The correlation between permit activity relative to historical norms and the year-over-year price change is +0.29, which is modest, but still statistically significant positive relationship. (Remember that correlations range from 1 to -1, where zero means there is no linear relationship.) In other words, builders are generally building where home prices are rising. The positive correlation is a reversal from last year when the relationship between the two measures was negative and builders were not necessarily building where prices were growing.

Trulia_ConstructionPrices_Aug2015

Today, there are generally more markets with building activity above the historical norm. Those markets also tend to be the bigger metro areas where price appreciation remained more robust than in smaller markets. Also, among the colder homebuilding markets, price appreciation is notably slower than last year. Moreover, there is a bigger range in building activity between the hottest markets and coldest markets today than there was last year. That suggests greater polarization between markets where builders are keen on participating in and the markets where they are not.

This brings us to a new connection that we’re seeing in the housing market this year, that between employment growth and construction activity. The correlation between permit activity relative to historical norms and the employment growth since the cyclical bottom is +0.29, which is again a modest, but statistically significant positive relationship.

Trulia_ConstructionJobs_Aug2015

While part of the employment growth is also employment in construction sectors, the scatterplot above also suggests that metros where employment growth has been across a greater number of sectors and robust, we’re also seeing a greater improvement in single-family home construction. In other words, solid and broad-based job market growth is pulling builders back in and giving them confidence to build single-family homes again.

All in all, the housing recovery has reached a new milestone. Builders have become much more bullish on the housing market, with homebuilder confidence haven risen to a near-decade high. New construction is now being driven by steady home price appreciation, but more importantly by stronger economic fundamentals, job growth, and demographic trends which are key fundamentals necessary for a sustainable healthy recovery.

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Are We Building Too Many Single-Family Homes?

The vacancy rate for single-family homes increased in 2013 and remains well above bubble and pre-bubble levels.

What? Too much new single-family construction? It sounds hard to believe, with only 618,000 single-family housing starts in 2013, heading toward 622,000 in 2014 – far below the pre-bubble average of 1.1 million per year in the 1990s. Even when adding in multi-unit building, which is booming, construction remains a laggard in the housing recovery and is contributing less than it should to employment and economic growth.

Of course, the historical norm doesn’t tell us what the just-right level of construction is now. That depends on the rate at which new households are formed. If new construction runs ahead of household formation, more homes sit empty and the vacancy rate rises. In 2004 and 2005, during the bubble, construction of single-family homes soared to over 1.5 million units. Then, during the bust, household formation slowed, in part because more young people lived with parents. Too much housing and too few households were a dangerous cocktail during the housing bust and recession, causing the vacancy rate to climb until 2010. Since then, the vacancy rate has fallen, but single-family construction has continued to wallow near all-time lows.

Newly released data from the Census Bureau’s American Community Survey (ACS) show that the vacancy rate for single-family homes actually ticked up a bit in 2013. That’s a big surprise. It suggests even today’s low level of single-family construction might still be too much, too soon. To determine whether we’re building too many homes, we need first to understand household formation, and then the vacancy rate.

Single-Family Rentals Increased Despite Low Household Formation Rate
To understand what’s happening with vacancy rates, let’s start by looking at changes in households and housing units in the past year broken down by owner-occupied and rented, and single-family and multi-unit:

Type of unit Change, 2012 to 2013, ‘000s Change, 2012 to 2013, % Change, 2006 to 2013, ‘000s Change, 2006 to 2013, %
Owner-occupied single-family -184 -0.3% -428 -0.7%
Renter-occupied single-family 331 2.3% 3540 31.2%
Owner-occupied multi-unit (i.e. condos) 18 0.5% -269 -6.4%
Renter-occupied multi-unit (i.e. apartments) 263 1.0% 2259 9.7%
Total single-family units, incl. vacant 226 0.3% 4701 5.5%
Total multi-family units, incl. vacant 199 0.6% 2131 6.5%
Total housing units, incl. vacant 356 0.3% 6496 5.1%
Total households 321 0.3% 4674 4.2%
Note: total housing units and total households include mobile homes, boats, RV’s, vans, etc. and their occupants.

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Hottest Homebuilding Markets of 2014

Although construction activity remains well below normal nationally, homebuilding in Boston, New York, San Jose, Houston, and several other local markets is booming.

Construction activity is a fundamental measure of local housing market health. That’s because homebuilding is both a signal of where builders are betting on future housing demand as well as a creator of local jobs. In this housing recovery, construction might even be a better measure of local market health than home price changes, which have been driven in part by investors and others buying undervalued homes.

Census building permit data reveal which markets are breaking new ground. Based on permits for the first half of 2014, we projected the level of building permits for the full year of 2014 for each metro, compared with the metro’s own historical annual average level of building permits from 1990 to 2013. Of course, the historical average level of construction ranges from a lot in places like Las Vegas and Raleigh to very little in places like San Francisco and Detroit, but we’re looking at how far each metro’s 2014 construction activity is above or below its own historical average.

Where Construction is Booming
Construction activity is highest relative to the local norm in Boston, New York, San Jose, and Houston, which are on track to build at least 50% more new homes in 2014 than their local historical average. The rest of the top 10 are in CaliforniaTexas, or Oklahoma. Of course, the normal level of construction in many of these markets – particularly Boston, New York, Los Angeles, and San Francisco – is low relative to most other metros across the country, but in 2014 they’re outperforming their own historical norm.

Top 10 Metros Where New Home Construction Is Highest Above Normal
# U.S. Metro 2014 annualized permit activity relative to metro historical norm Year-over-year asking home price change, July 2014 Multi-unit building share of 2014 permits
1 Boston, MA +73% 6.0% 71%
2 New York, NY-NJ +70% 5.6% 92%
3 San Jose, CA +69% 9.1% 75%
4 Houston, TX +61% 10.4% 34%
5 Oklahoma City, OK +42% 3.4% 23%
6 Orange County, CA +40% 6.6% 57%
7 Austin, TX +39% 12.3% 44%
8 Dallas, TX +36% 7.6% 51%
9 San Francisco, CA +36% 12.1% 84%
10 Los Angeles, CA +34% 9.3% 73%
Note: among the 80 of the 100 largest metros for which sufficient local permit data are available. Sources: Census and Trulia.

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The Housing Recovery Needs More Than Just Rising Prices

In the boom-and-bust housing markets with the biggest price rebounds, construction activity is lagging. In contrast, the markets where construction has recovered include big-city metros with strong rental demand. Rents are up 4.5% year-over-year, and rental affordability is worst in Miami and New York.

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of how asking prices and rents are trending nationally and locally. They adjust for the changing mix of listed homes and therefore show what’s really happening to asking prices and rents. Because asking prices lead sales prices by approximately two or more months, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.

Yearly Price Gain Smallest in 11 Months, Despite Steady Monthly Rise
Nationally, asking prices rose 0.8% month-over-month and 2.8% quarter-over-quarter in April, seasonally adjusted. Those gains are in line with March increases and show that home prices continue to rapidly climb.

However, asking prices rose 9.0% year-over-year, which is the smallest year-over-year increase in 11 months. Why are year-over-year price increases slipping despite month-over-month and quarter-over-quarter increases holding steady? One reason is that the biggest price spike during the housing recovery happened between February and April 2013, and the year-over-year change in April 2014 no longer includes those months.

TruliaPriceMonitor_LineChart_Apr2014

April 2014 Trulia Price Monitor Summary

 

% change in asking prices

# of 100 largest metros with asking-price increases

% change in asking prices, excluding foreclosures

Month-over-month,
seasonally adjusted

0.8%

Not reported

0.8%

Quarter-over-quarter,
seasonally adjusted

2.8%

97

2.8%

Year-over-year

9.0%

97

8.4%

*Data from previous months are revised each month, so data being reported now for previous months might differ from previously reported data.

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To Buy a New or an Existing Home? Why, How Much, and Where

41% of Americans say they would prefer to buy a newly built home over a previously-lived-in home; modern features and the ability to customize the home are the top reasons. However, just 46% of the people who strongly prefer a new home are willing to pay the 20% premium that new homes typically cost.

Should you buy a newly built home or one that’s been previously lived in? Both have their advantages and both have people who love them. Trulia surveyed 2,048 Americans in late March and early April 2014 about their preferences for new versus existing homes, and also analyzed recent home-purchase and building-permit data from the Census. Here’s what we found.

Twice as Many People Prefer New Homes Over Existing Homes
For the same price, 2 in 5 of Americans (41%) strongly or somewhat prefer to buy a newly built home over an existing home. Just 21% strongly or somewhat prefer an existing home. The remaining 38% have no preference. (The survey question explained that “new” means newly built, while “existing” means someone else has lived in it.)

Trulia_NewVsExisting_PieChart_5.55.14_v2

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