The Markets with the Greatest Shortage of Housing Starts

Many markets across the United States are experiencing single-family housing inventory shortages exasperated by low-home building activity, according to new research from the National Association of Realtors (NAR).

In a review of new home construction relative to job gains over a three-year period (2012 to 2015) in 171 metro areas to determine which markets had the greatest shortage of single-family housing starts, NAR found that single-family housing construction was underperforming in most of the country—with half of the top 10 markets with the largest deficiencies located in the Western U.S.

“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,” NAR Chief Economist Lawrence Yun said. “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.”

NAR found that 80 percent of the 171 markets researched had a ratio of annual change in total jobs to single-family permits higher than the historical average of 1.6, which indicates inadequacies in new home construction (the average ratio for the 171 markets researched as 3.4). Using this jobs-to-permits ratio, NAR calculated how many single-housing permits would be needed in each market to bring the ratio back to 1.6. The more permits needed, the greater the deficiency, according to NAR.

The top 10 list is as follows:

• 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)

Markets with the largest deficiencies in single-family permits typically have strong appetites for buying, home price appreciation that outpaces income growth, and instances where homes sell quickly, according to Yun. Strengthening job markets attract more homebuyers in those markets, which only increases the demand for housing in those areas.

“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,” Yun said.

NAR predicts that it will take multiple years for permits to get back up to speed in markets where there are shortages due to the hurdles facing homebuilders such as permit delays; higher costs for construction, labor, and regulation; difficulty in finding skilled workers; and the exhausting process (for smaller builders) of obtaining 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,” Yun said. “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 homeownership opportunities remain in reach to qualified prospective buyers at all ages and income levels.”