Not enough new homes are being built in many metro areas in the US

Despite positive improvements in the labour market in recent years, new home construction is currently insufficient in a majority of metro areas in the United States, new research has found.

The situation is contributing to persistent housing shortages and unhealthy price growth in many markets, according to the report 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 US to determine whether home building has kept up with the steadily improving pace of job growth in the past three years.

The findings reveal that home building activity for all housing types is underperforming in roughly two thirds of measured metro areas and NAR chief economist Lawrence Yun said that 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,' Yun explained.

'Our research shows that even as the labour market began to strengthen, home building failed to keep up and is now contributing to the stronger price appreciation and eroding affordability currently seen throughout the US,' he added.

The study examined job creation in 146 metro areas from 2012 to 2014 relative to single family and multi-family 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 some 63% of measured markets had a ratio above 1.2 and 72 percent 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 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. Additionally, our study found that limited construction is a widespread issue in metro areas of all sizes,' Yun pointed out.

The markets with the largest disparity of jobs versus home construction, single family, and currently facing supply shortages are San Jose, California, at 22.6, San Francisco at 22.4, San Diego and New York, both at 13.9 and Miami at 11.1.

Yun explained that while construction is limited in some markets such as Trenton–Ewing in New Jersey and Rockford, Illinois, they aren’t facing inventory shortages despite having high ratios because their job gains are more moderate.

Single family housing starts are seen as nearly adequate to local job growth at a ratio of 1.6 in Jackson, Mississippi, Colorado Springs, Chattanooga in Tennessee, Amarillo, Texas, and St. Louis.

Looking ahead, Yun said that there’s no question the home building industry continues to face many challenges, including rising construction and labour 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.

'The demand for buying has drastically improved this year and is propelling home sales to a pace not seen since 2007. As local job markets continue to expand, the pool of home buyers will only increase,' Yun added.

'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,' he concluded.