Where to Find a Home: Areas With Great Opportunities for Homebuyers and Homebuilders

Background

Housing supply is definitely one of the main concerns for the real estate market. However, this is not a new issue. Housing inventory has continued to fall for the last 9 years. NAR estimates that it would take 2 months to sell all current housing inventory, while 5 months is what we likely need for a balanced market. In the meantime, housing demand is continuously rising, especially since 2015, widening the gap between supply and demand and putting upward pressure on home prices. Record low mortgage rates in the past year is one of the main reasons that housing is booming during the pandemic, with home sales reaching the highest level since before the Great Recession. While 4.6 million millennials will be at the typical age that millennials get married¹ in 2022, expect housing demand to increase further. Thus, both low rates and favorable demographics will continue to boost homebuying activity for at least the next couple of years.

It's imperative to build more homes to accommodate this strong housing demand. Nevertheless, keep in mind that supply adjusts slowly over time. For example, developing new homes takes time, up to several years for large projects or 10 to 12 months for single-family homes. Thus, home builders cannot instantly ramp up production to meet increased demand. Expect this housing shortage to continue for at least the next 15 years.

The National Association of REALTORS® identified the areas with the most homes coming to the market in the following months. Along with housing starts, building permits are also a leading indicator of the housing activity for the upcoming months. Specifically, building permits provide an estimate of the number of new housing units that have been authorized by the government.

Findings

Nationwide, 13% more single-family building permits were issued in 2020 compared to a year earlier. At the local level, building permits rose in 42% of the metro areas. Nevertheless, in the following metro areas, single-family building permits rose more than 15%.

However, these new homes are not enough to bring the market into balance. In fact, an increase in building permits typically indicates a need for more homes. So, let's now estimate how many homes need to be added to the market and compare those with the year-over-year change of single-family building permits in 2020. Indeed, the data shows that even though building permits rose in 2020, we need to build even more homes. For instance, while there are nearly 1,330 fewer listings in Omaha, NE-IA area², only 910 more single-family permits were issued in 2020 compared to 2019. Respectively, in Philadelphia, PA-NJ-DE-MD, nearly 12,310 listings need to be added to the market while only 1,090 more single-family permits were issued in 2020 from one year earlier. Thus, there are opportunities for more homebuilders to build homes in these areas. Additionally, keep in mind that an increase in building permits specifically for single-family homes implies that more people are financially ready to buy a home. See below how many homes need to be added to these markets in order to be back to the average level during the period 2016-2021:

But in many markets, a new home builder's biggest competition isn't another builder, it's another type of home: an existing home. There are two types of homes that buyers can purchase; a new or existing home. While there are considerable advantages to buying a brand-new home such as low maintenance, less upkeep and better resale price, there are people who may prefer a resale house, even if it needs extensive work and time for renovations. In the meantime, this is what investors do. Some investors flip the houses and some resell the houses when they appreciate. Thus, in the spirit of getting to know the competition, the areas above had also a low number of investors. Nationwide, 11.7 million single–family detached homes are renter-occupied – 15% of all single-family detached homes – which implies that these homes are owned by investors. Nevertheless, 11% of single-family permits are owned by investors on average in the 10 areas above.

Thus, if you are a homebuilder in one of these areas, keep an eye out because there are great opportunities for you there. While there is a strong demand for housing, there is also less competition for you in these markets.