Current monthly data has recently been released on housing supply elements - in particular, building permits and housing starts. The data continues to be positive. However, with housing prices continuing on a rather steep trajectory, are these recent supply trend levels sufficient?
Building permits are up significantly from the trough. While well below the peak in 2005, building permits are running +300,000 less than experienced in the period from 2000 to 2002. Could an additional 25 percent increase move the dial on the supply-demand imbalance?
There are very similar data trends when reviewing Total Housing Starts data: significantly above trough; far below peak; and running +350,000 or more below levels in 2000 to 2002.
Focusing on housing starts for single family homes, we see starker differences. While up from trough levels and well under the peak, single family housing starts are more than 400,000 below levels achieved in the early years following the turn of the century.
Looking at the other component - Multifamily Housing Starts, the data suggests that we are achieving some of the highest levels historically. Perhaps we are constructing the appropriate supply of multifamily housing?
And while Multifamily Housing Starts represent a greater share of total housing starts, where will demand head in the future: more Multifamily or more Single Family or more of both?
Another data point to assess is the Building Supply Ratio. Here we will define as the number of new building permits per 1,000 population. Currently, there are 3.8 new building permits issued per 1,000 population. Again, up significantly from the trough of 1.8 and well below the peak of 7.3. Looking at the levels occurring in 2000 to 2002 of approximately 5.6, there are nearly 1.8 fewer new building permits issued per 1,000 population. With a population of more than 325 million, this would translate to +585,000 new building permits. Sounds much too high? - but this would be the equivalent shortfall.
The analysis of national trend data may allow for a quick and easy answer: more housing units (+300,000 annually) need to be permitted and built to alleviate the supply-demand imbalance.
But the reality is that addressing housing supply is extremely complex, given that this issue occurs across hundreds of local markets across the U.S. And each local market will have a somewhat unique and dynamic set of supply and demand factors, include land, labor, materials, contractors, demographics and population and job trends. There are also national issues that will impact both supply and demand: interest rates, tax policy and regulation are among the most important.
On the issue of Housing Supply, the easy answer is that more is needed. But the more complicated issues are numerous: How Many? What Type - multifamily, or single family or both? What Price Point? Where? And can this be managed to minimize a “boom / bust” cycle for home builders? These issues need to be addressed at the local, state and national levels.
For more data, information and analysis on the housing market, click on Mortgage / Housing Finance.