BuildingTeam Construction Forecast

U.S. Metro Housing Markets – From Booming To Depressed

The United States housing market is the sum of hundreds of local markets, ranging from “booming” to “depressed.” In the hottest housing markets, 50 times more houses per person are being built than in the most depressed markets. Each local market has a unique mix of home demand for replacement, additional employees, retirement and vacations. The most active housing markets have above-average demand for housing for new jobs, retirement homes and vacation homes.

These characteristics clearly describe the two most active housing markets: Cape Coral-Ft. Myers, FL and Myrtle Beach, SC. In both metropolitan areas, 50 homes a year are built for every 1,000 people, topping the list of the most intensive housing markets among the 360 U.S. metropolitan areas with populations of 50,000 or more. The most depressed housing markets are replacement only and not all obsolete homes need to be replaced. Wheeling, WV-OH (estimated population about 148,000 people) issued only one residential building permit in the last 12 months; Danville IL (estimated population about 82,000) issued two permits.

Each local housing market also has a unique demand/supply balance of new homes. A few markets, mostly in California (with supply constraints on home building), still have a shortage of available homes, even as the national housing supply has clearly expanded faster than housing demand so far this year. Hence, each market will respond uniquely to the changing national housing environment that results from higher interest rates, construction cost increases and tightening mortgage-lending standards.

Generally, the most active markets are near the ocean. All of the 20 cities with the most active housing markets have a substantial second-home market. Building permits per 1,000 people in each of these 20 cities are at least three times higher than the average for the whole country.

Generally, the most depressed markets are older, isolated, rust-belt industrial centers that have not attracted today’s rapid growth industries (electronics, biotechnology, finance, healthcare, recreation and leisure or entertainment). These characteristics clearly describe the 20 metropolitan areas with the least active housing markets, including Lima, OH, Pittsfield, MA and Johnstown, PA. Annual home construction in the bottom 20 metropolitan areas averages only 70 homes per 100,000 population. All but one of these cities is in the Midwest.

About 400,000 abandoned homes need to be replaced each year. Metropolitan areas with 1.1 or fewer building permits per 1,000 population are not keeping up with replacement needs and are not adding homes for new jobs, retirement or vacation. Realistically, since the typical home is much older in a depressed housing market, metropolitan areas with fewer than (approximately) 1.3 permits per 1,000 people are shrinking. This includes 24 cities; of these, Buffalo and Scranton are the largest. A weaker residential construction market will further depress these cities, but that amounts to only a rounding error when local markets are aggregated to a national housing total. These 24 cities account for less than 0.2% of all building permits in metropolitan areas. Generally, replacement demand will feel little impact from a weaker national housing market environment.

About 10% of housing demand is for second or vacation homes, although there is anecdotal evidence that the ratio was slightly higher last year. This figure does not include investment property that the owner intends to rent all or most of the time and may be holding primarily to realize a capital gain. The change in demand for vacation homes in any year is largely dependent on the change in income and wealth during the year and several previous years.

This dependency on the change in income and wealth suggests that vacation home demand might increase in 2006 to 2007, when income and wealth growth will continue to be above average, as they were in 2004 to 2005. However, this does not mean that all housing markets with a substantial share of vacation-home demand will avoid the housing start slowdown already underway. Many of the Florida, southern California and Rocky Mountain vacation destinations now have a speculative oversupply of homes that will depress starts though next year.

About 10% of housing demand is for retirement homes. This demand, of course, is matched by a reduction in housing demand in the retirees’ former cities. The expected weaker housing environment will have little impact on retirement home demand. Higher home prices and mortgage rates will have more impact on reducing square footage and amenities than on the number of homes. However, the retirement destinations that have recently experienced the most rapid home price appreciation will lose some new residents to less expensive cities.

The balance of housing demand, about 60%, is for living space for people who move to a city for a newly created job. Most of the 10% to 12% decline in housing starts expected through 2007 will occur in this segment of the market, primarily for entry-level homes. While job growth is expected to slow only marginally, affordability for first-time buyers will decline substantially. This decline will be due, in part, to higher interest rates, but tighter lending standards will be the main reason. Mortgage lenders will have an increasing fear of default, so they will focus both on the end of the long business expansion, including the layoffs of inexperienced workers and the upward adjustments of variable mortgage rates that are expected ahead. Nearly half of first-time buyers bought with no payment in 2005; this share will be much lower in 2006 to 2007.

The cities most at risk for declining housing starts to accommodate new workers are those in the southwest that have recently attracted domestic and foreign immigrants with low wage jobs, low monthly housing payments and little or no down payment. While job growth will not slow appreciably, fewer of the people who come for the new jobs will be able to buy a home. This impact will be aggravated later this year and early in 2007 by the need to sell off the surplus of available homes that has recently appeared in many of these cities.

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