Why Can’t They Build More Homes Where the Jobs Are?
In a logical world, builders would rush to put up homes in the U.S. regions adding jobs at the fastest pace. In reality, it's not so simple.
San Francisco's metropolitan area added 373,000 net new jobs in the last five years—but issued permits for only 58,000 units of new housing. The lack of new construction has exacerbated housing costs in the Bay Area, making the San Francisco metro among the cruelest markets in the U.S. Over the same period, Houston added 346,000 jobs and permitted 260,000 new dwellings, five times as many units per new job as San Francisco.
You can see the imbalance in this chart, based on one that Lawrence Yun, chief economist for the National Association of Realtors, uses to explain the shortage of for-sale homes across the country. For each metro, it compares net new jobs created from 2012 to 2016 with the number of new housing units authorized over the same period. Historically, one new housing unit for every two jobs created is considered normal, Yun said.
California, where job growth has been strong and local control of zoning decisions makes it notoriously difficult to build, is home to many of the cities where construction most lags behind hiring. Six California metros are among those with the slowest pace of home-building compared to job growth.
Sprawling cities in the South and Southwest tended to authorize housing at a faster pace. Houston, famous for its lax approach to land use regulation, authorized one new permit for every 1.3 jobs. Even such metros as Denver, Seattle,and Portland, Oregon, look like boomtowns, compared to California's metros.
It’s not just traditionally expensive coastal markets that are hurting for new supply. Buyers in small cities like Louisville, Kentucky, and Omaha, Nebraska, are frustrated by the tight inventory and lack of options, Yun said.
Nationally, builders have added fewer new units in the 10 years ending in 2016 than in any 10-year period since 1990. Low vacancy rates have led to rising rents. House hunters are sweating it out in seller’s markets, in which homes go quickly—and often above the listing price.
New construction isn’t the only source of housing for a growing population. Cities with more unused inventory can absorb new households without building more units. The foreclosure crisis flooded the market with cheap properties, many of which were fixed up and let out by investors in the burgeoning single-family rental business.
There are two ways to ease the inventory crunch, Yun said in an interview: “Either the builders build homes, or real estate investors unload homes onto the market.”
Why aren’t builders swinging into action? One reason may be a mismatch between the places people want to live and the places where buildable land is available. Plus, builders have had a hard time filling open positions, which boosts labor costs and slows the pace of construction. Zoning rules often prevent greater population density, pushing builders to erect single-family homes on the peripheries of big cities, instead of apartment buildings closer to job centers.
Regulatory costs play a role, too. On average, they account for 24 percent of the expense of building a new home, according to a 2016 study from the National Association of Home Builders. In San Diego, they drive 40 percent of the cost of a new home, according to a report by a local housing group.