Dallas, Texas is on track to build 48,772 new homes in 2017 while Allentown, PA will build only 436. So, what causes some cities to build so aggressively while others stagnate? The size of the city plays a part, of course but according to a recent study by Trulia, job growth, income growth and home price appreciation are the three key ingredients needed to spur homebuilding.
Increases or decreases in job creation have the strongest impact on demand for new construction. As people move to a new city for jobs they will need housing, of course. A steady income makes them feel financially secure enough to buy a new home. According to the study, for every 1% increase in job growth, there is a 5% increase in home building permits. In Denver, for example, employment grew by 16.3% between 2010 and 2016 and homebuilding grew to 56.2% above its historical average in 2017. Had employment increased by an additional 1% to 17.3%, homebuilding would be more like 61.2% above the historical average.
There is also a strong correlation between income growth and increases in new construction. It makes sense that as people earn more money they can save more for a down payment and feel comfortable that they can afford upgrading to a new home. When the average income of a metropolitan area increases by 1%, you can expect the number of new construction permits to increase by 2.1%.
Home Price Appreciation
Rising home prices typically signals strong demand which incentivizes homebuilders to build more homes because they know that 1) homes will sell quickly and 2) they will earn lucrative profits. In fact, Trulia estimates that for every percentage point increase in home prices, there is a 1.2% increase in new construction. This only occurs, however, when incomes grow along with home prices. If incomes fall or stagnate while home prices rise many buyers are priced out of the market and construction permits slow.
NAIHBR is a not-for-profit trade association brings together homebuilders, contractors, real estate professionals, lenders and suppliers to promote new construction and rehabilitation. Our members have a strong interest in building value in their local communities. For more information or to join NAIHBR contact us at 855-733-8100.