Homeownership is at its lowest level in half a century, but it’s not because of a lack of demand. There aren’t enough new homes in urban hot spots.
Single-family home construction is not meeting demand in 80% of US metro areas, according to a new survey from the National Association of Realtors (NAR). NAR reviewed new home construction relative to job gains over a three-year period (2013-2015) in 171 US metro areas and found this housing shortage threatens to hold back prospective buyers in the largest US cities.
New home sales in the US declined 7.6% in August and sales prices were down 5.4%, according to data released Monday. Sales of new US homes dropped last month after rising in July to its fastest pace since pre-recession levels.
Lawrence Yun, chief economist and senior vice president of research at NAR, pointed to a fairly simple explanation for the decline in home sales amid a housing shortage: “Builders aren’t building enough.”
He says that builders like Lennar (LEN) and Pulte Homes (PHM) are starting to respond accordingly to local supply shortages, but that it’ll be at least a few years before inventory rebounds. Some of the primary hurdles include permit delays, higher construction, regulatory and labor costs, difficulty finding skilled workers and the roadblocks that smaller builders face in order to finance their projects.
But overall, single-family homes in major cities are being gobbled up ravenously and builders can’t keep up with the demand. Builders are able to find a buyer within a reasonable amount of time, says Yun.
“The builders are dragging behind the market condition and as a result we’re seeing a massive housing shortage. And as a result, home prices are rising much faster than people’s income and rents are also rising because of the housing shortage,” he told Yahoo Finance.
Though new single-family home sales posted their biggest decline in nearly a year in August, the sales trend has been positive. The sales trend remains positive because “builders are building more starter homes and bringing the median price down,” according to Yun.
With new homes costing significantly more because of strong demand, the gap between the price of new homes and existing homes is still wider than what has been historically normal.
The top 10 metro areas with the biggest need for more single-family housing starts to get back to the historical average are New York, Dallas, San Francisco, Miami, Chicago, Atlanta, Seattle, San Jose, Calif., Denver, and San Diego.
Yun specifically cites markets like Seattle as a metro bursting with demand without enough supply: “Seattle is a very strong job-creating market — they’ve created over 150,000 net new jobs in the past three years yet have built only 30,000 single-family home construction.”
But perhaps the most extreme case is in California’s Bay Area, which has seen 200,000 net new jobs over the last three years but only 10,000 single-family starts. In places like San Francisco and San Jose, homebuyers are being forced to continue renting indefinitely or move further away from the heart of the city, despite desiring the walkability and amenities that an urban area provides.
“People are feeling the pinch of higher home prices and for non-owners, higher rents,” said Yun. “People just feel like that American dream of ownership is completely out of touch.”
Melody Hahm is a writer at Yahoo Finance, covering entrepreneurship, technology and real estate. Follow her on Twitter @melodyhahm.