2020 Outlook: Top Cities to Build In

This is the common thread among the top 10 cities for entry-level new home construction

By ODETA KUSHI

The dominant theme in the housing market nationally in 2019 has been the ongoing challenge of a dearth of housing supply amid rising demand. A natural solution to the challenge is to build more. Yet, nationally, supply headwinds still make it hard for builders to ramp up new construction, especially at the entry-level, where first-time homebuyer demand has surged.

However, as the old adage goes: all real estate is local, and new home construction is accelerating rapidly in some cities. What common trends link these cities? A new American Enterprise Institute (AEI) Housing Center study based on data from DataTree by First American examines new construction trends in 60 of the largest U.S. metropolitan areas. The study segments new home construction by entry-level and move-up price tiers.

In the second quarter of 2019, the 10 cities where new entry-level construction made up the greatest percentage of the existing housing stock were:

1. Austin, Texas (7.2 percent)

2. Boise, Idaho (5.1 percent)

3. Raleigh, N.C. (4.3 percent)

4. Houston (3.3 percent)

5. Dallas (3.0 percent)

6. Jacksonville, Fla. (2.8 percent)

7. Salt Lake City (2.7 percent)

8. San Antonio (2.7 percent)

9. Myrtle Beach, S.C. (2.6 percent)

10. Charlotte, N.C. (2.5 percent)

The 10 cities with the least new entry-level construction as a share of existing housing stock were:

1. Pittsburgh (0.1 percent)

2. Cleveland (0.1 percent)

3. Hartford, Conn. (0.2 percent)

4. Detroit (0.2 percent)

5. Milwaukee (0.2 percent)

6. Philadelphia (0.3 percent)

7. Chicago (0.4 percent)

8. Louisville, Ky. (0.4 percent)

9. Providence, R.I. (0.4 percent)

10. Los Angeles (0.4 percent)

New Home Construction Follows Job Growth

Builders will build it if people will buy it, which is why most of the cities on the top 10 list are cities with growing demand, largely stemming from strong job growth. At first glance, there is a clear geographic divide. The greatest rates of new construction as a share of the existing housing stock tend to be in the Southwest and Southeast U.S. Unsurprisingly, four of the top 10 new construction cities are in Texas, where the labor market has recently been described as “red hot.”

On the other hand, the cities with the least new construction tend to be in the Northeast and Midwest regions. Indeed, high rates of new construction follow high rates of job growth. In September 2019, annual job growth rates in all 10 top new construction cities exceeded the national metropolitan average of 1.4 percent.

For example, in Austin, the top city on the list, entry-level construction comprised 7.2 percent of the existing housing stock in the second quarter of 2019, according to AEI data, nearly seven times the national average of 1.1 percent in the same quarter. This level of construction is likely needed to keep up with employment gains in the area – a booming tech sector in Austin has attracted several large companies. The city added 18,800 jobs between September 2018 and September 2019, a growth rate of 1.7 percent.

Similarly, Dallas had the third highest annual job growth rate among the 30 largest metropolitan areas in the U.S. From September 2018 to September 2019, employment in Dallas increased 3.3 percent, adding 121,100 jobs, with the greatest increases in the financial and professional services industries. In the second quarter of 2019, the city increased its entry-level housing stock through new construction by 3 percent — nearly three times the national average.

On the other hand, the cities with the least new construction added, on average, only 0.3 percent to their housing stock through new construction in the second quarter of 2019. Pittsburgh, which ranked the lowest of the 60 metros, only added 0.1 percent through new construction. Accordingly, Pittsburgh added less than 1,200 jobs between September 2018 and September 2019, an annual job growth rate of 0.2 percent. In this case, the existing housing stock in Pittsburgh is enough to sustain the current demand.

Outlook for 2020: Build It and They Will Buy It

The cities with the greatest job growth are leading the way in new entry-level construction, adding much-needed housing supply where demand is strong. Higher rates of new construction, particularly entry-level construction, generally boost affordability by increasing housing supply, which tends to moderate price appreciation. Increasing construction of entry-level homes will be especially important to attract young millennials looking to become homeowners, as well as other job seekers attracted by the growing number of tech and financial services jobs in these markets. How- ever, it remains to be seen how these top new construction cities will fare in terms of affordability – can enough housing be built to stave off faster house price appreciation?

Odeta Kushi is the Deputy Chief Economist for First American Financial. To learn more, please visit firstam.com.

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