The impacts housing demand is having on home building
By Robert Dietz
Economic and social changes stemming from the spread of the novel coronavirus and the associated economic recession have resulted in significant shifts in housing demand in 2020, increasing the need for home construction. For housing, the changes are related to how work, school, retail and other economic activities have adapted to responses intended to slow the impact of COVID-19.
The primary effect of the virus was a large-scale and rapid experiment with working at home via telecommuting. According to survey research commissioned by NAHB, almost 30% of Americans in September were primarily working at home. Prior data from the Bureau of Labor Statistics indicate this is up from 4%, as measured at the start of 2020. And the NAHB survey data reveals that more than 60% of those working full- or part-time at home expect to continue to do so on at least a part-time basis after the deployment of a vaccine. In addition to working from home, millions of students are learning at home and large numbers of individuals are forgoing public gyms to workout at home.
Whether due to the need for home office, schooling or exercise space, the demand for residential space has grown in 2020. This is boosting demand for remodeling and increasing demand for larger, newly built housing, particularly in the single-family sector. This is a remarkable reversal of medium-run trends, given that median new home size has been falling for almost five years, declining to 2,264 square feet during the middle of 2020 per NAHB analysis of Census data.
Changing Geography – Suburban Shift
As we all know, home buyers can get more bang for their buck by “driving further to qualify,” trading a longer commute for a lower housing/land cost. The coronavirus has accelerated the trend toward telecommuting, prompting more Americans to move further out and increase their living space while simultaneously lowering their housing costs.
The net effect is clear, with a shift for housing demand for lower-density markets, where new construction plays a relatively larger role in meeting the needs of both for-sale and for-rent housing supply.
The coronavirus has accelerated the trend toward telecommuting, prompting more Americans to move further out and increase their living space while simultaneously lowering their housing costs.
This effect is disputed by some who argue that home prices are rising everywhere, and it’s too soon to see any effect. This argument is wrong, as the existing economic data are consistent with a clear shift for housing demand. Vacancy rates are rising for central business district apartments, while rents are softening in markets like New York City and San Francisco.
And the construction data tracked in the NAHB Home Building Geography Index (HBGI) prove that lower density markets saw greater growth during the challenging second quarter.
The HBGI tracks building data by economic geographies, or collection of similar economic areas. For example, single-family construction in core counties of large metro areas (metropolitan areas with more than one million in population) declined by almost 17% in the second quarter of 2020 as compared to the same period last year. This geography, which represents 18% of single-family starts, is the highest density region in the HBGI and was the worst performing class for single-family construction.
In contrast, as density declines in the HBGI, single-family construction growth performance improves. For large metro suburbs, which account for 25% of starts, the second quarter saw an improved but still negative 9% decline. Small metro core counties, the center of medium-sized cities, are the largest building region (29% of starts) and experienced a still smaller 6% decline. And the lowest density metro geography, outer suburbs of small metros (9% of total starts), experienced an actual increase for building, rising almost 3% during the depth of the recession in the second quarter.
Moreover, the data for multi-family construction is also consistent with this suburban shift. Multi-family starts outside of large metro areas, while making up only 30% of apartment construction, grew faster during the second quarter of 2020 than those markets in large metro areas.
This changing geography of housing demand is providing a boost for home building. It is also the natural, if accelerated, consequence of declining housing affordability during the post-Great Recession period. Fortunately, additional flexibility for work commuting is empowering renters and home buyers by providing additional housing options.
Some of these factors may partially roll back after a vaccine, but the NAHB survey data suggests that some impacts will persist. Given that the least affordable housing markets are generally located in and around large urban markets where the effectiveness of city governance is a concern for some, the elevated demand for new construction in lower-density markets will likely continue.
Robert Dietz is the chief economist for the National Association of Home Builders. Prior to joining NAHB in 2005, he worked as an economist for the Congressional Joint Committee on Taxation. He earned a Ph.D. in Economics at the Ohio State University.