Taking a closer look at home supply, market demand, and opportunities for homebuilders
By IGOR POPOV
Building permit data is just about the closest thing we have to a crystal ball in housing economics. Today’s permitted units become tomorrow’s new homes, and the quantity, type, and location of approved construction shapes a cities’ evolution. In a recent Apartment List report, our team dug into this permit data to break down what is being built, and where. Could the pipeline of housing supply offer some relief to the millions of Americans struggling with increasing housing costs? The big unknown factor, the fog in the crystal ball, is how zoning codes will evolve.
The size of the pipeline is not impressive by historical standards. Planned construction remains nearly 40 percent lower than its pre-recession peak. Multifamily housing construction has pulled more than its fair share of the weight in the recovery, matching its pre-recession peak by 2015. This wave of new apartments has tempered rent growth in recent years, especially at the higher end of the market. Single-family home construction, on the other hand, has been sluggish.
Of course, different housing markets are on different trajectories. We identified two gene al patterns of new residential development in growing metros. Acute housing shortages are generally limited to dense coastal hubs, such as San Francisco, Boston, and New York. In these metros, multifamily housing makes up a growing share of new construction, but this development is generally taking place in select pockets. There are not enough new units being added to keep pace with demand in these met- ros. Meanwhile, booming Sunbelt metros such as Atlanta, Phoenix, and Houston are doing a better job of accommodating growth, but they are doing so primarily through continued single-family sprawl.
Notably missing in both geography types is construction of smaller multifamily properties. This type of housing — two- to four-unit buildings, accessory dwelling units, town- houses, and low-rise apartment buildings — is often referred to as the “missing middle.”
Two to four unit properties account for eight percent of the nation’s total housing stock, but made up just three percent of all housing units permitted last year. It is unlikely that demand for these types of units is low. Duplexes and low-rises often share design and amenity characteristics with single-family homes but with density that enables a lower price point for middle-class families.
Instead, zoning restrictions are squeezing this middle category out of feasibility in many cities. A large share of residential land in many growing cities is zoned exclusively for single family housing, and multifamily developers are trying to make the most of the remaining blocks. As a result, the size of the average new multifamily building has doubled since the 1990s.
A recent wave of upzoning policy proposals may reverse this trend, making it easier to build “missing middle” housing and allowing for higher density development. From citywide upzoning measures in Minneapolis and Seattle to statewide efforts in Oregon and California, housing experts and policy makers are putting forth unprecedented challenges to the single-family zoning practices that shaped the American housing market through much of the 20th century.
By removing zoning barriers, these efforts aim to streamline the path to new construction. If successful, such zoning changes would put developers in a better position to serve the needs of consumers priced out of the segment of luxury apartments or single-family homes.
Many Americans desire the lifestyle associated with dense, walkable neighborhoods, but the few places where this lifestyle is possible have grown increasingly more expensive each year. Moreover, dense development has the potential to reduce environmental pressures as well because car-free city dwellers have lower carbon footprints than their rural or suburban counterparts.
In any case, the current state of approved construction indicates that something has to give. Many of the largest metros with rapid job growth are not building enough to keep up with demand, while other smaller metros actually find themselves with higher housing supply growth than job growth. Will we see a shift in people moving out of large metros, or will we increasingly live in very different places from where we work?
We suspect upzoning proposals will continue to gain traction. Preferences for dense living are changing, and in many cases, affordability concerns are necessitating more supply. In the dance between housing supply and demand, the zoning code acts as the chaperone. As our cities continue to mature, even the most strict zoning codes are likely to eventually concede to allowing a little less space between homes.
Igor Popov is the Chief Economist at Apartment List, where he leads the Rentonomics team in publishing original housing market research. To learn more, please visit apartmentlist.com or reach Igor at firstname.lastname@example.org.