The Truth Behind The Shortage of Homes: An In-Depth Look At Building Permits

Today, we delve into the topic of building permits, as the lack of home affordability has become a widely discussed issue in the media.

The shortfall in new single-family home permits and multi-family property permits and construction exacerbates the current housing crisis. I aim to present the data that highlights the significant underdevelopment in the housing market as of 2023 rather than warning of a housing bubble that is not forming.

Join me as I showcase graphs and tables that demonstrate the formation of this issue and the reality of what we're facing. Whether or not you have plans to move, this information is crucial for you to make informed decisions about your future as it affects both home values and rental rates.

New Construction For Sale

The following listings are for all new construction single-family homes for sale listed in the Tallahassee MLS:

Single-Family Building Permits Are Not Recovering

For more than six years, I have consistently emphasized through my videos and blog posts that we are facing a housing shortage. The accompanying graph solidifies my conviction in this truth.

The graph above tracks the number of single-family building permits each year, with detached homes plotted in blue and attached homes plotted in red. The green line plots the total ten-year average number of single-family building permits issued yearly.

Over the forty years from 1970 to 2010, Leon County typically approved the construction of around 1,500 single-family homes annually. However, in the last decade, this average has plummeted by 64% to a mere 545 homes per year. This significant drop in production would not pose such a problem if an increase in multi-family homes offset it. Sadly, as depicted in the following graph, that is not the case.

Multi-Family Construction Remains Stable

People have to live somewhere. If not in single-family homes, then multi-family is the most likely alternative.

This graph plots the number of multi-family building permits in Leon County each year in red and shows the ten-year average as a solid blue line. While single-family building permits declined by 64%, multi-family permits have fallen by 21% when comparing the past 13-year average with the previous 40-year average.

Even with all the new student rental properties recently built near the universities, there hasn't been much change in the multi-family market. I expect this will change as building costs and mortgage interest rates have increased significantly, each adding to the home affordability problem.

Residential Building Permits Needed

There is a significant challenge in the housing market when considering both single-family and multi-family permits issued.

The graph above brings together the information from the prior two graphs and presents a striking illustration of the shortage in the supply aspect of the housing market. Over the past fourteen years, residential permits issued have dropped by 44% compared to the average from the preceding 40-year period.

This is not just a temporary anomaly in the data but a clear indication that we are moving towards a housing affordability crisis that will affect homeowners and renters. In the following section, we delve into some intriguing insights about home values and how the decrease in new construction has impacted them.

New Versus Existing Home Values

This graph displays the alarming transformation in the average price per square foot for both new and existing homes. The values for new homes are represented in red while existing home values are depicted in blue.

Existing home values are entirely determined by market forces, driven by the principles of supply and demand. On the other hand, the values (or costs) of new construction homes are less influenced by market forces, as builders cannot build for less when demand drops though costs are still rising. If consumers are unwilling (or unable) to pay the cost of a newly built home, then builders will cease construction.

The considerable decrease in new home construction over the last 15 years has had a noticeable and substantial impact on the values of existing homes. With an insufficient supply of housing to meet the demands of our growing population, the values of existing homes have been rapidly increasing.

Over the past eight years, existing home values have increased at an average yearly rate of 7.4%, while new home values have risen at a yearly rate of 4.5%. This has caused both values to converge slightly, as demonstrated in the upcoming graph.

The Difference Between New And Used Home Values

In this graph, the average value of new homes (in terms of price per square foot) is depicted in red, and the average value of existing homes is shown in blue. The difference between the two is plotted in gray and is displayed on the right vertical axis.

The data indicates that the gap between new and existing home values has reached its lowest point in thirteen years, with new homes becoming more affordable relative to used homes since 2011.

In the past, the difference between new and existing home values was less than 10%, which is a stark contrast to the present day, where the cost of new construction has risen significantly due to factors such as increased construction costs, supply chain disruptions, labor shortages, minimum wage hikes, and a limited supply of affordable land. This has resulted in housing scarcity, leading to the rapid appreciation of existing homes.

The current market conditions differ from the housing bubble of 2006, when an abundance of speculators flooded the market, leading to a supply surplus. Today, most homes for sale are from homeowners who are moving rather than builders.

When mortgage interest rates doubled last year, the demand for homes tumbled. Unfortunately, the supply of homes for sale has not started to rebound, as new construction is not filling the void. When a buyer leaves the market due to affordability issues, it often means that a seller is leaving the market (as most homebuyers have a home to sell too).

With inflation expected to continue impacting the construction industry, new home values are likely to rise by 5% or more, putting additional pressure on existing homes and leading to further appreciation.

The Federal Reserve's actions this year will be crucial in determining the housing market's direction. If the Fed Funds Rate remains fairly stable, builders may be able to begin to meet the needs of the growing population. On the other hand, continued increases from the Fed could result in most homebuilding being carried out by investors building homes to rent rather than sell. Either way, new homes are needed, so the big question will center around affordability and whether or not consumers can afford to own a home.

We will closely monitor the various factors affecting the housing market and provide updates through our periodic reports here and on our YouTube Channel. A table displaying the newest sales of newly constructed homes can be found below for those interested in where new homes are currently being built.

Recent New Home Construction Sales

The table below highlights the latest 1,000 sales of newly built homes in Tallahassee. You can rearrange the table information by clicking on any column heading.