Building Permits Provide Great Picture Of The Housing Problem

Today we are going to examine building permits in detail, as the issue of home affordability is going to become one of the most prominent topics for many years in the national media.

The number of new homes and multi-family properties being permitted and built today is far short of what we need and a new housing crisis has formed. I am not warning about a housing bubble, rather I have brought the data that shows how grossly underbuilt the housing market is in 2022.

Follow along as I share graphs and tables that show how the problem formed and what we are facing today. If you believe you might be moving sometime in the next ten years, this is "must-have" information for you to plan your future.

New Construction For Sale In And Around Tallahassee

A Picture Is Worth A Thousand Words

I have been saying (and writing) that we are not building enough homes for more than five years, and the graph below is why I am so confident that it is true.

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.

During the forty-year period from 1970 through 2010, Leon County permitted (on average) nearly 1,500 single-family homes each year, but over the past ten years, that average has declined 58% to just 620 homes per year. This huge decline would not be a big issue if we had been producing multi-family homes to make up the difference. Unfortunately, as you will see in the next graph, that did not happen.

Multi-Family Construction Remains Flat

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 58%, multi-family permits only rose 1% over the past ten years.

Even with all the new student rental properties built near the universities, there really hasn't been much change in the multi-family market. I suspect this will be changing as we see interest rates move higher.

Residential Building Permits Paint A Clear Forecast

When we combine single-family permits with multi-family permits, it is clear that we have a major problem in the housing market.

The graph above incorporates the data from the two previous graphs and delivers a conspicuous image of the void in the supply-side of the housing market. The past twenty years (which includes the housing bubble years) have seen residential permits decline by 44% when compared to the average from the previous 40 years.

This is not some short-term glitch in the data, this is a clear sign that we are heading towards a home affordability crisis that will impact both homeowners and tenants alike. Below, we examine some interesting dynamics about home values and how they have changed due to the decline in new construction.

Home Value Changes: New Versus Existing Homes

This graph plots the change in the average price per square foot of new and existing homes. New home values are plotted in red, while existing home values are plotted in blue.

The value of existing homes is completely market-driven; good 'ol supply and demand at work. But new home values (costs) are far less so. If people are not willing to pay what it costs to build a home, then builders stop building.

The massive reduction in new home construction over the past 15 years has had a visibly significant impact on existing values. With not enough shelter to serve our growing population, existing-home values have been rising fast.

In fact, for the past seven years, we've seen existing home values rise at an average annual rate of 6.7% while new home values have risen at an annual rate of 3.3%. This has brought the values of each much closer together as we see in the next graph.

The Difference In Values Between New And Used Homes

In this graph, we've plotted the average new home value (in price per square foot) in red, and the average existing home value is plotted in blue. The difference (the Delta) is plotted in gray (highlighted in yellow) and is reported on the right vertical axis.

What I'm looking for in this graph is found by following the delta between the two, and it has fallen to just below 22%, the lowest we've seen in thirteen years! Simply put, relative to used homes, new homes are more affordable than we've seen since 2008!

What's interesting is that from 2000 through 2007, the average difference in values between new and used was less than 10%. This is an important fact that explains the big difference between today's soaring market and the market that formed the housing bubble of 2006.

Twenty years ago, builders were able to produce homes for a large portion of the homebuyer pool. But when loan qualification standards were tightened, the number of buyers in the market sunk well below the production volume that builders were producing.

Now contrast that period of change with that of today. Builders have not been able to produce for the vast majority of buyers, as the delta has been far too large due to increased costs of construction, supply chain issues, labor shortages, and a diminished supply of affordable lots. Instead of building for the masses, builders have been restricted to building for a much smaller segment of the population.

This has left us with a supply imbalance that is completely opposite of the housing bubble years. Back then, there were so many speculators in the market, oftentimes buying new construction homes and then flipping them to other buyers after the homes were completed. There are far fewer speculators and the majority of the inventory today is not coming from builders, rather it's from those homeowners needing to sell their homes because they are buying another one.

As mortgage interest rates rise, we will see a similar effect on the current housing market as did the change in available loan programs had on the 2006 market. We will see demand decline, but this time we are going to see supply diminish too as the majority of today’s inventory is from sellers who are also buyers. So when buyers no longer qualify for what they wish to buy, they will depart the market taking their potential homes to sell with them. In other words, declining demand will also result in declining supply.

Ultimately, what this graph shows is that the high cost of new construction has been pulling up the average value of existing homes, as the lack of supply that is not being replaced by new homes has created the scarcity that provokes runaway appreciation.

And just like the rest of the economy, inflation is going to strike new construction hard this year. Building supplies, labor, and land are all moving higher (faster) this year. I won't be surprised if new construction costs/values move up 10% or more this year, and we might even see a trend reversal in the delta shown above. This, in turn, will put even more pressure on existing homes, and runaway appreciation is a very likely outcome.

Equally important, it will be interesting to see how the Fed moves this year, as it controls the direction of the housing market. If the Fed keeps the Fed Funds Rate relatively low, builders will have a chance to start filling the void of homes that our growing population needs. But if the Fed responds rapidly (rashly?), I believe the majority of homebuilding could very well move to investors building homes to lease to people who can no longer afford to buy them.

We'll keep our eye on all the moving pieces of the housing market and let you know through our regular reports here and on our YouTube Channel. For our readers who are curious where new homes are selling today, you can see a table of the most recent new construction home sales below.

Recent New Home Construction Sales

The following table shows the most recent 1,000 new home sales in Tallahassee. Please note that you can sort the table by clicking on any column header.