The new home industry is a vital part of the US economy

Jan 15, 2020

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The sector breakdown of the housing industry has notably changed over the past two decades. New homebuilding represented 16% of overall housing transactions in the early- and mid-2000s, but today, it comprises 12%. How does this trend vary over time and market?

The new home industry is a vital part of the US economy:

New home buyers are estimated to spend 10% more on appliances, furnishings, and property repairs and alterations compared to those purchasing an existing home.
In addition, it is calculated that for every 1,000 average single-family homes built, 2,975 jobs are created. This is considerably higher than the 500 jobs attributed to 1,000 existing home sales and is spread across more specialties, including land development, private equity, banking, construction, government, and architecture.

The new home market is also critical in addressing today’s supply and demand imbalance. Homebuilders are able to bring inventory to a market where the already short supply is exacerbated by the lock-in effect of low mortgage rates encouraging existing homeowners to stay in place.

The drop in overall market share for new homes, however, is largely due to exogenous factors. Builders and developers are aware of the supply shortage and the opportunities created by today’s demographics, but land availability, land costs, a lack of labor, and strict government regulation are holding them back.

New Home industry Is A Vital Part Of The US Economy

As we all know, homebuilding is local. The 12% new home market share is low nationally, but the percentage varies widely by market. For example, the current new home market share of 17% in Las Vegas is low compared to the 45% capture in 2006.

To look at this trend closer, we studied the top markets in the country to identify where new home sales remain a big part of overall transactions. The metros in the chart below are sorted by highest to lowest based on 2019’s year-to-date new home market share.

From our research, we found:

New home sales are approaching 30% of the market in Austin and Raleigh.
The top ten markets with the largest new home share are in Texas or the Southeast. Las Vegas is the exception.
Of all the top US markets, the ones with the biggest change compared to 2006 are Las Vegas (down 27%), Miami (-22%), Phoenix (-19%), Riverside (-19%), and San Diego (-18%). The markets with the smallest change are Austin (flat), Salt Lake City (-1%), and Baltimore (-3%).
Among top markets, the share only increased compared to 2010 in Austin, Dallas, Salt Lake City, and Denver.

Austin, the top metro for new home market share, has some positive forces working for it. In particular, Williamson County, the submarket that represents roughly 45% of all the housing starts in Austin, is relatively development-friendly and is becoming increasingly more open to new product.

Our Austin Regional Director, Vaike O’Grady, was not surprised by the high ranking and points out key benefits of Williamson County:

Transportation. Even before Austin landed as the second-highest market in the country for in-migration, Williamson County officials were hard at work on infrastructure. As a result, the city’s transportation network makes it appealing to those looking to live outside the central business district. The red line train combined with the 183 and 130 toll roads links Williamson County to downtown in less than an hour.
Land. Unlike relatively close-in suburbs of other major cities, Williamson County still has land available and new lots coming online. The access to land allows the price to be considerably lower than other parts of the metro. In fact, home prices in the outlying counties are $100K+ cheaper than in the City of Austin according to Zonda.
Employment. Roughly 1.5 million of the 6 million square feet of commercial space that is under construction in Austin is located north of the City. This movement northward by employers makes sense because of the cheaper rents and access to workers. Large employers like HomeAway, Indeed, Facebook, and Amazon have a significant presence at The Domain, and Apple’s new campus just broke ground in Williamson County in late November.

Vaike believes Austin’s new home share will hold around 30% of the market in the coming years due to the existence of developable land, lack of supply in the resale market, and a continued push towards Williamson County.

The challenge for Austin, like the rest of the country, is how do builders attract individuals away from the rental market by offering something compelling and reasonably priced. While developers and builders have been working to downsize lots and home offerings in order to contain prices, cost pressures call for more creativity.

In Austin’s case, only 10% of new home closings are attached, and most of those are downtown. Working through different well-executed density solutions can help local builders gain a foothold in the market.