The Three Bears Paradox — Job Growth & Housing Permits 1999-2015

While we overbuilt numerous residential markets prior to the housing bubble implosion, many did not fall under the same supply excesses. These markets may have experienced price ballooning, but an overhang of supply was not a parallel component. Since the housing bubble burst, new residential construction has failed to recover back to what even was considered normal at that time.

There are two differing demands for housing. The first is what I term as Effective Demand, which is driven by jobs. New jobs drive household formations which in turn increase the demand for both owner-occupied housing and rentals. The second force in housing growth component is Demographic Demand. While an increasing population puts pressure on the housing market, without jobs (or subsidized housing) the demand is not realized. Without the ability to buy or rent, Demographic Demand does not put pressure on prices or rents. Thus the focus needs to be on Effective Demand. Population growth does not enter into the equation.

When looking at new housing, we have the Three Bears Paradox: Are we building Too Much housing, Too Little or Just Right?

The following table shows total residential building permits for the U.S. annually from 1999 through 2015. Included in the table are job growth (or loss) numbers for the same period. Calculated is the number of net new jobs per year per new dwelling unit. This calculation shows Effective Demand. From 1999 through 2015, the U.S. issued permits for 22.9 million new dwelling units (from apartments to mansions and everything in between). In the same period the country added 15.5 million net new jobs. This equates to just 0.68 net new jobs per new dwelling unit. A new job count of 1.25 to 1.5 net new jobs per new dwelling unit is considered normal. Once again I need to invoke the TINSTAANREM clause — There Is No Such Thing As A National Real Estate Market. Each real estate market is different. Ditto their underlying economies.

From an Effective Demand perspective, we have built too much housing since 1999 as an aggregate across the country, though some markets were underbuilt, some overbuilt, and others just right. Since 2010, however, supply has not kept up with demand. Hence rising rents and home values for most markets across the country.

8-6-16 table1

My hypothesis is that when we overbuild, such as from 2000 to 2009, it takes three to five years to absorb such a supply. Once that supply is absorbed, it takes several years to alter the median household size. The following table looks at residential building permit and job growth rate activity across three, four and five year durations. U.S. housing markets have performed well and improved in the past three to four years.


Look at the new jobs per dwelling in the three- and four-year intervals. The three-year interval indicates a tight housing market for the past four years with at least 2.50 net new jobs per dwelling (double the lower bound considered normal). The four-year interval indicates three years of job growth at double the normal pace. What this says is, that regardless of the excesses built from 2001-2009, the market absorbed those units, and since then, supply has trailed demand.

8-6-16 table2

Take a look at the Denver MSA, which in recent years continues to be ranked in the top three slots among the hottest housing markets in the U.S. In 2015 a total 18,326 dwelling permits were issued and 37,500 net new jobs were added. That equates to 2.05 net new jobs per new dwelling unit. That’s why Denver’s housing market remains hot. Demand continues to outstrip supply. In 2014 it was 3.55 new jobs per dwelling, 2013 3.02 and 2012 3.05 for a four year interval of 2.88 new jobs per new dwelling.

Now examine the Houston MSA. Despite the oil downturn, Houston’s total existing home sales have continued to rise (which I believe was due to pent-up demand). In the first six months or 2016, total existing home sales are were up 1.74 percent versus a year ago. Yet job growth in 2015 shrunk to a miniscule 20,700 with 0.36 new jobs per new dwelling unit. In 2012 there were 2.65 new jobs per dwelling unit, 2013 1.72, 2014 1.82 for a total 1.58 new jobs per new household for the four year interval from 2012 through 2015. I also assume Houston is just now getting to the saturation point in new construction.

The following Table shows the Denver and Houston MSA’s data for jobs and residential permits. Denver remains HOT and Houston is heading to NOT.

8-6-16 table3

So what metrics do I plan to use to assess The Three Bears Paradox on ascertaining overbuilt, underbuilt and those just-right markets? Simply look at the past four years of new jobs per new dwelling unit. As long as there are from 1.25 to 1.50 new jobs per new dwelling unit, things are just fine. Less than this range and supply is exceeding demand. More than this range points to a hot market.

So where are rents and home prices heading? That depends on job growth and new residential construction in each respective market in the past four full years (in which residential permits are the proxy for new construction).

When it comes to housing, the action is all a function of local markets – except for destination locales.


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