The Three Bears Paradox on an MSA Level — Jobs and Residential Permits 2012 to Q2 2016

Earlier this month the Jones on Real Estate blog compared Job Growth Numbers and Residential Building Permits for the U.S. and two Metropolitan Statistical Areas (the Denver and Houston MSAs). In that blog I had stated:

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?

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…..

You can read the prior log on the U.S. as a whole

What about local markets, i.e. the MSAs? 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. To address that, this blog shows the job growth numbers and residential building permits for more than 300 MSAs for:

  • Past Four Years – 2012 through 2015
  • Past Three Years – 2013 through 2015
  • Past Two Years – 2014 through 2015
  • 12 Months Ending June 2016
  • Individually each of the years from 2012 through 2015

Normal is from 1.25 to 1.50 net new jobs per new building permit. Previous studies have indicated 97 percent or more of all issued building permits are estimated to ultimately be constructed.

The following table shows the eight most likely overbuilt markets and the eight most likely underbuilt markets based on this analysis. Johnstown, Pennsylvania, for example, shows that for every residential building permit issued from 2012 through 2015, the MSA lost 13.25 net jobs. In the 12 months ending June 2016, the MSA lost 100 jobs per each new dwelling permit. On the other end of the spectrum, the Elkhart-Goshen, Indiana MSA added 17.77 net new jobs in the four years from 2012 through 2015 for each new dwelling permit issued. Napa, California added 14.24 jobs per permit. This is one of several markets that either the U.S. Census Bureau discontinued or estimates just once a year at year-end.

8-17-16 table1

A PDF of this table for more than 300 Metropolitan Statistical Areas is attached, sorted by state then MSA.

Is this a bullet-proof methodology to identify under and over-supplied markets? Not at all. In the Miami-Ft Lauderdale-West Palm Beach MSA, for example, there were 3.02 net new jobs per new residential permit issued in the 12 months ending June 2016. From 2012 to 2016 there were 3.94 net new jobs per new dwelling permit. That means that job growth was double in relationship to permits. Under the normal definition of 1.25 to 1.50 new jobs per new dwelling unit, the Miami MSA would appear to be dramatically underbuilt. In aggregate, the MSA is materially underbuilt. However, most of the new construction in recent years is high-end condominiums. So within a price range, the high-end condo market has a glut.

8-17-16 table2

Despite the limitations, this approach does yield a big-picture look on a local level at jobs versus new housing permits, addressing the Three Bears Paradox: Are we building Too Much housing, Too Little or Just Right?


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