Although employment and home price levels have returned to or exceeded normal, home construction during the fourth quarter of 2016 remained tepid in many markets due to regulatory and supply-side constraints, according to the NAHB/First American Leading Markets Index (LMI), released today.
The index’s nationwide score inched up to .99, meaning that based on current permit, price and employment data, the nationwide average is running at 99% of normal economic and housing activity. However, when breaking down the three major components of the index, single-family permits are running at just 52% of normal activity, while employment is at 98% and home prices are well above normal at 147%.
Part of the reason why home prices have jumped in many metro areas is directly related to the paucity of permits, creating an imbalance between supply and demand.
“Single-family permits continue to lag behind the other components of the LMI,” said NAHB Chief Economist Robert Dietz. “This is due to a number of factors, including regulatory hurdles and supply-side headwinds such as persistent shortages of lots and labor in many markets. As we address these challenges, we should see an additional increase in housing production.”
A recent survey of NAHB members found that their top two concerns this year are the cost and availability of labor and developed lots.
Richard Van Osten, executive vice president of the Builders League of South Jersey, summed up the problem succinctly: “It’s been more difficult to find lots to build on.”
Despite these challenges, the housing market continues to make gradual gains. The LMI shows that markets in 174 of the approximately 340 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity in the fourth quarter of 2016. This represents a year-over-year net gain of 60 markets. Moreover, 86% of markets have shown an improvement year over year.
Baton Rouge, La., continues to top the list of major metros on the LMI, with a score of 1.73 — or 73% better than its last normal market level. Other major metros leading the group include Austin, Texas; Honolulu; Provo, Utah; and San Jose, Calif. Rounding out the top 10 are Spokane, Wash.; Nashville, Tenn.; Charleston, S.C.; Los Angeles; and Salt Lake City.
The LMI examines metro areas to identify those that are now approaching and exceeding their previous normal levels of economic and housing activity.
About 340 metro areas are scored by taking their average permit, price and employment levels for the past 12 months and dividing each by their annual average over the last period of normal growth. For permits and employment, both the 12-month average and the annual average during the last period of normal growth are also adjusted for the underlying population count.
For single-family permits and home prices, 2000-2003 is used as the last normal period, and for employment, 2007 is the base comparison. The three components are then averaged to provide an overall score for each market; a national score is calculated based on national measures of the three metrics.
An index value above one indicates that a market has advanced beyond its previous normal level of economic activity. For historical information and charts, visit nahb.org/lmi.