Residential developers are building fewer homes even as home prices have continued to rise nationally, a new study released earlier this week by Trulia has found.
The real estate search portal sought to identify the housing “elasticity” at the national level as well as for the nation’s largest metros. “Markets with greater elasticity build more housing relative to price changes as opposed to markets with lower elasticity,” says Trulia in a blog post.
For the purpose of the study, Trulia examined the rate of homebuilding and market prices for the nation’s largest metros over the last 20 years. By comparing the numbers, a city’s “elasticity” — or how much new housing is built compared to demand — was determined. The higher the elasticity, the more housing is built relative to price changes.
According to Trulia, the rate at which the nation’s housing stock has grown relative to demand is low and that while elasticity has fluctuated during the last 30 years, builders are providing less housing now as prices rise than they have in the past.
On the national level, Trulia found housing supply elasticity to be 0.17, three points below the 30-year average of 0.2, and over half of the peak elasticity of 0.29 in 1999. Meanwhile, elasticity on the metro level varies substantially based on government regulation, general topography and even acts of nature.
One major contributing factor to low elasticity is local bureaucracy. Delays in approving new building permits can affect supply elasticity by 0.03 per month of delay. On the other hand, restrictive zoning practices were found to have no significant impact on supply elasticity.
Topography can also play a large role in determining a metro’s elasticity. San Francisco, for example, suffers from a steep landscape and is surrounded by water, making homebuilding options more limited than an area with a flat, buildable landscape like Phoenix, which Trulia found has a very healthy elasticity of 0.48.
Las Vegas ranks as the most elastic metro in the US with an elasticity of 1.17. While home prices have risen 71.4 percent over the last 20 years, homebuilding has risen 87.8 percent.
New Orleans has the lowest elasticity in the U.S., .02. However, Hurricane Katrina affected a large percent of New Orlean’s housing supply.
Other major metros in the top 10 most elastic included Albuquerque (0.81 elasticity), Atlanta (0.77 elasticity), and Washington, DC (0.59 elasticity).
Major metros with the lowest elasticity included Pittsburgh (0.04 elasticity), Los Angeles (0.04 elasticity) and New York (0.06 elasticity).
It’s also worth noting that in some areas low elasticity isn’t much of an issue due to a high vacancy rate. While Buffalo (0.04 elasticity) and Scranton, PA (0.05 elasticity) both rank at the low end of elasticity nationwide, their vacancy rates are 10 percent or higher.
Low elasticity does, however, play a significant role in other cities like Los Angeles where home prices have tripled over the years, and middle income families are forced to spend 13 percent over their income on average to afford a home compared to just a few years ago. Supply is not keeping up with moderate affordability.
You can view the full report here.