Home builders pivot to smaller cities, citing buyer demand and lower costs 

A slowdown in new single-family home construction in large metropolitan areas is being offset by projects in smaller towns and rural markets, the National Association of Home Builders reports.

The NAHB's Home Building Geography Index, a quarterly survey of home building in the U.S., found that the 2022 Q2 market share of single-family building permits in large metro areas fell from 44.5% to 41.6%, while the share of permits in outer suburbs increased from 17.4% to 19% compared to pre-Covid numbers.

Robert Dietz, chief economist at the NAHB, pointed to cost as a likely factor: "In general, our surveys indicate that markets of lower density tend to be locations with lower land costs. Regulatory burdens and costs associated with land development and home construction also tend to be lower in smaller cities."

Another contributor is the ability of many buyers to work remotely. "Work from home [has] shifted the shares further in the direction of lower-density markets. Buyers have increased ability to purchase homes in more affordable markets due to changes in work and commuting patterns," said Dietz.

Real estate agents have witnessed this trend firsthand. "It happens every day. Everyone wants to come here," said Ryan Bogden of Keller Williams Realty St. Pete. The attractiveness of community life in St. Petersburg, Florida, a waterfront city with 265,000 residents, draws people from across the country, Bogden said.

He sees prospective buyers who are technology workers, engineers and others whose jobs allow them to work online. One of Bogden's buyers recently signed a contract for a new construction home in Palmetto, a smaller community of about 14,000 residents outside of St. Petersburg. "It's a little more suburban with a little more land," Bogden said.

Other communities in the Tampa-St. Petersburg area where new home construction is active include Apollo Beach, with a population of 23,000. "There are brand-new residential developments with plenty of room for new single-family home construction," Bogden said.

Though building continues, cost is an issue. Home builders are expressing concern about buyers' expectations for cheaper homes even as construction costs rise due to supply chain delays for building materials and a chronic labor shortage.

"There is a mismatch between what buyers want to pay and the cost to build. It is a perfect storm to not be able to provide housing to the American public," said Jerry Howard, CEO of NAHB. "This impacts first-time home buyers the most, but brings the market down for the move-up buyer and even puts pressure on rents."

These challenges, in addition to broader economic trends, are reflected in NAHB's Housing Market Index, which tracks builder sentiment. Builder confidence fell for the tenth consecutive month in October, with builders reporting less buyer traffic. "While some analysts have suggested that the housing market is now more 'balanced,' the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers," said Dietz. He noted that the majority of builders in their September survey were offering incentives to try and entice buyers.

As another sign of falling confidence, some builders are even trying to sell off homes in bulk to investors, according to The Wall Street Journal.

For buyers looking to purchase a newly built home, however, the combination of reduced competition and lower prices could be welcome news.