Due to lingering demand-side challenges, the first quarter of 2019 was tough for housing. Single-family permits were down 7.5% on a year-over-year basis, which compares the initial quarter of the year relative to the first quarter of 2018. Due to being near a 10-year low for housing affordability, which was only partially offset by recent declines in mortgage interest rates, weakness in demand for newly built single-family homes was broad. However, one market experienced growth due to relative higher housing affordability: exurbs.

A new NAHB regional tracking of residential construction conditions, the Home Building Geography Index (HBGI), illustrates the degree to which single-family construction weakness was widespread at the start of the year. The new quarterly index uses county and metro level permit data and allocates those local estimates into more general economic geographies. For the first release of the HBGI, these geographies look at the market share and recent growth trends of areas such as exurbs, large metro suburbs, small towns, and rural markets. Future releases will examine issues such as how construction is faring in manufacturing- or agriculture-
intensive markets.

The initial HBGI data shows that the only geographic areas of the nation that experienced an increase for single-family permits for the first quarter of 2019 on a net basis were exurban markets. The HBGI defines exurbs as outlying counties of large metropolitan areas with more than 1 million in total population. For the first quarter of 2019, exurban markets posted a 1.6% gain year over year. Moreover, over the four-quarter period ending with the first quarter of 2019, exurban markets grew on average at a 5.6% annualized rate. While there was construction expansion in these regions, exurban markets represented only 9% of total single-family permits.

Compare these estimates to the second-best performing region, central areas of medium-sized cities. Representing 29% of single-family construction (the largest individual geography), the HBGI found that such core counties of small metro areas (less than 1 million in total population) grew at only a 3.2% annualized rate over the past four quarters and posted a 6.2% decline on a year-over-year basis.

The worst performing area in the HBGI was in fact the second largest geography. With a 27% market share, suburban counties of large metro areas saw the only decline over the prior four quarters (a 0.7% decline at an annualized rate) and a significant 9.7% drop when comparing the first quarter of 2019 with the start of 2018.

The first quarter data of the HBGI indicate that areas particularly sensitive to housing affordability factors, like current price-to-income ratios and interest rates, saw the most challenging market conditions. Suburban areas of large, and relatively more expensive, metropolitan areas are particularly challenged by lack of supply and elevated price levels, especially for entry-level buyers. In contrast, exurban regions experienced growth at the start of 2019 as builders were able to offer relatively less expensive new housing in “drive till you qualify” markets.

As the NAHB forecast calls for increasing but relatively low mortgage interest rates for the rest of 2019, inner suburbs of large metro areas and traditional suburbs of medium-sized cities should see some ramp up in growth as housing affordability conditions stabilize. This is positive news because, taken together, such markets make up more than half of single-family home construction. Without additional help on regulatory policy, core areas of large metros (central city and inner suburbs) will continue to lag in the months ahead due to high land costs and substantial regulatory burdens.