Which Markets are Oversupplied?

28 Replies

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 


I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

That percentage is definitely something to think about. I think other things to consider is how well the population growth percentage matches the building permit percentage. If those numbers are justifiable then it might not be as risky. Industry diversity is also important to consider in my opinion, as population growth and supply of housing can all be affected if a city is reliant just a few industries to provide jobs. @Nick Gerli

Originally posted by @Nick Gerli :

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

Brandon is right, Austin & Nashville are up there in terms of new construction, but they're also the top choices for companies moving out of California. The demand for housing must be a factor as well.

 

Pittsburgh's population is still well below the peak - there's plenty of houses around, some of them just need a lot of work.  As home values go up investors are fixing up houses that need more and more work.  I imagine Columbus has something similar going on

@Nick Gerli the Austin MSA has an extremely low housing inventory at present so increased permits would be a relief for many buyers who are competing for available inventory.  I am curious, does this data also account rehab work?  The Austin MSA has seen an uptick in both rehabs / flips as well as tear downs with new builds on the lot.  Unfortunately this does little to help the low inventory issue, but it certainly increases property values.  

@Nick Gerli Building permits are a good metric to track, but when determining how it affects the market, you also want to measure it with population growth and housing inventory. For Austin, here are some metrics to digest:

2019 New Construction Homes (a one-year record): 18,095 (Statesman article)

2019 Multi-Family New Construction Units (doors): 11,000 (from multi-family broker colleague)

2018-19 Population Growth (metro area): 61,586 (Austin Business Journal)

Property developers, both SFH and multi-family, are only building approximately 30,000 doors per year, which is less than half our annual population growth over a 12-month period. This trend has been ongoing for nearly two decades. Homebuilders could literally double construction and barely keep up with the inflow of population. This is why Austin is at record low supply for housing inventory, which could persist for many years to come.

Originally posted by @Nick Gerli :

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

Seems like it would be a good idea to buy in Columbus 

@Ryan Kelly solid data points.  And with article links, thank you for your insight.  I would add that if the Austin MSA builders did in fact double builds from 18k to 36k it should start to make a dent in housing inventory. I am not sure on the statistical variance for incoming Austin residents but the average persons per household is 2.47 for the area (https://www.census.gov/quickfa...).  If 61,586 people moved to Austin in a single year then mathematically Austin would need an increase of 24,933 new construction homes/apartments to break even at 2.47 persons per home.  As you mentioned, a record year for Austin new construction was still only at 72% of the actual incoming population growth and housing demand.  And to bring more validity to your point Ryan, housing inventory is already quite low.  @Nick Gerli Austin could probably stand to have an even higher percentage with as steady as our growth has been for years.  

Austin has an extreme shortage of housing metro wide presently. Its reflective in the appreciation rates of the metro. There simply isn't enough housing. Its crazy that lot values in some parts of the core of the city is over $550k... yeah lot value. A tear down for $575k is nuts imo. It's reflective of the city's 1980's land use code, the restrictive elements therein, the complexity of getting permits and the massive growth that has occurred over decades.

I did charts. Thanks. Investing in Austin in my opinion is a great idea for next 5-10 years at least. 

Originally posted by @Remington Lyman :
Originally posted by @Nick Gerli:

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

Seems like it would be a good idea to buy in Columbus 

 When isn't it a good idea?

Originally posted by @Robert Ellis :
Originally posted by @Remington Lyman:
Originally posted by @Nick Gerli:

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

Seems like it would be a good idea to buy in Columbus 

 When isn't it a good idea?

Never. Trying to get my clients to make a monopoly on real estate in Columbus, Ohio

@Nick Gerli

The Nashville market is painfully, and I mean painfully under supplied right now for houses. In order to reach any sort of market equilibrium I feel as though we need to be building 4 times as many homes as we are right now. 

The appreciation the market has seen over the past 6 months has been down right nuts. 

New homes are being listed at about 30% higher than they were just a year ago and they are selling way faster. 

I personally would have no concerns investing in the Nashville market right now especially for new development based on those numbers. Those are rookie numbers!

Lots of great responses in this thread @Luka Milicevic @Ryan Kelly @Bryan Noth  @Stefan D. @Aaron Gordy @Remington Lyman  

I agree that some level of demand needs to be accounted for in relation to permits (which track new builds, not renovations). While population growth is a good metric to evaluate, household formation might be even better. 

 A market like Columbus looks great in this comparison. Household formation is greatly exceeding new permitting, which bodes well for durability of occupancy and rent/value growth. 

Nashville? I'm not so sure. The opposite trend is occurring, where permits are greatly exceeding household formation.

Is Austin oversupplied? Nope, not even close. There is an extreme shortage of housing in the area. It's reflected in the appreciation rates. 

@Nick Gerli the charts are interesting but I do think they need to have side by side comparative data for other factors.  Measuring household formation and permits are interesting but that data becomes far more powerful alongside other metrics such as housing inventory as @Aaron Gordy mentioned.  To see an increase in the rate of permits and builds in Austin is still respectively chasing a declining inventory with increasing competition.  

Originally posted by @Nick Gerli :

Building Permits provide a snapshot into what the supply pipeline (new homes and apartments) in a market will look like in 12-24 months time. The more supply dropped into a market, the more growth needed to keep occupancies and rents up.

The graph below shows Building Permits as a % of Existing Housing stock in select markets. 

I'm curious what everyone thinks about this information. Would you be concerned investing in a market like Austin or Nashville given how much permitting there has been lately? Or do you feel like those markets will register enough growth to cover the increase?

Meanwhile, are Pittsburgh and Columbus good markets to get into right now? While their growth rates might be lower, you might feel more confident in the existing rents and value levels given how little supply competition there is. 

This data was collected from the US Census, which conducts a monthly building permit survey for every US metro. 

 Does population and job growth support the growth? If it does then nothing to worry about. If it does not then there's cause for concern. 

Pittsburgh is definitely nice to invest in because there's not a ton of increase of supply in rental units and we have a good percentage of the population as renters. 

Are you giving enough weight to population, population trends and income levels/trends in those areas you are studying supply in? Those permit charts don't mean much in that simple of a vacuum. 

Consider the Ghost Cities in China. Turns out money comes from people, not bricks. 

Originally posted by @David A. :

Are you giving enough weight to population, population trends and income levels/trends in those areas you are studying supply in? Those permit charts don't mean much in that simple of a vacuum. 

Consider the Ghost Cities in China. Turns out money comes from people, not bricks. 

That's very true. It's important to compare permitting to population and household growth. Look up a couple posts to see those comparisons in Columbus and Nashville.  

@Anthony Angotti

I think some of these markets do have the growth to absorb the permit supply. But my question would be:  what does appreciation look like? It's going to be hard to achieve the appreciation rates of years past when growing supply at 3-4% per year.  

Pittsburgh is an interesting market. It's in negative population growth territory but has so little new supply that it experiences strong rent growth in a lot of markets. I like Shadyside/East Liberty in particular. 

Keep in mind the Pittsburgh investment area includes the surrounding counties. There is a steady amount of new homes being built in the suburbs. Check out Ryan Homes and Maronda Homes. Once you get out of Allegheny County people are commuting from Cranberry Township, South Hills, east in Murrysville, Penn Township. Those areas have a tremendous amount of new growth. We built decks on those new homes for years and the work never stopped. It is what also makes flipping in those areas attractive. If anyone wants to come here and see the area DM me I would be glad to show you my city. Always looking of new connections and JV partners.

i live in austin @Nick Gerli we need MORE inventory. We have about 157 people moving a day, with more and more companies relocating I have a feeling that number will increase. plus our suburbs rock round, pflugerville are some of the fastest growing cities in USA. 

@nick 

@Nick Gerli all data is good to look over and consider but all of it is irrelevant if you don't know what you are doing. I dont know your experience level but consider working on raising your real estate IQ. Also if just starting out I would buy in the neighborhood thats close to you if thats at all possible. I know some areas are so expensive. I am in the Pittsburgh Market and its stable as can be. There is zero population growth here and the rental demand is good. That doesn't mean you should invest here. You can make bad choices here as you can in any market. I would also try to get a good mentor once you do find an area you want to focus on. Someone who does well in that specific market is ideal