October 2023 Residential Construction

Before I get to the subscriber portion of this month’s update, here is a chart that estimates construction time for different projects based on the number of units under construction compared to the number started or completed each month. The y-axis is the estimate of the number of months it takes for the average project to be finished, from start to completion. I used the 12 month moving average of non-seasonally adjusted monthly data.

Figure 1

There have been 2 recent spikes in single-family construction times. The first was after the 2000s housing boom, when demand crashed and so builders had more finished homes than they wanted. The recent one was due to supply constraints so that builders had more unfinished homes than they wanted.

For 5+ unit structures, the trend to longer construction times is more of a structural issue. It used to be about 10-12 months most of the time, but in the late 1990s, that started to rise. Now, it’s over 25 months, and even without the Covid-related delays, it’s over 20 months.

This suggests that urban land use obstructions have become much worse over the past 25 years. But, one question I had was that, maybe with the lack of “missing middle” housing, the average project size has become a lot larger. Maybe 200-unit projects always took 2 years, and there are just a lot more 200-unit projects than there used to be.

You could probably really dig into local data to try to control for this issue, but there is an easy way to check it in the national data by looking at construction times for 2-4 unit projects.

2-4 unit projects have gone from an average of an 8 month construction time to 17 months. They averaged about 13 or 14 months before Covid. So, the relative increase in construction times in 2-4 unit projects is about the same as in 5+ unit projects. Project size appears not to be an important element.

I think there are two possibilities here. Probably each is responsible, to a certain extent.

1. Land use regulation really has gotten that much worse in the last 25 years. I think most industry insiders would agree with that.

2. Land use regulation has been bad for a while, but until the turn of the century, most cities were able to make up for the loss of multi-unit construction with entry-level single-family construction in the exurbs. That supply was enough keep the bandaid on our terrible land use regime regarding multi-unit projects. The country’s cities appear to be capable and willing to permit about 400,000 units annually. Much of the demand above that could find an outlet in single-family. When mortgage suppression killed that market and ripped off the bandaid, demand had nowhere to go. So, with demand for, like 1 million units, and capacity caps from urban planning departments of 400,000 units, there was nothing that could happen except for an expensive queue to form. It’s sort of like the Covid spike in construction time, but instead of waiting on windows, they are waiting on inspectors, permits, etc. In other words, with less competition in single-family construction, developers were more willing to suffer a longer queue in order to complete a new project. To a certain extent, demand itself probably drives these delays, and so, to industry insiders, I suspect it is hard to delineate between these two effects. In either case, upzoning, deregulating, etc. will ameliorate the problem.

OK. On to updates for paid subscribers.