While home construction may contract in the short term after recent increases in mortgage interest rates, a study conducted by Jordan Rappaport, a senior economist at the Federal Reserve Bank of Kansas City, suggests that time savings from fewer commutes could provide a boost for single-family home construction in the long run. According to Rappaport, construction is predicted to more than triple in the New York, Los Angeles, Chicago, Philadelphia, and Boston metro areas, where commutes have been the longest for residents.
Rappaport’s study—”Hybrid Working, Commuting Time, and the Coming Long-Term Boom in Home Construction”—indicates that for a large share of metropolitan residents, long commutes contribute to making the outer suburbs a less desirable place to live than places closer to metropolitan centers. Home construction costs are typically the least expensive in outer suburbs, where commute times are longest for potential residents. According to Rappaport, a major benefit of hybrid work environments induced by the pandemic is reduced time spent commuting for individuals. The associated time saved commuting is likely to increase workers’ willingness to live farther from their workplaces, spurring construction in and beyond the current outer suburbs of large metropolitan areas, according to Rappaport.
According to the study, reduced commuting times will eventually increase aggregate single-family permits in the 56 core-based statistical areas (CBSAs) with a population of at least 1 million in 2020 by 427,000 per year. The predicted increase would result in an increase of single-family construction by 92% in these CBSAs compared with 2019 levels. Nationally, the predicted increase in large CBSAs would result in an overall increase of single-family construction by 49% compared with 2019 national levels.
Hybrid working is also projected to increase single-family construction for reasons indirectly related to decreased commuting. Hybrid working is likely to increase demand for larger residences to accommodate home offices. While some households may be able to meet this need through renovations, Rappaport says many individuals will move to new homes, further driving up single-family construction.
Based on Rappaport’s predictions, national single-family permits will eventually rise to a long-term annual rate of 1.4 million.
While Rappaport remains bullish on the long-term trend of single-family construction, the economist notes several current headwinds will continue to impact the housing sector.
“Shortages of workers, construction materials, and ready-to-build lots are likely to constrain the growth of single-family construction in the short term,” Rappaport says.
The sector would need 1 million more construction workers than were employed in mid-2022 to accommodate the estimated annual single-family starts rate of 1.4 million units, according to Rappaport. However, despite the potential headwinds, Rappaport predicts that once single-family construction ramps up, “it is likely to remain high for many years.”
