Fed Sees Long-Term Boom in Home Construction Coming

The long under-development of home construction in the U.S.—both individual homes and multifamily—started after the global financial crisis and domestic housing crash. And it’s overly easy to leave the analysis there.

But a new paper from Federal Reserve Bank of Kansas City senior economist Jordan Rappaport points out that another enormous factor has been commuting time. The pandemic resulted in, among other things, a shakeup of perceptions about commuting. The ultimate effect could be an almost doubling of single-family home construction.

The commuting time connection was an issue of land cost and consumer preference. “Land available for new development in the central portion of metropolitan areas and in most older suburbs is limited; although the outermost suburbs have more land for development, many workers have been hesitant to take on the long commutes associated with living in them,” Rappaport wrote.

The pandemic turned that upside down. Many millions weren’t allowed to come into the office or bring their children to school. As a result, a good number bailed out of city apartments and looked for more space in homes at a further distance from central business districts, since they could work remotely.

Separately from the paper for a moment, such moves also help explain why many workers want to continue working remotely. They moved and are now located in places less convenient for commuting.

Not that most jobs are in central business districts, but overall the paper argues that “far more workers commute toward the CBD,” so there is much to be potentially gained by helping them to

“Although home construction is contracting after recent increases in mortgage interest rates, my results suggest that in the long run, the time savings from fewer commutes could almost double single-family home construction in these metropolitan areas from its level just prior to the pandemic, an aggregate increase of 427,000 units per year,” Rappaport wrote. “The largest metropolitan areas, where commutes have been longest, are likely to see an especially strong boost. For example, construction is predicted to more than triple in the New York, Los Angeles, Chicago, Philadelphia, and Boston metropolitan areas.”

Even if a commute is longer, if repeated fewer times during the week, that can make less total time traveling. Further locations become more appealing, especially as there is likely to be more land at lower prices, making the cost of a house less expensive.

“For example, in all but one of the 56 CBSAs with population above 1 million in 2020, at least half the land area has a population density below 500 persons per square mile, the threshold below which the U.S. Census Bureau classifies land as rural,” he wrote.”

All this doesn’t mean an easy course to more housing. There are still supply and labor constraints that will slow construction.