By Dr. Lisa A. Sturtevant
Vice President of Research
National Housing Conference

Home prices continue to rise across the Washington DC region and affordable rental apartments remain difficult to find in many neighborhoods. A key reason for continued upward pressure on prices and rents is that residential construction remains below historic averages. Furthermore, the new housing construction that is underway is not always in the right places or at the right prices or rents to meet the region’s housing needs.

Over the past 20 years, there have been about 28,000 permits for residential units issued annually in the jurisdictions through the Washington DC metropolitan area. This average includes the recent boom years of the mid 2000s when nearly 40,000 new housing units were built each year, as well as the years immediately following the recession when new housing permits totaled less than 13,000. Since 2011, there has been a steady increase in the amount of residential construction activity across the region. In 2014, there were over 24,000 permits issued for new housing units.

Historically, about 30 percent of new home construction in the Washington DC region has been multifamily. Since the downturn, multifamily construction has made up a much larger share, comprising more than half of new permits in 2011 and 2012. New multifamily construction was critical for meeting the demand of new young works who flocked to the Washington DC region in the first few years following the recession, as well as to accommodate a swell in the number of new “renters by necessities”—those who has been shut out of homeownership as a result of foreclosure or difficulty accessing the mortgage market.

In the period following the downturn, and related to the uptick in multifamily construction, there has also been a dramatic shift in where new housing is being built across the region.  Back in the early 1990s, more than half of all new residential construction activity took place in the inner suburbs of Fairfax, Montgomery and Prince George’s counties. The inner core—DC, Arlington and Alexandria—accounted for less than five percent of all residential permits. There has been a steady decline in the share of new residential construction in the inner suburbs over the past two decades as the more distant suburbs have captured greater shares. But in recent years, the share of residential building activity in the inner core surged—from less than 10 percent of new home construction before the downturn to nearly 40 percent in recent years.

And the majority of new residential construction has centered on the higher end of the market. According to Delta Associates, the average monthly rent for a Class A residential apartment in the District was $2,500 in 2014. Similar properties rented for between $1,700 and $1,800 in suburban Maryland and Northern Virginia. A household would need to have an income of at least $72,000 to afford these rents. On the homeownership side, the majority of both new and existing homes currently on the market are priced above $400,000, prices generally out of reach to those who earn less than the region’s area median income.

The Outlook for Residential Construction in 2015

The Washington DC region has a deficit of housing. This deficit is two-fold. The first is a persistent structural deficit that has existed for decades and has resulted in an insufficient supply of housing to accommodate our workforce, leading thousands of workers to live outside the region and commute in. But there is also a cyclical deficit in the region’s housing supply. During the housing boom, the region built somewhat more housing than was needed to accommodate population growth. But during the downturn, the pace of new residential construction was far below what was needed.

In the coming years, the region needs significantly more new housing, both to accommodate new household growth and to begin to work through the cyclical deficit which has led people to double up, live with their parents and live in crowded housing conditions.  I’ve estimated that the region needs to produce 39,000 new housing units each year for the next five years to meet the demand. Based on the current 2014 permit data, we are unlikely to see that level of new construction in 2015.

Even if we were able to produce enough total units, it probably would not be the right kind of housing—in the right places and at the right prices and rents—to meet the region’s housing needs. An assessment of the region’s economic and demographic trends suggests several areas of new residential construction that need to ramp up to meet current and future housing demand:

1.     More single-family homes. The fast pace of multifamily residential construction in the inner core was critical for meeting the needs of young workers who came to the region after the recession. But these young workers are getting older. As their incomes rise, they will be ready to form their own households, get married, and become homeowners. Surveys of Millennials consistently show that they desire homeownership. A local survey of young adults in the District revealed a strong preference for single-family housing (results available from the author), including both single-family detached homes and townhouses. But the single-family market still hasn’t kicked into gear in the region.

2.     More suburban housing. There has been a lot of residential construction activity in urban neighborhoods, but the pace of residential construction in the suburbs dropped off dramatically and still hasn’t picked back up. Along with the usual reasons for people to move to the suburbs—including good schools and high-quality local services—the region’s suburbs offer diversifying job opportunities and more transit options that will draw new homeowners to them. The types of suburban housing that will be in demand will be different, however, including more mixed-used, town center style developments and less traditional cul-de-sac development.

 3.     More lower cost housing. According to the most recent forecasts from the George Mason University Center for Regional Analysis, the region’s job growth over the next few years will be largely driven by jobs with wages lower than the region’s median wage. Recent research on future housing demand has demonstrated significant needs for housing for households with incomes below $50,000 per year. In order to make housing more affordable, localities need to make it easier to build smaller homes and more multifamily and townhouse developments.

Next Month: Innovative Affordable Housing Development: Stories from Around the U.S.

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