Over the last 22 consecutive months, we have characterized the new home markets in three mid-Atlantic MSAs (Baltimore, MD; Philadelphia, PA; and Richmond, VA) as Cold, even though each posted the highest annual employment growth in July since (at least) 19921. For example, July’s annualized job growth in the Philadelphia MSA (65,700 new jobs) outpaced the closest annual rate (65,200 new jobs in 1997).
Likewise, we do not usually associate a Cold new home market with such impressive gains in the typically high-wage Professional and Business Services employment sector.
Because of our monthly interviews with industry professionals, we know that multifamily and mixed-use development activity in Baltimore and Philadelphia is booming, yet suburban development in both MSAs struggles to gain traction. In the Richmond MSA, the new home market is oversupplied with an ample pipeline of lots, suggesting stiff competition and stagnant prices in the future.
The Gap between New and Existing Home Prices Contributes to Slow New Home Sales
Although the range seems high, the current spread may have peaked in each MSA. From 2002 to 2015, the spread reached as high as 41.7% in the Baltimore MSA, peaking as recently as 2015; 55.1% in the Philadelphia MSA (2014); and 77.0% in the Richmond MSA, also in 2015.
Think SurbanTM: Urban-Like Living in a Suburban Environment
The resale inventory in both the Baltimore and Philadelphia MSAs is more or less at equilibrium (5.0 months) now, suggesting an adequate supply of existing homes competing with new homes at much lower prices. In the Richmond MSA, the listing inventory measures roughly 3.1 months of supply, well below equilibrium and revealing how dramatically the spread in prices affects new home demand and sales there.
To compete with resale inventory at lower prices, builders/developers should consider creating an urban experience in less expensive suburban areas (what we call surban) to attract the surge of millennials and retirees we expect will enter the new home market in the next ten years. We have copious product ideas, designed to appeal to these seemingly disparate target buyers.
1 Extent of job losses minimized to highlight positive job growth.
2 A word of caution: Some of the gap is likely attributable to the typical size difference between new and resale homes.