These markets are on track to build at least 50 percent more new homes in 2014 than their historical average, according to Kolko’s study of building permits. That’s why apartment real estate investment trusts in these regions, like Avalon Bay and Equity Residential, are hitting new highs on Tuesday.
Read More Low rates boost REITs, commercial real estate stocks
Meanwhile, Detroit, Atlanta, Chicago and much of Florida are still building well below historical norms. They are struggling with an oversupply of vacant homes, some of them held off the market by either banks or investors—thousands still stuck in the foreclosure process.
“Bottom line, the starts figure was again mostly driven by multifamily in response to the lowest homeownership rate in almost 20 years,” said Peter Boockvar, chief market analyst of the Lindsey Group. “The single-family improvement was great to see but 656,000 [annualized starts], is only slightly above the 12-month average of 628,000 and compares with the peak of 1.8 million in 2006, the 1991 recession trough of 604,000 and the 1981 recession bottom of 523,000. Good and better are very relative terms.”
While builders are the most optimistic they’ve been since the beginning of this year, mortgage applications to purchase a home are still at six-month lows, despite falling rates. New home prices could also be a big roadblock in 2015, as cheaper, existing homes come on the market, but some builders, like DR Horton, have already said they will offer incentives to get more buyers to contract.
“They’re going to open the communities and we believe that demand will be sufficient to meet the new supply, but in some instances there will be builders that are going to have to incentivize to move inventory,” said real estate analyst Ivy Zelman, founder of Zelman Associates.
Along with starts and building permits, Zelman watches “pipes,” that is when builders develop unfinished lots with sewers and sidewalks.
“Development activity is a leading indicator of starts, and development activity is definitely above normal now,” she said. “We believe the starts will continue to result in new community growth and we will see market demand sufficient to meet that new supply.”