National Housing Market Outlook

Demand and Supply Fundamentals Point to Continued Price Growth

September 10, 2013

Will home price appreciation remain strong in the face of modest job growth and the recent uptick in mortgage rates?   Price appreciation is largely driven by the degree to which demand exceeds supply. While the best short-term measure of the housing demand/supply balance is months of supply of homes on the market, the best long-term measure is the ratio of household formations to new home construction. Since household formation data is highly unreliable, we use job growth as the best proxy because there are typically 1.2 jobs per household. Affordability, confidence, and demographic factors determine whether that household rents or buys. We have a great demand model that estimates that demand by price and rent range. Consider the following:

  • Demand exceeds supply in 90% of major markets. The employment growth-to-permit ratio (E/P ratio) remains above the standard equilibrium level of 1.2 in 18 of the top 20 markets. Nationally, the E/P ratio of 2.5 is well above equilibrium levels and up from a ratio of 2.3 a year ago.
  • E/P ratios are most favorable in many slower recovering markets. Demand exceeds supply the most in many markets that are still in the very early stages of recovery, like Chicago and Boston. In Chicago, job growth exceeds permit growth by a factor of seven. The primary cause of limited price growth in many Midwest and East Coast markets is distress, which is steadily clearing. Once the excesses clear out, these markets are poised to appreciate quite well.
  • Texas’ job growth continues to outpace supply. Robust economic growth will continue to boost prices in Texas, despite minimal entitlement barriers and permit levels that are near historic norms. Despite rapidly rising construction, Houston and Dallas are still adding jobs twice as fast as new home permits are being pulled.

It is important to note that in most markets elevated E/P ratios are primarily the result of historically low housing supply, rather than strong job growth. Price appreciation will be even more closely tied to job creation as new supply comes online and mortgage rates continue to rise to more historic norms.

Building Market Intelligence™

Every week, we deliver analysis to over 40,000 subscribers with our Building Market Intelligence™ newsletter. Subscribe to our weekly BMI newsletters to stay current on pressing topics in the housing industry.

About The Author

Contact Us

If you have any questions about our services or if you would like to speak to one of our experts about we can help your business, please contact Client Relations at

Products and Services Mentioned

green check icon

Research Membership

Our research services enable our clients to gauge housing market conditions and better align their business and strategic investments in the housing industry. We provide a thoughtful and unique holistic approach of both quantitative and qualitative analysis to help clients make informed housing investment decisions.
green check icon

Metro and Regional Housing Package

An overview of major housing and economic trends, as well as forecasts across 100 MSAs nationwide. The information in this subscription package provides a complete picture of housing supply, demand, and affordability through local insight, proprietary surveys, and extensive data analysis.
green check icon

Real Estate Consulting

Our experienced team of consultants helps clients make sound housing investment decisions. We thrive on their success and work with many clients over multiple years and numerous projects.

Latest Insights

Building Success: Doug Bauer and the Growth of Tri Pointe Homes
Dear Consultant: How will the declining birth rate impact the move-up housing segment?
Golden State Resilience: Four Considerations for California’s Housing Market