The Exurbs are Returning, But Not Necessarily for the Right Reasons
The growth of the exurbs opens the door for innovative builders and investors to find ways to address an immediate need.
By Katia Potapov
The exurbs, a region where people live in a metropolitan area outside the main city and suburbs, showed the most substantial gains in single-family home growth, according to a report the National Association of Home Builders released during the final week of May.
The association’s quarterly Home Building Geography Index tracks building trends throughout the country, based on permit data counties collect to assess construction in urban and rural regions.
The May report focused on metro zones, which for the first quarter of 2019, found that compared to the first quarter of 2018, the exurbs were the sole region to show permit increases for single-family homes. This is a 1.6% gain, even though exurbs account for just 9% of single-family home construction.
Why the Exurbs Are Growing
Exurb growth has to do with affordability.
Real estate experts are paying attention to the growth in the exurbs. Though part of a metropolitan region, these homes are further away from the main city and offer cheaper, more affordable properties.
Unlike suburbs, which are the region directly outside of an urban center and generally close enough to the main city for residents to take advantage of the city’s entertainment, medical facilities, public transportation and dining, exurbs are further outside of the city. These areas are generally more rural with great privacy, land and fewer neighbors.
“A shortage of buildable and affordable lots is forcing builders to increasingly look further outside of the suburban and metropolitan areas to find cheaper land that provides more building opportunities,” said National Association of Home Builders Association chairman Greg Ugalde in the report.
Ugalde’s statement is backed by a separate report the National Association of Realtors released in May as well. The NAR’s quarterly findings state that so far in 2019, the median single-family home increased 3.9% in metro markets to $254,800. The first quarter median price in 2018 was $245,300.
In metropolitan regions, 153 of the 178 markets studied had a home price increase. Thirteen metro markets had double-digit percentage increases, which was one market less than in the fourth quarter of 2018.
Although the NAR report says the national median income increased to more than $70,000 in 2019’s first quarter, it also notes that “higher home prices caused overall affordability to decrease from last year.”
Depending on location, it estimates that an individual would need to earn $50,000 to $60,000 to afford a home in the U.S., making a down payment of 5% or up to 20% based on income.
“There are vast home price differences among metro markets,” said NAR chief economist Lawrence Yun. “The condition of extremely high home prices may not be sustainable in light of many alternative metro markets that are much more affordable. Therefore, a shift in job search and residential relocations into more affordable regions of the country is likely in the future.”
Millennials Are Finding Their Way to the Exurbs
The Wall Street Journal reported in March that millennials, in particular, are purchasing homes in the exurbs.
“Rising mortgage rates and home prices, especially in urban centers, are once again motivating buyers to drive until they can afford a home, including in Dallas, Las Vegas, Atlanta and the San Francisco Bay Area. Low gas prices help as well,” the publication noted.
Millennials are buying homes in the exurbs because of affordability, and they are willing to have a longer commute simply for a chance at homeownership.
Business Insider, which also published its findings on this trend in March, attributed the millennial push to the exurbs to economic factors facing the generation.
Housing Supply Is and Is Not the Problem
The first quarter of 2019 ended with 1.68 million homes available for sale. That total is 2.4% more than the end of the first quarter of 2018. Homes are also staying on the market longer during the same periods, increasing from 3.5 months in 2018 to 3.8 months in 2019.
Sales also slowed. Single-family homes and condo sales increased by 1.2% in the first quarter of 2019 compared to the fourth quarter of 2018. However, when home sales are compared for the first quarters of 2018 and 2019, the pace is 5.4% lower.
It’s understandable that builders want to construct homes that will make the most profits, but as Yun points out in the National Association of Home Builders report: “More supply is needed to provide better homeownership opportunities, taming home price growth and widening the inventory choices for consumers. Housing Opportunity Zones could provide the necessary financial benefits for homebuilders to construct moderately priced-homes.”
Is the Growth of Exurbs a Bad Sign?
The exurbs, like any other market, are an indicator of what’s happening in current time. Its rise points to an affordability issue of the wider housing market, particularly for younger generations seeking to buy a home.
Added to affordability, the last time the exurbs were a popular market was during the housing boom. The exurbs, with an older and cheaper housing stock, attracted great attention from individuals and small companies looking to make money by flipping these houses inexpensively and selling for big profits.
Then the bubble burst. These markets were mainly left vacant, leaving builders deep in the red. With experience comes wisdom. A repeat of the housing collapse triggering the Great Recession is hard to predict. After each recession, new safeguards are put in place to avoid a similar meltdown, but protecting against the unknown is a difficult problem.
While investors and builders may have some trepidation about dealing in exurbia markets, the reality is that a need exists for development. Studies show that millennials, and ultimately Gen Z, will continue to push into exurbia markets. The housing stock will have to keep pace either through renovations or new constructions.
In a way, what is happening now is similar to post-World War II homebuying. Developers found methods to build new homes at cheaper prices relative to returning troops’ income as they started their careers and families. In time, the Greatest Generation was able to afford more expensive homes as they transitioned into higher-earning jobs, and the next generation—the baby boomers—started purchasing the cheaper properties that were vacated.
This is seemingly the same pattern today. The only difference is the market does not have a large stock of affordable homes in exurbia as it did decades ago. This opens the door for innovative builders and investors to find ways to address an immediate need, while also understanding that millennials, Gen Zs and others who are looking for that first home will eventually transition into a more expensive property once their incomes are high enough.
Certainly, this means that more expensive properties will remain on the market for longer periods, but cheaper homes that meet the needs of today’s homebuyer will help to offset those financial loses. ·
