New home construction activity in Virginia was relatively strong in 2021, with housing starts outpacing recent years and building permits surging in many areas of the commonwealth. Despite the momentum, significant headwinds for the new home sector remain in play, which will continue to be a factor in 2022 and beyond.
By the end of 2021, housing starts in Virginia were outpacing both 2020 and 2019 levels. Housing starts in December 2021 in Virginia were at a seasonally adjusted annual rate of 42,500, which is about 27% higher than December of 2020. Favorable weather conditions in December and a strong multifamily pipeline helped to keep construction activity relatively busy around the state as the year came to a close. In addition, the chronic lack of inventory in the existing-home market is fueling demand in the new home sector.
Housing Starts in Virginia (Seasonally Adjusted Annual Rate)
SOURCE: Federal Reserve Bank of Richmond
The pipeline keeps growing, but challenges facing the new home sector are creating a backlog. Builders are trying to meet the demand in the market as building permit authorizations surged in 2021. However, construction on many of these authorized units has not yet started, as material and labor shortages persist. There were an estimated 39,400 authorized residential building permits in Virginia during 2021, which is about 5,600 more permits than 2020, a 14% jump in activity. Most of the additional 5,600 permits, about 85%, were for multifamily homes.
Annual Residential Building Permit Activity in Virginia
SOURCE: U.S. Census Bureau (Building Permit Survey)
Authorizations for single-family homes across Virginia only inched up by about 800 permits in 2021 compared to 2020 (+3%). This number is likely to rise slightly as final annual permit tallies and estimates are firmed up in some of the state’s smaller markets. But even if all of the authorized single-family homes in Virginia were built, the supply of homes would not even be close to meeting the demand in the market. The headwinds facing the new home sector are complex and are fundamentally changing the pace that new supply is reaching the housing market. Builders are facing material shortages, slowing down construction on many sites. Even when builders are able to get all the needed materials, there continue to be widespread labor shortages in the construction sector. In addition, the cost of building materials has surged over the past year, which in turn drives up the cost for new home buyers and can dampen sales as the price points become out of reach for many in the market. Limited availability of lots to build on is another significant challenge facing the new home sector, making it difficult for builders to meet the demand that is out there in the market. These factors will remain in play for the foreseeable future and will likely constrain the pace of new home construction both here in Virginia and around the country in 2022.
Written by Ryan Price