Rapid job growth is driving housing construction to new heights in some second-tier U.S. cities, giving these areas similar affordability problems as their larger counterparts.
Cities including Austin, Texas; Raleigh-Durham, North Carolina; and Nashville, Tennessee, are “supernovas” because of surging growth in the past decade, the Urban Land Institute said in its annual Emerging Trends in Real Estate report released in late October. The population in these cities is projected to grow 8% in the next five years, four times the pace forecast for the nation.
But in its ranking of 81 cities by prospects for single-family home building, ULI found some of the markets faded from a year earlier. Austin topped the list in 2023, but this year slid to No. 27 as Raleigh-Durham dropped from No. 8 to No. 33 and Nashville fell from No. 20 to No. 35. Nashville's median home price hit almost $500,000 and cost of living reached 110% of the U.S. average, though it's still less than coastal cities including Boston and San Francisco.
“The glow for this category faded a bit … this year as their unfettered growth has invited some big-city problems such as congestion and rising cost of living,” according to ULI’s report.
The results show how an economy in which inflation has fallen and interest rates are expected to follow suit can set the stage for growth. Metropolitan areas such as Tampa, Florida, have added jobs, while other Florida cities also benefit from an employment picture that surpasses the nation as a whole.
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The places with the strongest prospects for new home construction were found to be Sun Belt hotspots, including Tampa Bay-St. Petersburg, an area that rose from No. 9 to No. 1 in this year’s rankings; Fort Lauderdale, Florida; and Southern California’s Inland Empire, including the city of Riverside. Dallas-Fort Worth, Atlanta, Phoenix and Houston are also in the top 10.
Tampa’s housing affordability has eroded, according to the ULI report, with house prices up 66 percent in the four years through July 2024. But it keeps its allure because of job growth that nearly doubled the national pace over the past decade.
A number of West Coast cities that grew in the past due to their thriving tech sectors such as San Jose; San Diego; Portland, Oregon; San Francisco; and Seattle are now losing population due to their relative lack of affordability.
To be clear, while a number of these fast-growing cities are smaller than the largest urban areas in the country, some metropolitan areas can now be comparable in population. Even so, the ability to expand quickly shows how these cities have more room to grow than the nation's biggest urban areas.
Single-family rentals
A saving grace for homebuilding in cities where it’s become too costly to buy a house is the growth of the single-family rental market that can affect multifamily demand. In Austin, it’s 95% more expensive to buy a single-family starter home than to rent one, a difference of $2,085 per month, the report found.
Cities that want to encourage more housing development need to examine their zoning codes, ULI said. Another high-growth market that fell in this year’s homebuilding prospect rankings is Boise, Idaho, a metropolitan area experiencing the downsides of attracting numerous new residents fleeing bigger cities. Strong demand and rising prices in Idaho’s capital have pushed longtime residents further from the places where they work and shop.
“The need for attainably priced housing is particularly acute in these high in-migration markets, and many builders we interviewed want to build smaller homes to achieve lower overall price points,” ULI said. “However, municipalities often restrict these types of homes, because of either old zoning guidelines that require large lots and low density or the influence of residents who fight for lower density, similar to what already exists.”
Another zoning-related issue is that cities commonly make it difficult to build manufactured homes, though the report notes that they can be constructed faster than other types of residences with lower labor costs.
ULI also called for home builders to use more “value engineering” to cut housing costs for consumers, from stripping architectural details from home facades to offering vinyl plank flooring instead of tile or wood. Builders have to be careful their cost-cutting doesn’t result in unattractive designs that lead local governments to make it harder to obtain development permits, however.
“Careful consideration and open communication between builders and municipalities could mitigate this type of situation and allow more affordable products to be constructed,” according to the report.
ULI praised Myrtle Beach, South Carolina, as a model for its good working relationship with developers who want to build housing. The city experienced a growth boom during the pandemic, as developers built a variety of housing types for people with a range of incomes. These included large estate homes as well as cottage-style build-to-rent communities.