Excess supply and depressed housing values in rural counties may affect housing development

November 23, 2020

By Daniel Kuhlmann, Assistant Professor, Department of Community and Regional Planning

Graphs showing the share of statewide single-family permits issued in the top five counties versus the balance of the state, 1994–2018.New housing development is occurring in Iowa, but its distribution is not even across the state. In 2018, just five of Iowa’s 99 counties accounted for more than 65% of the total new housing permits issued statewide.

For places experiencing little new development, an aging and deteriorating housing stock is an urgent concern for local policymakers. While new development is not a cure-all solution to rural housing problems, increasing housing options in rural areas can help attract new employers and stabilize local budgets.

I have been conducting research into why many rural counties in the state experience little new development. In this article I highlight some preliminary findings of my research, which I will present in greater detail in a forthcoming report from the Iowa State University Extension and Outreach Community and Economic Development program.  

We should only expect people to build new housing when there is adequate demand and insufficiency in the current supply. When there is too little demand or too much supply in a particular place, it will no longer be profitable to build new homes. This is true in all housing markets, but particularly so in rural areas. New building in rural communities tends to occur either in small developments or by families building their own homes. A family will generally only build (versus purchase an existing house) when they have unique tastes or demands, or when the supply and demand conditions are incorrectly aligned. And speculative developers in rural communities are highly sensitive to local conditions since their potential market is small.

In my research I divide community characteristics that can help explain new housing development rates into two categories—those measuring the localized demand for new housing and those that describe the existing housing supply.

The demand factors I examine include household incomes, population growth, and estimates of the proportion of each county’s population that could afford the minimum mortgage payment required to purchase a basic new construction home. On the supply side, I examine housing vacancy rates and a new measure of the proportion of each county’s housing stock that is valued below minimum replacement costs.

I draw data from a variety of sources, including building permit counts from the HUD building permit survey; demographic and economic characteristics from the American Community Survey, the Decennial Census, and the Bureau of Labor Statistics; and construction cost estimates from RS Means Company. I then use these data to examine whether the characteristics of counties that issue large numbers of new building permits (“high-development” counties) differ from those that build relatively few new housing units (“low-development” counties).

I find that demand factors only partially explain the differences in new housing development across the state. High-development counties have faster-growing populations and higher incomes, in general. But when I estimate the proportion of each county’s population that could afford a new-construction home, the differences are less clear. Even though low-development counties have lower incomes, my estimates suggest that a large proportion of their populations could still afford the minimum mortgage payment on a new-construction home.

When examining supply factors, however, the differences between high- and low-development counties come into starker relief. In low-development counties, a larger portion of the existing housing stock is valued below replacement costs. And in these counties, rates of housing vacancy are also much higher. These phenomena are related.

Although the markets for new and existing housing are distinct, ultimately prices of new and resold houses are co-determined. While new housing is generally more expensive than existing units, prices overall are lower in areas where buyers have more options in the existing housing market due to high vacancies. Developers are less likely to build in counties with high vacancy rates, since lower values mean tighter profit margins.   

While my results are preliminary, they illustrate the complexity of rural housing problems. Although low demand for housing partially explains low housing development rates, demand is not the only, and perhaps not the most important, factor affecting development. My analysis suggests that a combination of excess supply and depressed housing values make it difficult for developers to profitably build homes in low-development counties.

In future work, I will further explore the role of supply issues in rural housing development. Do high development costs, particularly associated with skilled labor, influence the profitability of rural development? Can targeted renovation programs in rural areas help correct some of the supply issues in rural communities, clearing the way for new development? What is the quality and desirability of existing vacant housing in rural communities?

Answering these and other questions will help us understand the root of these rural housing issues and begin to inform policies to address these problems.