Weldon Cooper Center for Public Service Analyzes Dismal Residential Building Activity

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May 22, 2009 — Virginia's building permit tally for 2008 paints a dismal portrait of the recent serious slowdown in this economic sector, according to a new analysis by the University of Virginia's Weldon Cooper Center for Public Service. The building permit data was released earlier this month by the Census Bureau, and is reported annually. The total for Virginia includes all residential building activity reported by local zoning and permit offices throughout the state.

"For the past few years the housing industry has suffered through a number of calamities, beginning with poorly conceived mortgage products, to skyrocketing foreclosure rates, to falling home prices. One of the casualties of this meltdown has been new home construction," U.Va. demographer Michael Spar said.

In the first six years of this decade, total residential construction grew from about 50,000 units per year to 62,000 in both 2004 and 2005.

By 2005, the housing bubble had grown too large to sustain; in 2006, residential construction activity dropped to 45,000 units, and dropped again in 2007, to 38,000. The just-released 2008 data show a further decline, to 27,500 units, less than half the building activity of just four years ago.

The first chart above shows the number of building permits issued statewide for all types of housing (the upper dark blue line), and for single-family units (the pink line), which make up the bulk of housing construction.

Another way of looking at these changes is in terms of year-over-year percent change, as shown in the second chart. The three-year period from 2006 to 2008 has been disastrous for homebuilders, with successive declines of 27 percent, 16 percent, and 28 percent.

In 2005, Virginia's localities issued permits for 62,412 residential housing units. In 2008, the total was 27,581, a 56 percent decline; and some areas of the state are doing even worse. The part of the Washington, D.C., metropolitan area in Virginia – Northern Virginia – is off 64 percent, while its close neighbor, the Winchester metropolitan area, is down a staggering 77 percent. Metropolitan areas with relatively smaller losses include Harrisonburg, down 21 percent, and metropolitan Danville, off by 31 percent.

Many economists feel that since the recession began with the housing meltdown, it can only end when the housing market has returned to its normal equilibrium. Homebuilders have drastically cut the supply of new housing in the face of falling sales and declining prices, but with the number of defaulting mortgages still very high, there is little hope for an improved market in 2009. The outlook for 2010 is somewhat better, provided that the number of defaults and the existing inventory of unsold homes are reduced.