GO WEST Or [sim] Maybe HEAD SOUTH.

Bustling Atlanta tops the list of new-home markets in the United States. Retirement-haven Naples and tourist-heaven Myrtle Beach are the fastest growing new-home markets, according to a study that defines the U.S. new-home markets in upbeat detail.

RESIDENTIAL BUILDING PRODUCT factories are going full blast in Canada to satisfy the unflagging demands of a North American home building boom that may flutter occasionally, but appears unstoppable.

But there appear to be pockets of the U.S. home-building market that are underserved, because Canada Mortgage and Housing Corporation (CMHC) sponsored a seminar in Toronto in October to pinpoint them for Canadian home builders and manufacturers of selected building products.

Two Canadian consultants gave their take on U.S. sites that would likely offer business opportunities. Then Irvine, California-based The Meyers Group's John C. Burns, senior managing director, and Timothy P. Sullivan, a principal, presented an overview of the U.S. housing market.

The Meyers Group's Outlook Study was commissioned by CMHC and is based on an analysis of residential building permits issued in major metropolitan U.S. markets during the first six months of 1999. An information database, market research and management consulting firm specializing in the real estate industry, The Meyers Group conducted 600 housing studies in 14 states in 1998 and 800 studies in 17 states in 1999.

Burns notes that the United States has enjoyed eight consecutive years of "a very healthy economic growth rate" after the last recession, accompanied by "consumer confidence at record levels over the past four or five years."

"The stock market is able to indicate signs of a recession 12 to 18 months in advance," Burns says, "and it hasn't indicated any dips coming."

Nor are there signs of the housing markets seriously slackening. A record number (1,612,260) of residential building permits was issued in the United States during 1998. Some 1,265,200 permits were issued during the first nine months of 1999--up 5 percent from the number issued during the same period in 1998, according to U.S. Housing Markets, published by The Meyers Group. It is still too early to tell, but at that rate 1999 could easily top the previous year for permits. Burns says the increase will be led by single-family home permits and reinforced by a comeback in apartment buildings. Apartment building has been particularly strong in Dallas, Houston, Seattle and Orlando, with a noticeable increase in expensive units in downtown cores.

This spurt in new-home construction has been spurred by a combination of other positive factors, including relatively low mortgage rates, the wide availability of low-down-payment mortgages, rising incomes, low unemployment and federal government programs encouraging homeownership.

Ranking the housing markets

Based on an analysis of residential building permits issued during the first six months of 1999 (at least 5,000 in a single year) in 40 out of 58 metropolitan areas, and other factors, The Meyers Group concludes that:

* The largest single-family markets, in terms of permits issued during the 12 months ending October 1999, were Atlanta, Washington, D.C., Phoenix, New York City, Dallas, Chicago, Houston, Detroit, Denver and Las Vegas, in that order, according to U.S. Housing Markets (see Figure 1). It doesn't necessarily follow that the largest markets in this category are also the fastest growing, however--Las Vegas, for example, shoots to the top spot in the Outlook Study's market hotness index, followed by Boise, Idaho; Raleigh, North Carolina; Phoenix; Charlotte, North Carolina; Atlanta; Orlando, Florida; Sarasota, Florida; Austin, Texas; and Denver (see Figure 2).

* The largest apartment markets, also ranked by numbers of permits issued during the year ending October 1999, as compiled by U.S. Housing Markets, were New York City, Dallas, Houston, Seattle, Orlando, Atlanta, Washington, D.C., Phoenix, Miami and Chicago, in that order (see Figure 3). The fastest growing apartment markets, according to the market hotness index, are, in order, Orlando, Florida; Austin, Texas; Las Vegas; Raleigh-Durham, North Carolina; Charlotte, North Carolina; Sacramento, California; Dallas; Madison, Wisconsin; Seattle; and Phoenix (see Figure 4).

* The top five markets, measured in MSA and CMSA terms, are Atlanta, New York, Phoenix, Dallas--Fort Worth and Washington, D.C. (see Figure 5). More building permits are also expected to have been issued in these cities during 1999 than in 1998--except for Dallas, where a 2 percent drop was looming. Permits were up in those markets by i6 percent over 1997 and by 11.2 percent during the first half of 1999 over 1998.

* The five fastest growing markets, in terms of market hotness (the ratio of the number of annual building permits per 1,000 people, or how fast it's growing), are Naples, Florida; Myrtle Beach, South Carolina; Fort Myers, Florida; Las Vegas; and Raleigh-Durham, North Carolina.

* The best housing markets for investment over the last 12 months, ranked in order by "investor hotness," are Los Angeles; West Palm Beach, Florida; New York; Tampa, Florida; Orange County, Riverside-San Bernardino, Fresno and Ventura, all in California; Tulsa, Oklahoma; and Providence, Rhode Island (see Figure 6). The Meyers Group study was working from an investor hotness index based on:

[frac{12 Months Total Employment Growth/Total Permits}{Each Area's Total Employment/Total Housing Units}]

The top three cities for investor hotness--West Palm Beach--Boca Raton, Los Angeles and New York--are "experiencing strong employment growth, and housing production is not meeting the demand, especially where there is a lack of buildable land and rising costs of development, as in Los Angeles and New York, Burns says.

"Although the Northeast has only five markets with at least 5,000 [annually issued] permits, they have very high investor hotness indices. New York, Pittsburgh, Boston and Philadelphia all have excellent prospects for home-price appreciation," Burns adds. He says it is difficult to find buildable sites in those cities, except for Pittsburgh; the building codes are tough; and there is NIMBYism (not in my back yard) to overcome in Boston.

The markets expected to be the best investments over the next five years (based on projected employment, population and households growing more quickly than housing supply) are Los Angeles--where demand will be the greatest, exceeding supply by 81 percent--followed by Salt Lake City; Austin, Texas; Tampa, Florida; San Diego; Orange County, California; Dallas; Kansas City; San Antonio; and Washington, D.C. (see Figure 7).

Freeway contractors take note

Burns says that 80,000 jobs--but only 12,000 housing units--were added in Los Angeles County last year, which makes for an enticing investor market and real estate appreciation.

Employment and population growth in Chicago, Washington, D.C.--Baltimore and Minneapolis are also expected to create more demand for housing than is coming onto the market in those cities, suggests the Outlook Study.

"Some of the metropolitan areas with significant building activity are not necessarily the best places for investment," the study notes. "Phoenix and Las Vegas are both in the top 10 in number of permits issued, but are in the bottom third with respect to investment outlook. Denver may be getting overbuilt."

The study identifies New York and California as the hottest states for housing investment. Burns says that includes metropolitan New York City and the state, representing "the greatest imbalance between jobs and housing," and notwithstanding California's "myriad building codes and terrible entitlement process [series of approvals leading to a permit]."

44,000 jurisdictions in 50 states

Sullivan notes that builders must cope with 44,000 jurisdictions in 50 states. Many of them have "no-growth" or "smart-growth" neighborhood policies or negative attitudes about new housing, which he says is making development "more difficult [and] more restrictive to get entitlement."

The Outlook Study, conducted during the first half of 1999 and presented in October, concludes that:

* Eight of the 10 hottest new-home markets are in the South and two are in the West. Among the 20 hottest markets, 14 are in the South and five in the West. Of the 58 market areas with at least 5,000 issued permits in 1998, 28 are in the South, 13 in the West, 12 in the Midwest and five in the Northeast.

"According to the Harvard Joint Center for Housing Studies, although many of the nation's largest cities are located in the Midwest and Northeast, many of them continue to lose population, compared to employment growth in many areas of the South and West, which are favored among most people, regardless of their moving to a metropolitan or non-metropolitan area, the study notes.

* The top 10 states for new-home construction, measured in terms of permits issued during the first six months of 1999, were Florida, Texas, California, North Carolina, Georgia, Arizona, Virginia, Ohio, Michigan and Illinois.

* The highest ranking new-home markets in Northeastern states in 1998 were Pennsylvania (13th) and New York (15th). "The states with large population concentrations in metropolitan areas and large areas of undeveloped land [i.e., Texas and California] rank significantly higher than states with equally large concentrations of population but with much smaller areas of available land [i.e., New York or New Jersey]," says Burns.

* Investment prospects for several small states, including Iowa, Montana, Delaware, Maine, Vermont and Connecticut, are "highly rated, with the expectation that development will follow in due course. There are no [major] metropolitan areas in those states and therefore they didn't meet the criteria for number of permits issued, yet they are relatively high on the investor hotness scale because the demand for housing is spurred by employment growth," Burns adds.

The size/diversity of the market

The demand for housing is generated by population growth, household formations and employment growth. Estimates for demand were based on building permits issued in 1998 and those three factors.

"Markets showing the greatest potential for an undersupply of housing are those that are expected to have lower levels of building activity, mainly because of a lack of buildable land within the metropolitan area," says Sullivan.

"The Los Angeles--Long Beach metropolitan area, for example, has the highest demand/supply ratio and the highest levels of job and population growth, but also has very little land on which to build new housing. Much of the demand for housing is subsequently being absorbed in the outlying counties of Riverside, San Bernardino, Orange and Ventura," Sullivan adds.

As for population growth, The Meyers Group study quoted the Harvard Joint Center for Housing Studies as the source of a projection that U.S. households will increase by an average of 1.1 million to 1.2 million a year over the next decade, arising from the following factors:

* Immigration, accounting for about one quarter.

* About two-thirds will come from children leaving home to head independent households.

* Higher divorce rates and declining remarriage and marriage rates will account for the rest of the growth in households.

The Outlook Study also suggests that the overall aging of the population, as the baby boomers reach their 40s, 50s and early 60s, will boost homeownership rates and real estate values--mainly for those in their preretirement and retirement years (aged 55 and over).

The impact of the aging population will extend into the next decade, the study continues, reflected by "rising home ownership rates, strong home building and remodeling activity, and robust home sales."

Parts of the United States with low proportions of elderly residents--the Western, Mountain and Southeast states, for example--will experience a dramatic growth in senior households over the next 20 years as the demand for low-cost retirement housing in less-urbanized areas increases.

Although homeownership is most prevalent among those 45 years of age and older, homebuyers' household composition is becoming more diverse in age, marital status, race and ethnicity.

Design centers: the indispensable element

The Outlook Study devoted a lengthy section to the nature and impact of design centers, from builder and buyer perspectives. Some major builders (such as Kaufman & Broad) continue to offer basic homes and use design centers extensively; other big builders (such as Lennar) have reduced customization options to speed up production and are building homes with "everything included," including all the options buyers really want in the base price.

Some builders also indicate significant revenue items such as room changes, pool packages (in some areas) and basement-finishing packages. Options to upgrade to a third-car garage (popular where offered) would generally fall into this category.

Upgrades and options are a major source of homebuilder revenue, such as:

* Flooring, cabinet and counter surface upgrades are the most common options, as well as air conditioning, a third-car garage and upgraded wiring, basement finishes, various room or garage configurations, pool and landscaping packages, accessory units or bonus areas over attached or detached garages and detached guest houses or casitas.

* Other major options include upgraded appliances, light fixtures and plumbing, tile on walls and floors, fireplaces and fireplace surrounds.

The Outlook Study notes that homebuyers are most concerned about the quality of windows, doors and cabinets as well as structural items like roofing, moldings, stairs and hardwood flooring. Molding and hardwood floors are buyer upgrades in most areas of the country and therefore homebuyer interest in quality is not surprising (they pay extra for these things).

Most builders favor the mixed strategy of offering some upgrades as standard and allowing buyers to upgrade other things. This is particularly true in the under-$400,000 price categories, according to the study.

The lowest-priced homes are generally offered as "basic," or with some upgrades. To control cost to buyers, the preferred strategy in lower price points is to offer minimal upgrades or include the most common ones. Affordability is the issue; buyer option packages are generally limited at this lower price range.

"The preference at the high-end (over 5400,000) is to offer a home with most features buyers want and expect to be built into the price. Options and upgrades are nonetheless most extensive in the luxury-home categories, but are focused not on upgrading 'basic' home elements but adding luxury or accommodating unique needs," the study says.

Options packages range from 4 percent to 9 percent of the basic price of the home. Nondesign-center options (i.e., structural changes, pool, landscaping) are not included in these percentages (and account for significant additional revenue). Not surprisingly, the percentage amount of options and upgrades generally increases as home prices increase, the study notes.

One of the statistics about the size of the United States market that must have sunk in for attendees at the October CMHC seminar in Toronto is that by 2010, when the U.S. population is expected to top 300 million, another 25 million more housing units will have been added to the estimated existing 114.6 million units at the end of 1996. That's more than doubling all of Canada's housing stock in less than 15 years.

Albert Warson is a Toronto-based writer and editor specializing in real estate--related subjects.