February 20, 2020

Housing Shortage to Become Reality

The title might have thrown you off. What housing shortage? There is, in fact, a shortage of new home construction now and it’s about to get worse. The National Association of Home Builders recently made a downward revision on the number of homes to be built by end of 2010. That number is 479,000. Next year they’re projecting a 40% increase over 2010 with around 650,000 homes to be built. While that may seem like a lot of homes, an estimated 1.5 million homes need to be built every year just to keep up with population growth. Add to that fires and tear downs and the number is 1.6 million. Of course there doesn’t seem to be any shortage at all. With over 2 million foreclosures this year, vacant homes seem to be around every corner. Next year we’ll see another 2 million+ home possessions. But quietly the market is absorbing inventory. It’s expected that nearly 1 million units of inventory were absorbed and next year stands to see roughly the same.

I don’t expect many of us will notice this under-supply of new homes because there is still currently an over-supply of overall housing stock. It’s estimated an over-supply of around 5 million homes in 2010 and that number will be roughly the same at the end of next year. We’ll notice the over-supply working down quickly as we go from 5 million units to 4.2 million by end of 2012, and even more evident as that number reduces to 2.8 million in 2013, 1.1 million in 2014, and flips to an under-supply of nearly 650,000 homes by end of 2015 (source: Mark Boud, Economist at Real Estate Economics). Prices will rise before all of this takes place though as the sun sets on foreclosure crisis over the next 24 months. Foreclosures aren’t going away though as we’re likely to see higher than normal foreclosures over the next half decade and maybe longer. But the decline in the number along with market absorption will result in a dwindling excess supply.

To combat those who think building makes little sense when we have an excess supply should consider the quality of the existing housing stock. The distressed inventory sitting on the market is largely in sub par condition, leaving a gap investors are presently filling. Investors buy properties and value add to them by repositioning them back on the market (whether rental or retail). The average owner occupant doesn’t want to buy a distressed asset that is in poor condition even if it is cheaper. Further, the 203 loan for people looking to renovate and live in homes, is not well known and is somewhat of a labyrinth to navigate. Fortunately, investors represent roughly 18% of the current market. Much of what they’re buying is being converted into rental housing because of poor selling conditions. But flipping is about to make a come back. It’s likely we’ll see the rise of flipping to the retail market over the next 12-24 months as market conditions improve and the days on market shrink. Further fuel to the housing recovery, an article by Brighton House Associates shows that European pension funds are set to double their investment into the US real estate market to the tune of $97 billion in 2011. This follows a trend of US investment firms entering real estate as a source of alpha.

When the economy improves a lot of homes are going to come on the market as people finally look to make prolonged moves. Their homes will not ultimately affect the size of the current housing stock. Household formation and population growth will overwhelm the housing stock in short order. The fundamentals of housing have greatly improved behind the scenes in 2010, and are set to improve much more in 2011. While I largely doubt this will be evident in the media in 2011, the improvements will be noticeable in 2012. Following that, will once again be a rise in home prices.


  1. Malcolm Carter says

    Although I generally agree with your analysis, I wonder whether you’ve taken into account the growing number of combined households–unmarrieds and families?

    • Ryan Hinricher says

      Good question: Household formation is running below its typical 1% currently as students can’t find jobs and are still living with parents. Many are also postponing marriage and growing their families. This is one reason 2011 will look much like 2010 with regards to a stagnant market. Only as the jobless rate decreases will household formation return to normal levels. This is why builders focusing on first-time buyers are hurting so bad while others are returning to profitability.