Housing analysts are expressing disagreement about how much new housing the country actually needs. Who’s “right?”
Housing Production Historically About Balance of Supply and Demand
“Balanced” housing markets have historically been considered equally squared between the buyer (demand) and seller (supply) with a 6-month supply of housing to meet demand. An imbalanced market is a market in which there is either not enough or too much housing supply to meet buyer demand.
The US housing market has been imbalanced for many years. Housing supply has simply not kept pace with population growth for the past 40 years. Housing starts as a share of the US population fell by approximately -39% in the 15-year period from January 2006 at the peak of the housing bubble to June 2021.
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Supply Specifics
Freddie Mac now estimates that the current housing supply shortage is approximately -4.1M, up substantially from an estimated -2.5M in 2018. Entry-level homes, constructed with less than 1,400 square feet, are more than -80% lower than the amount built in the 1970’s. According to the National Association of REALTORS® (NAR) entry-level homes currently represent less than -10% of all newly constructed homes compared to the roughly 35% of entry-level homes available to buy in the 1970’s.
NAR indicated that the supply of homes for sale at the end of August came in at a total of 1.29M, down -1.5% from July and down -13.4% from August 2020.
These 1.29M homes represent a 2.6-month supply at the current pace of sales. A 2.6-month supply is one of the lowest supplies on record…a 6-month supply of housing units is considered a balanced market. A 6-month supply of housing units translates into building approximately 1.8M new housing units per year.
Analyst Believes Housing Market Now Overbuilt
Dennis McGill, director of research with Zelman & Associates, believes our country’s demographics do not support building more new homes. McGill said, “There is a downward trajectory of population growth, household formation as well, that’s really going to undermine the need for what’s built.”
McGill referred to the latest data from the Decennial Census from the US Census that indicates household formation is approximately -24% below household formation in the last four decades.
Ivy Zelman, McGill’s partner, believes the housing industry has already overbuilt the single-family sector by roughly 20% and 10% in the multi-family sector.
Homebuilders Disagree
Rob Dietz, chief economist with the National Association of Home Builders, doesn’t agree with Zelman or McGill.
Dietz said, “We need 800,000 to 900,000 single-family homes for household formation growth and another 200,000 to 300,000 per year for replacement housing and second homes.”
Wild Card is Sizzling Hot Single-Family Rental Market
Currently, investors are fueling demand for single-family rental homes. Why? Despite historically low interest rates, home price appreciation (roughly +18% y/y in August, according to CoreLogic, and roughly +19% according to the latest CoreLogic Case Shiller Dow Jones Home Price Index) has precluded many potential homebuyers from homeownership. Those potential buyers have simply exited the for-sale market and are renting single-family homes built essentially by investors.
But what happens if rental demand falls and those investors in single-family rentals choose to sell and cash out? Supply would then outpace demand.
Who’s “Right?”
There’s no way of knowing who is “right” about the number of housing units the country needs in order to meet demand. All we know now is that McGill had the last word about this issue, for now.
“You have homebuilders who bring supply, you now have single-family rental companies who are bringing a lot of supply…and you have multifamily developers bringing supply, so all three of those pieces have seen a very big step up in optimism on the development side…”
McGill speculated that if rental demand falls, then too much supply is “…going to be coming pretty aggressively,”
Thanks to CNBC.
