Housing Shortage! Really?
And you’re thinking, “Has he lost his mind?” While that’s certainly debatable, the fact is it’s hard to imagine that in just a few years a housing shortage could be upon us.
After all, drive down virtually any street, in any town, USA, and there are homes for sale. In many communities, realtor lawn signs are as plentiful as mailboxes. Early last year, Sussex County had close to a five year supply of available homes. Nationwide, it would take just over one year to sell all of the homes currently listed for sale (12.5 months available housing inventory, July, 2010).
Add the flood of foreclosures from recent years and talk of a housing shortage again gets lost in the mix. And why shouldn’t it? According to the U.S. Census Bureau, as many as 7 million homes are sitting vacant, many of which aren’t even listed for sale. This will provide cushion for a few years, but the problem is that many of those homes are either so undesirable, or in such oppressed areas that they may never be inhabited again.
Despite this, economists, in growing numbers, are talking more and more about the likelihood of a legitimate housing shortage that has the potential to cause another, albeit very different, housing crisis. Consensus says it’s not likely to occur until the market moves in virtually the opposite direction from where it is now. For most, however, it’s no longer a question of if, it’s a question of when.
Here’s the argument. When the housing market crashed, it took the rest of the economy with it. Banks made it harder to get loans, buyers stopped buying, and builders stopped building. Not completely, but you get the point.
Consequently, for at least the last two years, the U.S. has not built nearly enough homes to keep up with future demand. Given population demographics, the Census Bureau estimates that approximately 1.3 to 1.4 million new homes are needed each year to sustain the growing population at existing levels.
In 2005, at the peak of the housing bubble, almost 2.1 million new homes were built. As the market turned, the number dropped to 1.81 million in 2006 and has continued on a downward trend ever since. Last year, only 550,000 new homes were constructed. Year-to-date, the annualized rate of new home construction is now in the neighborhood of 650,000, approximately half of what’s needed to meet the lower end of expected demand.
Thus far, the housing shortfall has been shrouded by a weak economy that’s hindered home buying. Fortunately, the household formation rate (technical term for people moving in together) has also fallen the past few years, thanks to the recession, with only 398,000 new households formed in 2009. This has helped, and will continue to help, prolong the pending shortage.
It’s important to note that between 2002 and 2006, over 1.3 million households were formed each year, causing demand for 1.5 million new homes (more homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect).
But the household formation numbers are misleading. Many college grads, who’ve not been able to find jobs, have had to move back home out of financial necessity. And they’re not alone. People from all walks of life are finding it necessary to double-up, and live in conditions they’d never expected until the emergence of this economic crisis.
A major factor that will impact the shortage is the staggering number of homebuilders who’ve left the industry during the downturn. As time passes and inventories dwindle, there is a real possibility of capacity constraints on the industry.
Ordinarily, the nation’s homebuilders have been able to react quickly to meet surges in demand. But several factors are expected to prevent them from doing so as the market recovers this time around. The biggest is the difficulty in getting loans. According to Jerry Howard, CEO of the National Association of Home Builders (NAHB), “When we came out of past recessions, there wasn’t the difficulty of obtaining financing that there is now,” he said.
Many small builders have been unable to obtain loans or have lost their financing mid-project and haven’t been able to complete construction. In turn, that has caused builders to postpone purchases of land they could’ve prepped for future development. Consequently, it will take them that much longer to prepare for production once the housing market improves.
At that point, there will be far fewer companies to do the building and the survivors will confront a vastly different landscape, with loans harder to get and a transformed regulatory environment that will likely make new homes harder to build and more expensive for home purchasers.
On top of that, when the job market rebounds, people will once again start looking to the “American dream” of home ownership. But pent-up demand from several years of housing deprivation could wreak havoc on the industry. It seems rather obvious that if a smaller number of builders are building dramatically less homes, eventually we’ll run out of supply, causing prices to increase. Here we go again. Remember Economics 101?
The good news, and we could use it, is that no one is really expecting, nor planning for, a housing shortage in the immediate future. But a proactive conversation never hurts. For now at least, let’s just focus on getting out of the mess we’re in. Cheers!
Chris can be reached at email@example.com.