A recently published data study by Realtor.com found that the gap between single-family home constructions and household formations hemorrhaged from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021. And this is not a situation that can be solely blamed on the disruptions created by the COVID-19 pandemic.
“The pandemic has certainly exacerbated the U.S. housing shortage, but data shows household formations outpaced new construction long before COVID,” said Danielle Hale, chief economist at Realtor.com, which is operated by News Corp (NASDAQ: NWSA) subsidiary Move Inc. “Put simply, new construction supply hasn’t been meeting demand over the last five years,”
In an exclusive interview with Benzinga, Hale highlighted the current state of the housing market’s inventory shortage and offered insight on whether this situation can be successfully addressed in the near future.
Q: At the risk of asking the most elementary question imaginable, why do we have such a large shortage of new homes?
Hale: That is a great question and I think that is one of the most difficult questions to answer.
Part of the answer is it has taken us nearly a decade to get to this point. We have seen homebuilding lagging behind household formation over the last 10 years. In many ways, the real estate market recovered and construction is included with that. We have seen an increase in single-family home construction.
But it just hasn’t been enough of an increase to keep up the pace of household formation. If you look at the demographic curve of the United States, you’ll find that we have a lot of young people ages 22 to 30, or even 33. At this point of the age range, it’s the back half of the millennial generation and it’s very large.
So, we have a lot of young people that are ages where they’re typically forming their own household, either moving out on their own or settling down getting married. We have larger than normal household formation combined with slower than normal construction, and that has put us over the last decade into the point where we are about 5.2 million homes short.
Q: What conditions are exacerbating this shortage?
Hale: Builders are grappling with a lot of challenges: the availability of land that’s ready to build on for homes and the labor shortage, which has been ongoing for builders for the last decade or so and is likely only worsened by the broader economic labor challenges that employers of all kinds are facing right now and even before the most recent surge in prices for materials like lumber, other costs are rising. That’s only made it more challenging for builders to build homes that are at a price point that buyers, particularly the entry-level buyers who make up that large group of young households is looking to buy, can afford.
Q: Realtor.com’s research showed that the greatest shares of nationwide home starts in the first half of 2021 were in the South and the West. What is the advantage in those regions compared to other parts of the country?
Hale: Land is more abundant in the South and the West, and that’s one thing that makes it easier for builders to build a new subdivision at a scale much more effectively than trying to do teardowns and infill, which is what we see in a lot of cities in the Northeast. On top of that, zoning regulations and the amount of time it takes for the permit application process to be completed and approved. Those are all challenges that can make it easier or harder for builders to build in an area.
Q: Is it safe to assume that the majority of the new homes being built are not really among the more affordable homeownership options for entry-level buyers?
Hale: Yes. In fact, only 32%, just less than one-third of new homes, sold for less than $300,000 in the first half of 2021. And that was down from over 40% in 2018.
We have seen fewer homes fall into that lower entry-level price category, and that does create challenges for buyers, particularly first-time buyers who are usually not coming into the market with any equity because they generally don’t own a home; they also tend to be younger and their incomes tend to be lower, so they’re very price and budget sensitive.
For those types of households, we tend to see them often in buying existing homes, since builders have not focused on starter homes as much given all the challenges they’re facing on the various costs that we talked about.
Q: If we’re able to get more homes on the market, is that going to bring down the record-breaking home prices that we’ve seen over the past couple of years?
Hale: We have very few homes available for sale and that’s one of the reasons that we’re seeing such rapid increase in home prices. At the same time, I think there’s substantial demand sitting on the sidelines, buyers who have been searching and searching and searching and can’t find what they’re looking for. Even if we see more houses come up for sale, I don’t think we’ll see prices soften because there are plenty of buyers out there just waiting for their opportunity.
Q: If we were to have this conversation again at this time next year, where would you see the state of the housing inventory?
Hale: I think that we will see somewhat more homes available for sale. We do know the economy is normalizing. Sellers are getting more comfortable putting their homes up for sale, builders are continuing to deal with material shortages and supply chain issues.
I think we’ll see home construction continue to stay at the higher end of the range, which will be good because it means we’ll make some headway against the shortage. But I think we’re not going to make enough headway and that we’ll be very far away from that 5.2 million gap that we have right now.
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