There are many reasons why real estate values have ballooned over the past decade. Favorable demographics, monetary policy (low interest rates), economic stimulus, and migration patterns, to name a few.
But one of the most powerful and persistent variables driving prices up over the past decade has been the scarcity of housing units. Estimates vary depending on the size of this shortage, but typically range from about 1.5 million to 7 million units.and According to Realtor.comthe shortage is actually getting worse.
look back
To truly understand the housing shortage, we need to look back at the lead-up to the Great Financial Crisis and its aftermath.
As seen in the graph, housing starts (new housing starts) accelerated during the housing bubble period from 2000 to 2007, but then rapidly fell off a cliff. Home construction bottomed out in 2009, but it took until 2020 for construction levels to return to “normal” 1990s levels.
There are several reasons why this recovery has been so slow, but the main one is that the housing price crash caused many construction companies to close shop, and it takes time for the industry to recover from such an event. This is because it takes a while.
Of course, construction continued during this recovery period, with an estimated 13.4 million homes built from 2012 to 2023, according to Realtor.com. Of those, 9.5 million were single-family homes and 3.9 million were residential homes. multifamily unit. This may sound like a lot of units, but this number must be considered in light of the growing demand.
In the housing market, the best way to measure macro-level demand is using an indicator called household formation. A household in this context refers to an independent individual or group of people living alone.
Therefore, families living together are households. A household is a group of unrelated roommates living together. They are both individuals living alone and households. Therefore, to understand how housing demand is changing, we need to look at how many new households are being formed (or dissolved).
From 2012 to 2023, 17.2 million households were formed. According to Realtor.com research, this means that even though 13.4 million homes were built, there was a deficit of nearly 3.8 million homes.
If we zoom in on just the last year, we can see that this problem hasn’t gotten any better. In 2023, 1.5 million homes were completed, but 1.7 million households were formed, increasing the deficit by 200,000 homes.
Impact of trends
This has major implications for investors and the broader housing market. The housing shortage will put sustained upward pressure on the housing market. housing prices. This seems obvious to me, but I would like to offer two caveats.
First, as mentioned earlier, there are many variables that affect the housing market, and housing supply is just one of them. I believe that supply-side forces will support home prices for years (decades?) to come, but that doesn’t mean home prices won’t fall, nor does it mean home prices will grow rapidly. . Other forces in the housing market include: affordable price Alternatively, downward pressure on the labor market could offset the effects of the supply shortage.
Second, as with all real estate, the impact of this trend will be regional. Some markets have sufficient supply or even excess supply, but most markets have no supply. Realtors say 73 of the top 100 markets are facing deficits, with some high-growth markets in Texas and Florida facing the biggest shortfalls.
So keep in mind that this trend won’t feel the same everywhere. We encourage investors to research the relationship between home construction and household formation in the markets in which they invest. Understanding supply dynamics is critical.
Once that’s done analysislet me know what you found in the comments below.
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Note by BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.
