I just saw an article on CNBC with the headline: America is short 5 million houses.  The media is proclaiming a housing crisis throughout the country due to the shortage.  Ironically at the same time the US has hit a record for the slowest population growth in the last 100 years.  Is there really even a shortage of houses?  Is the shortage driving housing keeping house prices high?  Will they continue to rise?

Is there really a shortage of houses?

According to new research from Realtor.com, the U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million.  At the same time, according to the US census bureau , population grew just .1%, the slowest rate since the founding of the United States.  Furthermore, slower population growth has been a trend in the United States for several years, the result of decreasing fertility and net international migration, combined with increasing mortality due to an aging population.

In other words, since the mid-2010’s, births and net international migration have been declining at the same time deaths have been increasing. The collective impact of these trends is slower population growth.  If there are less people from births and migration, how is there a shortage of houses?

What is causing the “shortage of houses”?

With population growth slowing to the lowest in history, I am going to go out on a limb and say there isn’t an actual shortage of houses in most markets, there are other factors at play causing a so called “shortage”.

  • Wrong price points: Let’s look at a city like Denver, there is huge demand to be in Denver, but prices are now falling. If there were a shortage as noted in the various studies, then inventory would not be increasing and prices would not be resetting which means there is a mismatch in prices.  Affordable houses are rare in locations like Denver with a median home price around 600k which is well out of reach for most buyers.
  • Mismatch of housing types/locations: Just as in past cycles there is a desire to be in “trendy” markets like Miami, Denver, Atlanta, etc…  so demand in these markets is off the charts, at the same time, there are plenty of houses available in places like Detroit (here are 18 markets where inventory is growing).  Even with a work from home revolution, there is a continued conglomeration in hot markets that has caused an acute shortage in particular markets due to growth.
  • Rental/second homes: Investors have snapped up rental and second homes at an unprecedented pace. Historically in Washington 12% of homes were bought by investors, that number has more than double to over 25%.  In parts of Atlanta, the number has soared over 30%.  This is due to the prior rock bottom low interest rates, if you can borrower at 2 or 3 percent and use leverage to buy a house, your return on investment is astounding.

 

 

 

 

There is not really a shortage of houses.

A new university of Kansas study sheds light on the so called housing shortage:

 

““There is a commonly held belief that the United States has a shortage of housing. This can be found in popular and academic literature and from the housing industry,” McClure said. “But the data shows that the majority of American markets have adequate supplies of housing available. Unfortunately, not enough of it is affordable, especially for low-income and very low-income families and individuals.”

The numbers showed that from 2010 to 2020, household formation did exceed the number of homes available. However, there was a large surplus of housing produced in the previous decade. In fact, from 2000 to 2020, housing production exceeded the growth of households by 3.3 million units. The surplus from 2000 to 2010 more than offset the shortages from 2010 to 2020.

The numbers also showed that nearly all metropolitan areas have sufficient units for owner occupancy. But nearly all have shortages of rental units affordable to the very low-income renter households.”

 

Will the housing shortage correct itself?

The housing “shortage” will correct itself as it is not built on population growth and “real” demand.  The recent shortage is built on low interest rates, a mismatch of locations, and the “affordability” gap.  Below are four factors that will quickly correct the so-called shortage.

 

  • Interest Have risen: As rates have risen close to 7% the sales volume has declined precipitously. Eventually as rates stay high and inventory increases there will be a reset in prices.
  • Investor activity wanes: As rates have risen, the return on investment for investors will not work.  With high prices the return is well below the 10-year treasury as rents have not climbed enough to offset the run up in rates.  Investors will not reenter the market unless there is a large drop in prices and/or interest rates which would enable a positive return on investment
  • Recession will occur: Historically when the federal reserve raises rates this is an indication of an oncoming recession.  Over 90% of the time, the fed is unable to engineer a soft landing.  Our current inflationary environment makes this task even harder, and I am certain that the federal reserve will be forced to cause a recession to get control of inflation as they totally missed the boat and should have tapered the easy monetary policy a while back.
  • Labor market normalizes: Historically when there is a recession you get a “normalization” of the labor market where wages do not continue to increase as rapidly as they are, and companies focus on profits and expenses.  As labor demand cools companies will normalize their policies and not pay an engineer a bay area salary to live in Denver.  This will further slow the real estate market.

 

Will this shortage of houses continue to drive real estate prices higher?

It is important to separate short term and long-term trends with the so called housing shortage.

  • Short Term: prices will continue to rise albeit at a slower pace than the past two years due to the mismatch in the real estate market and still historically low interest rates. I don’t see this lasting beyond 2024
  • Long term: Rates will remain high, an economic correction will occur, and the real estate market will “normalize”.  With no real shortage of houses, the only direction for house prices is down.

 

Summary

The study authors reiterate “When looking at the number of housing units available, it becomes clear there is no overall shortage of housing units available.”  There is currently a mismatch in the real estate market caused by ultra-low rates and a mismatch of locations and prices points.

Whenever there is a major economic mismatch, it creates arbitrage opportunities which ultimately lead to a correction.  The factors above are no different and  will correct over the next year or so as rates remain high, the labor market continues to normalize, and the mismatch in prices vs rents returns to historical trends.

Do not buy the hype that there is a shortage of houses that will keep prices high as there is no overall shortage, merely mismatches.  The theory of shortages keeping prices high indefinitely will quickly unravel when there is an economic hiccup.  The only outstanding questions are when this will occur and how much prices will drop.

 

Additional Reading/Resources

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.  To get started on a loan all we need is our simple one page application (no upfront fees or other games).

 

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