U.S. Housing Shortage Drives Long-Term Market Demand for Homebuilders
A note from the editor: This blog post was planned before the COVID-19 health situation. Despite this new crisis, we decided the information is still important because the current housing supply and demand situation remains unchanged, and most likely will continue once we rebound from this public health crisis.
It’s a simple supply and demand equation—the current pace of building is inadequate to meet the growing residential and multifamily housing demand. The bright spot is that this seemingly alarming deficit is driving demand and creating a potentially positive market for homebuilders.
According to a Feb. 27, 2020, Freddie Mac report, indicators point to a shortage of 3.3 million homes in the U.S. housing market, a deficit that is a result of underbuilding, especially in states where strong economies have brought in residents from across the country, thereby stretching these burgeoning markets to their limits. Currently, more than half of all states are undersupplied to some level, with Oregon, Colorado, Florida and California having the highest number of deficits.
The shortage is rising by about 300,000 units a year and is spreading beyond high-cost coastal markets to include traditionally affordable states, such as Minnesota and Texas, which, surprisingly, have among the highest deficits in spite of an abundance of land.
While there are a number of factors that account for these missing units, including last decade’s housing crash and financial crisis, Sam Khater, Freddie Mac’s Chief Economist, argues the following as one main cause: “We are in the midst of a demographic tailwind, and we expect home purchase demand will remain strong well into the next decade as the peak cohorts of millennials turn thirty years of age in 2020 and beyond.”
Lawrence Yun, Chief Economist of the National Association of Realtors, offered his take on the challenge, recently stating, “It’s been a decade and we’re not back to normal in terms of home building. Many small-time builders are still out of the game. It was small-time builders in the aggregate that built many more homes than the big builders, and they’ve hesitated to get back in, even though it appears there is a money-making opportunity.”
Today, with relatively low mortgage rates and entire generation of aging millennials, demand is on the rise. And, although homebuilders put up 888,000 homes nationally in 2019, there still is a gap.
So, compounded with the ongoing scarcity of skilled labor in many markets, this housing shortage creates a real challenge…and real opportunities…for the residential construction industry.
Industry Challenges Drive Opportunity
Recent data from the National Association of Realtors (NAR) indicate “solid increases in single-family starts, still historically low interest rates, and high buyer demand [that] point to healthy sales of new-home construction.”
Freddie Mac also reports some positive news: Permits for new houses were at a 12-year high in January 2020, indicating that builders are starting to pick up the pace. Additionally, Fannie Mae forecasts that in 2020, single-family housing starts are likely to rise to a 13-year high of 981,000 from 888,000 in 2019, and in 2021it could rise to one million.
Although labor and supply issues continue to be an issue for U.S. homebuilders, NAHB Chief Economist Robert Dietz indicated recently that the steady rise in single-family construction will continue into the coming year, although a shortage of available lots and labor remains a challenge.
Additionally, NAHB Chairman Greg Ugalde has stated that construction growth is likely to come in the months to come, noting, “low interest rates and a healthy labor market combined with a need for additional inventory is setting the stage for further home building gains in 2020.”
Freddie Mac predicts, too, that the growth in the multifamily market “should remain healthy through 2020 but with expected higher levels of new supply, rent growth will moderate and vacancy rates are expected to increase modestly. …Given the nationwide undersupply of housing and an economy that is projected to maintain positive growth, we do not see any short-term obstacles that would cause a significant downturn in the multifamily market.”
U.S. homebuilders, in fact, appear to be on a confidence high…more than have been seen in the last two decades, according to new data form the National Association of Home Builders/Wells Fargo Housing Market Index, which shows the national Housing Market Index (HMI) for newly built, single-family homes at 74 in February 2020, up 12 points from a year ago.
The overall takeaway for the industry is, in spite of the ups and downs…and remaining challenges, confidence levels are trending high for the homebuilding market. There is tremendous potential for homebuilders willing and able to get into the game, and that message seems to be getting through.