The National Home Shortage
According to a report by Freddie Mac, America’s national home supply will meet the current demand only if the U.S. adds 3.8 million new homes. How bad is the shortage? Compared to 2018, for example, the current housing deficit now is a full 52% greater. The supply of entry level homes is even worse, making it very difficult for first time buyers to enter the market.
These statistics help explain the red-hot housing market across most of the U.S. America’s housing market reached a median price of $329,100 in March, a new all time high according to the National Association of Realtors (NAR). Nationally, prices this past March skyrocketed 17.2% compared to March of last year.
The Covid pandemic kept many buyers out of the market for a year either for fear of catching the virus or not knowing if their jobs would return. But with the virus abating and the improving economy, most folks no longer have the same fear level of either the pandemic or job security. But, still, those soaring home prices are keeping some buyers on the sidelines.
According to The Wall Street Journal (WSJ), “The supply shortage poses an obstacle to U.S. economic growth, by pushing up housing prices and making it difficult for first time buyers to enter the market and build wealth.”
Another reason for the housing supply shortage is that home building activity has eased since the Great Recession of 2007/08, as many builders went out of business during that period. Additionally, builders are hampered by the labor shortage and a steep price rise in certain commodities such as lumber.
On the bright side, single-family housing starts rose last year to 991,000. This represents the most housing starts since 2007 but starts fell in January and February as construction costs rose.
Rob Dietz, chief economist at the at The National Association of Homebuilders stated, “Builders would need to construct between 1.1 and 1.2 million single-family homes a year to meet long term demand, but the start rate would need to be even higher to shrink the existing deficit.”
During a recession, housing demand declines and supply increases. But the effect of the pandemic has changed all the normal rules, as it has actually spurred demand. One reason for this is that higher income households who were able to work from home wanted more space. Also, during the pandemic, as home buying slowed, some people, nevertheless, needed to downsize (empty nesters), while others needed to upsize (children). Many of these families delayed those moves for the reasons outlined above. The pent-up demand is now manifesting itself as existing homes do not meet the current demand. Hence, house prices are rising sharply, as buyers, flooding the market, compete for the diminished number of homes for sale. In February, for example, there was only a two-month supply of homes for sale, close to a record low according to the NAR.
Shopping activity increased again in March. Across the country, there were more than 10 home showings on average per active listing.
Hopefully, in the near term, builders will fill the home buying needs, and the housing supply will meet the strong demand which should serve to stabilize the residential real estate market.