A recently-released report by the National Association of Realtors estimates that the U.S. residential housing market supply is currently short by 5.5 million units. If this estimate is accurate, would-be home buyers and renters could potentially expect this challenging environment to continue for some time. As reported in the Wall Street Journal, “Construction of new housing in the past 20 years fell 5.5 million units short of long-term historical levels. The 5.5 million-unit deficit includes about two million single-family homes, 1.1 million units in buildings with two to four units, and 2.4 million units in buildings of at least five units.”
As we have discussed in the past, the U.S. residential housing market is undergoing a significant boom and an historical supply/demand mismatch. Emerging from the housing recession of 2008/2009, many large homebuilders severely cut back on new home construction. As reported in the Journal, “The report also says that from 2010 to 2020, new-home construction fell 6.8 million units short of what was needed to meet household-formation growth and replace units that were aging or destroyed by natural disasters.”
This decrease in new construction was understandable in 2010 as consumers emerged from the housing crisis and demand for homes fell. However, in the past several years, the supply/demand dynamic has changed considerably. One of the biggest changes is that millennials began entering the home buying market in large numbers. This group had most likely delayed purchasing a home coming out of the 2008/2009 crisis. However, only a few short years later, that group demographic accelerated family formation and home purchase activities. In addition, during the pandemic, many consumers altered their home buying behavior. Homeowners made the decision to remain longer in their homes, opting to remodel rather than move.
These factors, along with lower levels of new construction have created an extremely unbalanced market – a massive under-supply of new and existing homes for sale, soaring home prices, surging home construction material costs, and a short supply of labor for the construction industry. However, it is not just homes that are in short supply. Every factor input in the home construction industry is being strained. From the article, “More than 90% of home builders surveyed by the National Association of Home Builders in May reported shortages of appliances and framing lumber.”
As the industry challenges continue to pile up, home and rental prices continue to climb nationwide. As stated in the article, “Limited supply has been a recent driver of rising housing prices for renters and home buyers, alongside robust demand. The median existing-home price rose 19% from a year earlier to $341,600 in April, a record high, according to NAR.” It is doubtful that these challenges can be mitigated quickly.
The good news is that increasing home prices have been a positive financial boost to many families. In addition, this boost has come during a time of great financial, social, and health uncertainty. In other words, households across the country received a financial lift exactly when they needed it most. As we have discussed before, the health of the residential housing market is intimately tied to industries that span the entire U.S. economy. A strong residential housing market has historically translated into confident consumers and a robust economy.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.