WIll the Housing Shortage Continue for Long?

Since early spring, home prices have been rising at a double-digit rate.  Why?  According to Lawrence Yun, chief economist for the NAR, the reason lies in that basic economic principle: "increasing demand and tight supply."

With the economy improving, it is not surprising that there is a rise in housing demand, especially following a five-year period where new households were being formed at less than half of the normal rate (college graduates moving back home with mom and dad, young professionals getting roommates, etc.)  Since the six million new job additions in 2012-13, this number has seen a rapid rebound.  Yun anticipates this continuing for several years, ultimately at least returning to the historic average of 1 to 1.1 additions of new households per year, if not surpassing this figure.

The catch is, naturally, supply.  Yun provides a few possible scenarios where inventory increase could be suggested.  The first coincides with underwater homeowners being able to sell due to rising prices, thus adding to supply.  While this scenario may provide a new property on the market, these homeowners typically have an intent to move and buy another home, not to sell to become a renter.  Selling a home, and buying another, results in a zero sum inventory gain.
But what about "accidental" landlords? (Underwater homeowners who intended to move, but could not sell the original home, choosing to rent instead).  Yun does not imagine this scenario will add much supply.  Pure investors could provide fresh supply by selling their properties to take advantage of the higher market, but there is a high strength in rental yields in the current market - not likely that a mass dumping of properties will occur.

The most direct way, according to Yun, is "through new-home construction."  We saw historic lows with housing starts during the housing market crash, and so the initial decline was certainly warranted to compensate during the bubble years.

The conclusion?  According to Yun, we shouldn't expect any kind of housing inventory increase any time soon.

My estimate suggests we have already overcompensated and are facing a housing shortage to the tune of 900,000 million. That is, cumulatively from 2001 to 2012, there were 15.7 million housing starts, while household formation along with the need to replace demolished units created demand for 16.8 million units (2001 was chosen for the beginning year since it was a non-eventful and very normal year for the housing market). Furthermore, if household formation is 1 million in 2013 along with 300,000 demolished/uninhabitable units and 100,000 in new demand for vacation homes this year — a reasonable and conservative assumption — then it will take 1.4 million housing starts just to meet the new demand this year without solving the previously accumulated shortage. This year’s consensus economist forecast on housing starts estimate is around 1 to 1.1 million. Consequently, the housing shortage is likely to worsen, sustaining robust price growth through the end of 2013.

If you are looking to buy in this low-inventory market, the key is preparation. 

First, be clear about what you're looking for - do your research - a Realtor can help. When it does arrive on the market, be prepared to quickly and definitively make a competitive offer.  Working with a knowledgeable agent in this instance is invaluable and will help you attain the property you're looking for.  Give me a call or send me an e-mail and we can assess your situation.