Housing supply

The Great Housing Shortage Is Not Going Away

Assuming the housing market had a balanced supply of housing relative to demand in 2000 (no deficit or surplus), we can track the excess or shortage of housing supply relative to demand cumulatively over time with gray bars. While we overbuilt relative to demand in the housing boom as household formation slowed, we have underbuilt since 2008. Since 2018, the housing supply deficit has widened.

The pandemic may have slowed household formation in 2020, but the pre-pandemic trend was upward in household formation. And, if we project the total amount of housing construction for 2021-2023 at the 2020 rate and use recent projections that annual household formation will be around 850,000 (slower than before the pandemic), then the housing shortage is here to stay. According to this analysis, while it is true that there has been less household formation over the past decade, there has been even less house construction.

What about existing homes?

The majority of the supply of homes for sale is from existing homes, not new construction. Still, many existing owners withdrew the offer for fear of finding anything to buy. The result was that the average length of time a person will live in their home has hit an all-time high of 10.7 years, meaning there are fewer homes on the market as fewer homeowners sell their homes. Additionally, while increased equity may entice some existing homeowners to relocate and move up in 2022, many homeowners have been able to refinance at rock bottom mortgage rates during the pandemic. As mortgage rates rise, it costs more to borrow the same amount of money, so an increase in mortgage rates can leave existing homeowners feeling “locked in,” deterring them from selling their homes.

You can’t buy what isn’t for sale

It’s not all bad news, however. Homebuilders have a lot of backlogs that they haven’t completed and put on the market due to supply chain disruptions. If supply chain issues ease, these new homes will hit the market and provide some relief in supply, but the current acute supply shortage will be difficult to resolve. It will take years of accelerated construction of new homes to close the gap of a decade of underconstruction. Millennials will continue to age into their prime home-buying years in 2022, but they will face limited inventory, which will continue to put upward pressure on prices. Although the price acceleration may slow as some buyers pull out of the market due to declining affordability, the imbalance between supply and demand means house prices remain poised to rise further. In short, the housing shortage is here to stay, so we can expect housing prices to remain high in 2022.