US Housing Market Supply 3.8 Million Homes Short of Demand
GSE mortgage giant Freddie Mac began warning about an impending housing supply shortage in December 2018. FreddieMac’s research indicated that construction in the US housing market had not yet recovered from the 2008 subprime mortgage crisis and subsequent recession. At that time in 2018, Freddie claimed the US housing market was 2.5 million homes short of satisfying demand. Now Freddie Mac’s research says the shortfall in housing supply has only gotten worse since 2018 and the shortage has now reached 3.8 million homes. And it’s still getting worse.
With just over $2.06 trillion is housing-related assets, Government Sponsored Enterprise (GSE) Freddie Mac continually researches and reports on every nuance of the housing market
According to Freddie Mac’s housing market research, the US housing market is coming up 3.8 million homes short of meeting the demand for single-family homes. The shortage in housing supply has grown significantly in the past 2 years as builders have failed to keep up with buyer demand.
Freddie Mac began sounding alarm bells in 2018 when they estimated that the US housing market was 2.5 million units short of meeting long-term demand, a market condition that disproportionally impacts low to moderate-income homebuyers and renters hoping to become homeowners. Continuing research indicates that the housing shortage had increased to 3.8 million units by the end of 2020.
Freddie indicated that a continuing increase in a housing shortage is extremely unusual. Typically, in a recession, housing demand declines, and supply rises, causing inventory to rise above the long-term trend. That would begin to correct the imbalance in the marketplace. However, the shortage has not only persisted, it is increasing.
Generational Decline In Entry Level Construction
It’s a simple case of supply and demand. The housing shortfall is being driven by a long-term decline in the construction of single-family homes, which Freddie Mac documented in two research reports: The Housing Supply Shortage: State of the States and The Major Challenge of US Housing Supply. That decline in construction has resulted in a decrease in the supply of entry-level single-family homes.
In the late 70s, the construction of entry-level homes averaged 418,000 units per year. Rising mortgage rates pushed the construction of entry-level housing down in the 1980s by more than 100,000 units to 314,000. A surge in demand for single-family construction reached a 20-year high by 1999. However, while new construction was high, entry-level supply continued to decline, dropping to 207,000 units a year during the 1990s.
During the 2000s there was a substantial rise in new housing supply as new subprime and Alt-A mortgage products led to record demand. Despite the concurrent rise in single-family construction, entry-level supply continued to decline to 150,000 units a year. Since 2010 construction of entry-level homes decreased further, averaging only 55,000 units per year. In 2020, there were 65,000 entry-level homes completed. In the last fifty years, entry-level construction fell from 418,000 units per year to 65,000 in 2020.
In short, the construction of single-family homes for first-time buyers, which had averaged 418,000 units per year in the 1970s has declined to an average of 55,000 units per year today. What I can’t understand is how anyone who is even tangentially involved in the home building business can be surprised by this shortage.
At the most fundamental level, there were 65,000 homes built in 2020 for first-time buyers, and 2.38 million first-time buyers purchased homes. The tremendous gap between entry-level supply and demand will continue to widen.
ADDITIONAL DATA NOT YET QUANTIFIED BY FREDDIE MAC
The US housing market never fully recovered from the massive downturn triggered by the Subprime mortgage crisis in 2008. Housing starts fell to 554,000 units in 2009, rebounded to 1.379 million units in 2020, and is still 10% lower than housing starts in 1959.
At the same time, more adult children moved back home with their parents than ever before in history, and the problem was further aggravated by Covid lockdowns.
As those millions of adult children leave their parent’s homes they will be entering a housing market where the supply is already 3.8 million homes short of demand. It’s conceivable that that presently unquantified demand could double the current shortfall. Whatever that surge in the shortfall ends up being I shan’t venture an estimate. It is, however, a mortal lock that no one has figured out where we’ll come up with an extra 5 million houses.
