If you’d suggest to people that we’re headed for a housing shortage in the United States, they’d likely think you’re on another planet. Most folks would point to all the homes on the market and a healthy inventory of foreclosed properties owned by the banks. It would be hard to imagine that we’re on the cusp of a housing shortfall.
Well, as full-time real estate agents for many years, as well as agents who do a considerable amount of research to produce this column, we are becoming increasingly convinced that a housing shortage is a real possibility, and it might be here faster than you think.
What most people fail to recognize is that our population is constantly growing. Right now, the United States has about 310 million people. We’re the third-largest population in the world, behind China and India. In the 2000 Census, the U.S. population was around 281 million, so we’ve grown 10 percent in the last 10 years.
Furthermore, some might think that as the baby boomers begin to die off, our population could actually decline. That’s not true; our population will continue to grow, albeit at a somewhat slower pace. It is estimated that by 2030, we’ll be up to 364 million people, and by 2043, the number of Americans will push over the 400 million mark.
All those people are going to need somewhere to live. Here’s how that population growth, coupled with other prevailing factors in the housing market, might lead to a housing shortage by mid-2012:
First, our growing population translates into a need for about 1.2 million additional homes each year. On top of that, the nation loses about 300,000 houses annually due to decay and demolition. So, if you add together the need for replacement homes and the housing stock that’s required by new household formation, we must build approximately 1.5 million housing units each year just to stay even.
Second, when the housing bubble burst, new home construction was drastically reduced. In 2005, the annual rate of new construction was around 2 million units. Today, the number of homes being built is about one-quarter of what it used to be — about 500,000 units per year.
Plus, the reduced rate of new construction has remained at those low levels for the past 2½ years. So, if you’re only building 500,000 houses a year, for a growing nation that needs 1.5 million, you’re eventually going to run short.
However, there are other conditions that have enabled us to cover the country’s housing needs, even though the amount of new construction has been lagging.
While the housing market was booming, new construction really ramped up, creating an excess of supply. Right now the existing housing stock has a 2.6 percent vacancy rate. Under normal market conditions, the expected vacancy rate would be around 2.0 percent. But we aren’t in a situation that one could call normal.
A lot of homes got built out there in 2005 and 2006, plus we’re coming off one of the most severe recessions since the Great Depression. That combination has created an excess of supply. Slowly but surely, we’re chewing through that additional inventory. At the current rate of sale, and with the lower than normal levels of new construction, it’s expected that we’ll be back to a typical and more sustainable vacancy rate of 2.0 percent sometime in mid-2012.
Third, there are other important factors that could have an impact on the degree to which a housing shortage may materialize. Chief among them is the overall state of the economy. If the economy starts to take off, new construction might lag a bit and have difficulty filling in the void between a higher demand for housing and the available housing stock. Plus, due to a lack of jobs, there are a lot of highly educated young men and women who have graduated but are now living at mom and dad’s house.
It’s nice to have some family time, but that arrangement can quickly become tiresome. In that housing affordability is near an all-time high, these kids will fly the coop the minute a job affords them their independence. Some will start off as renters; others will make the leap to home ownership. Regardless, there will be a backlog of new household formations that could suddenly hit the market, as the economy begins to regain its footing.
Another variable affecting the demand for real estate is the degree to which banks start to loosen up on lending. We obviously don’t want to go back to the days when you could get a loan on a wing and a prayer, but neither do we want to continue with the “enhanced body pat-down” that seemingly has become part of the process to obtain a mortgage.
Last month, we had a client who was putting 50 percent down on the purchase of a house, plus she had an 800 credit score. Even with the extremely low-risk scenario such a buyer presents, Bank of America did just about everything except take DNA samples before approving her loan.
We understand a lender’s need to mitigate the large number of bad loans they have recently experienced, but it seems as though we have yet to achieve a balance between sensible qualification standards and an end result that will provide for a reasonable degree of risk.
We once wrote a column called, “The herding effect in home sales.” In that piece, we noted how the transition from a seller’s market to a buyer’s market can happen much more suddenly than you might expect. Once the lead in a herd changes direction, the rest of the pack is quick to follow suit.
That being said, the recent severity of changes in the housing market will make people cautious. As a result, the inevitable change back to a seller’s market will most likely be gradual.
However, if we have the combination of low mortgage rates, easier lending, a rebound in the economy and some degree of scarcity in the available housing stock, buyers could suddenly wake up one day and find they are no longer in the driver’s seat.
Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is McWilliams@BobDonna.com.