Realities of Real Estate: Is a housing shortage just around the corner?

Exactly one year ago, we speculated that there may be a housing shortage in the not too distant future. Last June we wrote:

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 281 million, so we’ve grown 10 percent in the last 10 years.

Some might think that as the baby boomers begin to die off, our population could actually decline; but 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.

Consequently, all those people are going to need somewhere to live. Here’s how that population growth, coupled with other 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 new housing units each years, just to stay even.

Second, when the housing bubble burst, new home construction was drastically reduced. The annual rate of new construction, in 2005 was around 2 million units. Today, the number of homes being built is about one quarter of what it used to be, falling by 75 percent to only 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 some 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 were built 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.

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.

Fast forward to June 2012, and we can indeed see the beginnings of what might be the initial stages of a housing shortage, as well as a transition out of what has been a buyer’s market for almost six years.

Although new housing construction has started to rebound, it’s still a far cry from the traditional levels needed to keep pace with our growing population. Furthermore, an increasing percentage of new construction is going toward multi-family units and other housing stock designed to meet high demand in the rental market.

The focus on rental construction could exacerbate a growing void in the supply of single family homes. As real estate agents, we see this lack of supply in terms of fewer homes available for sale.

In the area covered by our local multiple list system, which is much of the Mid-Atlantic, there are about 40,000 homes on the market. That represents a decline of over 25 percent versus what we had at this same time last year, and a drop of more than 50 percent against 2007 levels. Meanwhile, despite the recession, demand for housing in this area has remained relatively strong.

Another indicator of a pending housing shortage is the vacancy rate. In our June 2011 column, we noted that the housing vacancy rate was 2.6 percent. According to the Census Bureau, it has now fallen to 2.2 percent, the lowest level since 2006. As the economy improves and the job market picks up, renters will once again become homeowners, and those kids living in mom and dad’s basement will also make their way into the housing market. All of this will put further downward pressure on the vacancy rate.

And finally, we have a number of anecdotal observations that would indicate housing demand is starting to exceed supply. Buyers seem to sense that prices have bottomed out, and these record low interest rates aren’t going to last forever. As a result, well-priced homes sell quickly, and we’re even seeing more cases of multiple and full price offers.

Whether or not we really find ourselves in a housing shortage will most likely depend on how fast the economy recovers. Right now, the economy is limping along, seemingly in limbo.

Seeing the possibility of perfect storm just over the horizon, businesses, both big and small, are still sitting on the sidelines. Europe is still unwilling to deal with the financial realities that face them; and here at home, uncertainty abounds with the upcoming Supreme Court decision on health care and a Presidential election in November.

Additionally, we’re also about to be confronted with what’s being called “Taxmageddon.” In January 2013, the Bush tax cuts will expire. Simultaneously “sequestration,” or drastic cuts in government defense spending, will also take place. Most economists believe the combination could throw us back into recession.

As long as visibility down the road remains poor, the economy won’t be on the fast track to recovery. This should allow the housing market more of an opportunity to find the equilibrium point between supply and demand. Plus, new home builders will also have additional time to gear up as the need emerges.

Nevertheless, the supply of homes for sale is tight, and we expect it to stay tight for several months to come.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is [email protected].