Realities of Real Estate: Housing shortage knocking at door

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In June 2011, we wrote a column titled, “Are we headed for a housing shortage?” One year later, in June 2012, we sounded the bell again, with a column called, “Is a housing shortage just around the corner?” Now that we’re closing in on June 2013, it looks like that housing shortage is at the doorstep.

Back in that 2011 article, we laid the foundation for what appeared to be the basis of an impending shortage. We noted how population figures, showing the United States with 310 million people in 2010, was heading to 364 million in 2030. In order to keep up with enough housing, we need to have a net gain of 1.5 million housing units per year.

However, the construction of new homes slowed dramatically after the housing bubble burst. We wrote two years ago:

“The annual rate of new construction, in 2005, was about 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.”

We pointed out that other factors have affected any possible housing shortage, however. The boom in building while the bubble was expanding left us with an excess supply, as did the economic slowdown affecting home buying. We also wrote:

“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.”

Recently, the National Association of Realtors affirmed what we saw on the horizon when it said: “A sellers’ market is developing in real estate as home sales and prices continue to rise steadily across the nation.” As further evidence, the number of homes sold hit a three-year high in February. What’s pushing prices up is the collision of a dramatic decline in inventory coupled with increased demand. In the mid-Atlantic region, the number of homes available for sale is at an 11-year low, and a national poll of real estate agents showed that 75 percent believe housing supply is inadequate to meet demand. In the Washington area, we would venture to guess that 100 percent of agents think listing inventory is too low.

Predictably, new home building is surging in an attempt to pick up the slack. According to the U.S. Department of Housing and Urban Development, January 2013 new home sales were 15.6 percent above December 2012 and 28.9 percent ahead of year ago. But ramping up new construction isn’t like just turning on the spigot. In many parts of the country (especially around here), the permitting process is long and laborious, and raw material suppliers can be equally slow in trying to catch up. For example, The Wall Street Journal says plywood prices have jumped by 45 percent in just the past year. To some extent, the turn in real estate has left many important suppliers to the housing industry flat-footed. In that same WSJ article, it notes: “Georgia-Pacific, the largest U.S. producer of plywood, will announce Friday it plans to invest about $400 million over the next three years to boost softwood plywood and lumber capacity by 20 percent.” Unfortunately, the demand is here now, and building new plywood plants isn’t something you do overnight.

In sum, builders, their suppliers and existing home sellers got burned plenty when the real estate bubble burst. So, they’re not eager to come rushing in at the first sign of life in the housing market. The result will be a temporary lag in supply meeting demand, something that’s typical of any industry that’s turning toward improvement. Nevertheless, the herding effect will soon take hold, and everyone will soon be in unison and running in a new direction.

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].