I just saw an article on CNBC with the headline: America is short 5 million houses and the media is proclaiming a housing crisis throughout the country due to a historic shortage. Ironically at the same time the US has hit a record for the slowest population growth in history (net migration and births plummeted). Is there really even a shortage of houses? Is the shortage driving housing prices through the roof? Will prices continue to rise due to the shortage?
Is there really a shortage of houses?
According to new research from Realtor.com, the U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million. At the same time, according to the US census bureau , population grew just .1%, the slowest rate since the founding of the United States. Furthermore, slower population growth has been a trend in the United States for several years, the result of decreasing fertility and a slow down of net international migration, combined with increasing mortality due to an aging population.
In other words, since the mid-2010’s, births and net international migration have been declining at the same time deaths have been increasing. The collective impact of these trends is slower population growth. If there are less people from births and migration, how is there a shortage of houses?
What is causing the “shortage of houses”?
With population growth slowing to the lowest in history, I am going to go out on a limb and say there isn’t an actual shortage of houses in most markets, there are other factors at play causing a so called “shortage”.
- Mismatch of housing types/locations: Just as in past cycles there is a desire to be in “trendy” markets like Miami, Denver, Atlanta, etc… so demand in these markets is off the charts, at the same time, there are plenty of houses available in places like Detroit (here are 18 markets where inventory is growing). Even with a work from home revolution, there is a continued conglomeration in hot markets that has caused an acute shortage in particular markets due to growth.
- Rental/second homes: Investors are snapping up rental and second homes at an unprecedented pace. Historically in Washington 12% of homes were bought by investors, that number has more than double to over 25%. In parts of Atlanta, the number has soared over 30%. This is due to rock bottom low interest rates, if you can borrower at 2 or 3 percent and use leverage to buy a house, your return on investment is astounding.
- Historically low rates encourage purchase of housing: With interest rates well below historical average, it is cheaper in many cases to buy as opposed to rent a house. This has created additional demand.
There is not really a shortage of houses.
Although the media continues to classify the housing market as short millions of houses, the data is painting a different picture. There is first and foremost a mismatch of housing where people want to be in the same area like Denver. This has been exacerbated by remote work. Currently someone with a salary from New York can move to Denver with the NY salary, buy a house, and save substantial money. As the work form home matures companies will catch on that they do not have to pay someone a NY salary to live in Denver, they can pay them 30-40% less furthermore companies might not pay someone a Denver salary, when they can pay them half to work in Detroit. When a recession hits, at the labor market normalizes you will see huge changes in pay structures.
Furthermore, the extremely low rates have made housing a great investment. All of the recent investor demand is not long-term demand and will correct itself with rising rates. Increased salaries in mid tier markets like Denver and Atlanta along with huge investor demand has created the façade of a housing shortage.
Will the housing shortage correct itself?
The housing “shortage” will correct itself as it is not built on population growth and “real” demand. The recent shortage is built on low interest rates, a mismatch of locations, and the work from home trend with outsized salaries in mid-tier markets. Below are four factors that will quickly correct the so-called shortage.
- Interest rates will rise: We are already seeing the beginning of the cycle as 10 year treasuries have spiked to the highest levels in the last two years and interest rates are also hitting highs. Mortgage rates will jump from a low of around 2.5% to over 5% over the course of the year and inflation doesn’t abate quickly look for rates to head even higher to 6%+ in the next year or so. Yesterday the federal reserve emphasized larger hikes coming as inflation becomes entrenched; this is a likely scenario to breach 6% and will put a huge damper on demand.
- Investor activity will wane: As rates rise, the return on investment for investors will decrease and in turn slow down the current real estate market as they pull back on purchases. Leverage is less desirable in a rising rate environment and especially as appreciation wanes.
- Recession will occur: Historically when the federal reserve raises rates this is an indication of an oncoming recession. Over 90% of the time, the fed is unable to engineer a soft landing. Our current inflationary environment makes this task even harder, and I am certain that the federal reserve will be forced to cause a recession to get control of inflation as they totally missed the boat and should have tapered the easy monetary policy a while back.
- Labor market normalizes: Historically when there is a recession you get a “normalization” of the labor market where wages do not continue to increase as rapidly as they are and companies focus on profits and expenses. As labor demand cools companies will normalize their policies and not pay an engineer a bay area salary to live in Denver. This will further slow the real estate market.
Will this shortage of houses continue to drive real estate prices higher?
It is important to separate short term and long-term trends with the so called housing shortage.
- Short Term: prices will continue to rise albeit at a slower pace than the past two years due to the mismatch in the real estate market and still historically low interest rates. I don’t see this lasting beyond 2022
- Long term: Rates will rise, a recession will occur, and the real estate market will “normalize”. Unfortunately during any transition there will be winners and losers. I’ll do a separate blog on what this means for prices in the future.
America is not short 5 million homes as the headlines suggest. There is currently a mismatch in the real estate market caused by ultra-low rates and a very tight labor market. Both items will correct over the next year or two as rates rise significantly, the labor market normalizes, and the mismatch in the real estate market corrects itself. This has happened in every single economic cycle and I can guarantee it will happen again. The irony is that in 2024 we are going to be having just the opposite discussion of how is there this much inventory!
- America is short more than 5 million homes, study says (cnbc.com)
- 3 Reasons Why There Really Is No Housing Shortage | Seeking Alpha
- S. Population Grew 0.1% in 2021, Slowest Rate Since Founding of the Nation (census.gov)
- 18 cities where the number of homes for sale is growing (acorns.com)
- Investors bought up a record share of homes last year – Washington Post
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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