What factors underlie the supply of housing?
Did you know there is a shortage of housing in the U.S.?
Why is there a shortage of housing in the U.S.?
These are some questions I will try to answer today.
These are Factors affecting Supply:
- Changes in costs of labor and materials
- Changes in regulations
Over the last several years, in the U.S., new construction of housing units (whether single-family or multi-family) has failed to keep up with growth in household units and replacement of older stock of housing units.
On May 27, 2020, I discussed the factors that drive demand for real estate. In that post I talk about demographic shifts in populations and generations that lead to increased demand for new housing units. As people move into their late 20s and 30s, they start to form more permanent households, have children, obtain more steady employment and create more demand for housing units.
On July 8, 2020, I discussed the demand being created by the size of the Millennial generation and the fact that they are in the prime age range for spending money on housing. I also mentioned that the Millenials by the nature of their size have certainly created a high level of demand for households compared to previous generations.
While the demand for housing has been steadily increasing over the last decade, the construction industry has been unable to keep up with this demand for the last several years, possibly for the last 10 years.
The construction industry not only needs to keep up with growth in households, but it also must replace older homes as they are lost from the market due to lack of maintenance and repair. Older home do eventually become demolished or destroyed and new homes are needed to replace these lost homes. So, the construction industry is fighting against two drivers when trying to supply enough housing units.
Since 2000, there has been well over 100 million households and therefore approximately that many housing units. In the Northeast and West, the loss rate of existing units is low, generally averaging a loss of about 1 per 1000 per year. However, in the Midwest and South, the loss rate is much higher, generally about 5-10 per 1000 per year. Let’s assume for the sake of argument that the U.S. average is at least 2 units of housing lost per 1000 per year. This means we have needed in the range of 200 to 250 thousand new housing units per year just to replace lost homes.
Over the last 10 years or so, new household growth has averaged above 1 million per year. This means the construction industry would need to build at least 1.2 million units per year or more just to keep up. During this period, the construction industry has averaged just under 1 million units per year.
Coming out of the 2008-2009 recession, there was an over-supply of housing in the U.S. market. However, based on the deficit of new construction for the last 10+ years, that excess supply is gone and now there is a deficit.
Why hasn’t the construction industry kept up?
One factor that has led to the low construction levels was the great job market for the last 5 years or so through 2019. During that time period, the job market was so good, that people left the construction industry for better jobs. When home builders didn’t have enough labor to build all the homes demanded by the population growth and also replace the lost homes, they focused on higher priced homes rather than lower priced homes in order to capture higher profit margins and still build at a lower volume.
Now, with the high rate of job loss in 2020 and the deficit of new homes, home builders may have the opportunity to start attracting labor back to construction jobs and return to building the volume of new homes needed in this country.
Weather and regulations can also impact the number of new housing units constructed, but I submit that those have less impact in the long term. Weather patterns will tend to average out and the industry will adjust as necessary. Regulations also stay the same for long periods of time, so the industry will also adjust to that.
What the industry couldn’t manage to do for a long period of time was attract enough labor to facilitate building the number of entry-level housing that was needed by the growth in demand.
If we didn’t have the economic impact from COVID-19 during 2020, I would be investing in rental housing in the strongest way at this time.
Watch for more blogs about:
- How I think COVID-19 will ultimately create massive opportunities to create rental housing investments.
- How I use data to determine the markets that have better than average opportunity for above average returns with rental housing.