Housing Shortage?

Is America short 5 MILLION Homes as reported in new data from the National Association of Realtors and Realtor.com?

The US Housing Market looks like it’s in a massive Bubble in September 2021. Home list prices, prices adjusted for inflation, and appreciation are all at all-time highs. With home buyers and real estate investors priced out of the market many are now wondering if there will be a big Housing Crash.

Housing Shortage?

But recent studies from the NAR and Realtor.com suggest otherwise. They argue that new home construction in America has lagged significantly over the last two decades. And that there is a shortage of roughly 5 Million homes across the country as a result. This shortage – them and others argue – is the reason why real estate prices in America are so high and why so many home buyers are priced out of the market. According to them, the bad news is that until this shortage is resolved – aka home builders build way more homes – prices will still elevated. But there’s a problem with this analysis.

The first is that looking at the US Housing Market as a whole is a mistake. Some cities across the country – Detroit, Chicago, and San Francisco – have legitimately experienced a decline in homes being built. Yet others – Austin, Provo, Boise, and Nashville – have experienced the opposite and seen a huge increase in the number of homes constructed. In reality most of the decline in home building in America over the last 15 years has occurred in the Midwest / California. Interestingly, there is no discernible relationship between declines/increases in home building and long-term home price appreciation. In fact, many of the markets with the biggest declines in home building are the ones with the lowest levels of home price growth!

This suggests that the narrative of 1) A broader shortage of homes across America and 2) This shortage resulting in higher home prices isn’t necessarily true. Prospective home buyers and real estate investors should study the home building trends in their markets, especially relative to migration, to educate themselves further.

If the Fed ever normalizes interest rates, this house of cards will tumble. Hence their reluctance. Whether ten or a thousand people are bidding on the same house, if access to money lending is normalized, the housing prices will need to normalize inline with incomes. I remember when interest rates were at 6-8% on the low end. Higher interest rates and larger down payments forces people to have more skin in the game and speculative ROI from borrowed money becomes unattractive.

Is there a Housing Shortage?