The Supply of New and Existing Homes is a Serious Problem

As I previously outlined in the demand side of the equation, baby boomers are staying in place which reduces the inventory of existing homes on the market. This lack of supply has been causing local markets to experience quick housing appreciation. The rise in prices may slow down but it will not flatten out. I would like to outline why I think the supply of housing is a serious problem today and in the future.

Existing Homes

Inventory of Existing Homes is below norm and the average number of days a home stays on the market has significantly decreased over the past three years – signaling a seller’s market. This phase will stay will us for many years since we are not moving as often as in the past. 

New Homes

Even more troubling than the inventory of existing homes for sale is the lack of new home construction. Depending upon the source, the number of new homes needed each year varies but the following is the most recent estimate.

400,000 homes are demolished each year and must be replaced

On an average year, 1,100,000 new households are formed. However, only 380,000 new households were formed over the past year. Without question there is a pent-up demand.

A 20-year average of 1,200,000 new housing starts is needed to satisfy the demand and replenish the housing stock

For the past 6-years, new housing starts have been well below the 1,200,000 yearly averages. But from 2002 – 2009, it is estimated that there were 3,000,000 new housing starts in EXCESS of the households formed.

The excess inventory has supplemented the new housing starts over the past 5-years:

Average Number of Housing Starts                                                         700,000 per year

Average Number of New Homes in Surplus built from 2002-2009      600,000 per year

Total of New Homes Starts                                                                    1,300,000

With the surplus building and the new homes started over the past five (5) years, you would conclude that our housing needs should have been satisfied.

Based on this simplistic review of data, you would think that the new home market would be running on all cylinders. Not so much. Again, the demand is pent-up and the supply is hindered by lending practices, retraction in the industry and government regulations.      Also, for your consideration in understanding the next phase for housing, the pent-up demand is real and the lack of supply will cause havoc in the housing industry:

Prior to the housing bubble:  

85% of home sales were purchased with a mortgage

            10% were all-cash sales

5% were distressed sales

In 2013:

40% of home sales were purchased with a mortgage

40% were all-cash sales

20% were distressed sales or flips

Housing’s Next Phase – in the short term, housing supply will continue to lag behind what is required to meet the demand. In the long term, we will have a severe shortage of homes driving prices even higher causing interest rates to rise shutting out new home buyers from buying. This vicious cycle will continue until federal policies are measured for positive and sustainable economic growth.

The trend has to be multigenerational housing.

Baby Boomers will be housing the Greatest Generation and the Millennials.

Housing just doesn’t settle into equilibrium overnight – it will be decades before we see a normal balanced housing pattern. 

In my opinion, if you build it, they will come. My next post will be home prices.