Written By: Joel Palmer, Op-Ed Writer
The U.S. economy is about 2.5 million housing units below what is needed to match long-term demand.
If the current shortage continues, it will result in home prices and rents outpacing income. As a result, household formation will fail to reach its potential.
That’s the conclusion of a recent Insights report by Freddie Mac titled: The Major Challenge of Inadequate US Housing Supply.
“We estimate that over the next decade, young adults will add about 20 million households — and those households will need a place to live,” said Sam Khater, chief economist at Freddie Mac. “Until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households.”
According to Freddie, only 1.25 housing units were added in 2017, which includes home, apartments and manufacturers homes. Only once between 1968 and 2008 were there fewer housing units built in a year.
Freddie estates the current rate of demand is 1.62 million housing units per year, 370,000 units more per year than the current rate of supply. Of that 1.62 million:
•1.1 million homes are needed to accommodate household growth
•300,000 units are needed to replace depreciated existing stock
•100,000 homes are needed to meet the demand for second homes
•120,000 units are needed to provide enough vacant homes to maintain an efficient marketplace
The reason for the large need to accommodate household growth is that the population of first-time buyers has become younger. “With the age of the median first-time home buyer now at 31 years, these young adults comprise a large share of the first-time home buyer population and therefore drive demand higher,” read the Insights report.
Freddie also noted that there is pent-up demand for housing due to young adults living with parents or roommates. “If the economy remains strong and housing costs moderate, then household formation for young adults could significantly increase,” read the report. Freddie estimates that over the next decade, young adults in the age group of 15 to 34 in 2016 will add about 20 million households in need of living space.
“Conventional wisdom suggests that the following factors would have an impact on household formation: housing costs, income, employment, education, marriage and children, race, and geography. Of these factors, we have identified housing costs to be the biggest impediment to household formation, followed by labor market outcomes,” said Khater.
In addition, current housing stock has gradually depreciated and must be replaced. Freddie cited U.S. Census Bureau data indicating the U.S. housing market needs to add approximately 350,000 units per year to replace lost units.
“To bridge the gap between the current housing supply and future demand, housing construction will need to accelerate. First, the annual gap of 370,000 units currently being under supplied relative to long-term demand must be filled. Then, the housing market will need to supply excess units for some time to bring the housing stock up to its target level,” read the report.
One of the reasons for the shortage is that homebuilding has not recovered since the Great Recession. Since 2011, residential housing construction has increased, but only gradually – and not enough to meet demand.
Lower levels of housing production have been mainly caused by an increase in building costs combined with a shortage of skilled labor.
According to Freddie, land costs have averaged about 23 percent of total home building expenses since 2010. In certain California markets, land is costing upward of 70 percent.
In addition, laws and regulations are increasing the cost of homebuilding. Examples include local zoning restrictions on lot sizes and building height, and open space designations. The National Association of Home Builders (NAHB) estimates regulatory costs have increased 29 percent between 2011 and 2016.
NAHB also reported that unfilled jobs in the construction sector increased reached a post-Great Recession high in July, with 273,000 openings.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.