The Undersupplied U.S. Housing Market: A lack of inventory stifles homebuying and pushes prices higher – positives for the rental market.
Despite the Pandemic, the for-sale housing market has been “hot” with existing home prices in November up 8% from year-ago levels1. It should be even hotter. Barbell demographics of retiring baby boomers and a growing pool of 30-somethings should be driving sales of single–family homes at a more robust clip. Further, mortgage rate drops typically pull demand forward, and work-from-home policies are creating a rush for more space. But despite these historic catalysts for homebuying, sales of existing homes through November are on pace to exceed 2019 levels by about 3%, likely clocking in at about 5.5 million compared to 5.3 million in 20192. Even after adding in sales of newly built homes3, transactions are relatively depressed: as a share of inventory, 2020 volume is unlikely to surpass 6%, a level eclipsed in 13 of 18 years leading up to the Financial crisis but not eclipsed in any of the 13 years since. Relative to the size of the potential first time homebuying population (aged 25-39), sales levels in 2020 will likely come in below 2016 and 2017 volume.
Why hasn’t there been a bigger boom? The answer is inventory constraints; there are simply not enough homes on the market to lift sales volume. In fact, there was little more than two months of inventory available in November, or about one-third of the six months rule–of–thumb that relators translate as a balanced market. The scarcity is not a new problem: the U.S. has been undersupplying the housing market for more than a decade. Freddie Mac estimated the shortfall at 3.3 million homes earlier this year4. If the calculation, which keys off vacant homes, also accounted for affordability, the gap would be significantly wider.
The undersupply has propelled home prices higher, eroding affordability. In many places, the jump in prices has already offset the benefit of historically low mortgage rates5. High and rising home prices should quell the conversion of renters to buyers, precipitating favorable demand drivers for rental housing.
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