3 Reasons Why the Housing Shortage Could Last Very Long
The housing supply is currently at its lowest level since the 1970s. Goldman Sachs said the shortage could last for years due to millennial home buying and fewer starts. There also won’t be enough foreclosures to make a meaningful impact on the market, the bank says.
Supply for homes can’t keep up with demand. At a point when the country badly needs more houses, housing starts fell 9.5% in April.
Housing starts are an economic indicator that reflects the number of privately owned new houses (technically housing units) on which construction has been started in a given period. The construction of a 30-unit apartment building is counted as 30 housing starts.
In May, the housing supply was at its lowest level since the 1970s. But as demand remains high, little is being done — and can be done — to fix the low supply.
The reasons for the imbalance has to do with millennials aging into a home-buying time of life, the lack of availability of construction materials and workers.
Three key reasons why the housing shortage may last for few years:
(1) Millennial home buying will boost housing formation
Even before the pandemic started, millennials were buying homes and boosting housing demand, but with homeownership rates rising around age 30, the true “millennial boost” is still to come.
The bank estimated how demographic change will affect the rate of household formation in the years ahead and found a household formation rate of 1.3 million per year for the next few years, higher than recent trends.
Millennial demand is intense for the starter home, and shortage existed even before the pandemic due to rising construction costs, restrictive zoning rules, and real-estate investors snapping up starter homes in hopes of making a profit.
Unfortunately, many millennials cannot take advantage of low mortgage rates, as there aren’t enough houses for them to buy.
(2) Homebuilding will be limited to 1.5 million starts per year
A lack of construction workers and a lack of available plots to build on also contributed to the housing shortage and won’t improve in the near term outlook. The forecast is that annual home building will be limited to 1.5 million in the coming years. Also, the building-material shortages, particularly lumber, are causing homebuilders to intentionally raise home prices – which would dampen some demand.
(3) Foreclosures won’t have a meaningful impact on supply
Pandemic-related forbearance provisions later this year should put some additional homes on the market, but not enough to have a big impact on the housing supply. As we see improvement in the labor market, which we expect in the coming months, it should increase households’ ability to resume mortgage payments. Of the roughly 45 million mortgages in the US, 4.5% are currently in forbearance, but the majority of those aren’t likely to enter foreclosure as economic conditions improve.
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