We Need More Houses

On today’s show we’re talking about the real estate shortage.

The obvious question is that if the population has not been growing significantly, and immigration has been curtailed significantly as a result of the pandemic, then why do we have a housing shortage in such a big way.

The fact is, we have seen migration that has produced the shortage. There are surpluses in a few areas like NYC, San Francisco, Seattle. But migration, combined with a small number of people listing their properties has created real estate gridlock. Unless people list their homes for resale, there are not that many homes available for purchase on the market.

While there are not than many distressed properties in the owner occupied market as of this point. Many of the properties that had their loans in forbearance have managed to exit their forbearance agreements and get back into good standing.

But the real story is the nearly 8M rental properties where the tenants are seriously delinquent and the landlords have not been able to collect rent, nor have they been able to evict. Some of those properties are a ticking time bomb and they need to be factored into the housing equation. They’re being artificially held off the market as a result of the moratorium on evictions.

The gridlock in the single family home market is such that demand exceeds supply in many markets. On a national basis, real estate sales for single family homes and condos have jumped 9.1% in February compared with 2020. Home prices are up 16.2% YOY.

Inventories are at historic lows across most of the US and Canada. Normally when that happens, construction activity ramps up. But we have actually seen a drop in construction activity since the start of the year. New home construction has been hovering around 1M units a year for much of the past decade. The entire construction industry shrunk in the wake of the 2008 financial crisis. If you go back to 2006, the construction industry in the US was producing over 2M home a year. The current construction industry simply doesn’t have the capacity to produce that many homes any longer.

Supply chain disruptions during the pandemic have pushed construction prices up. Hard construction costs are up 11.4% compared with this time last year. Oddly, there is a surplus of trees for softwood lumber, but a shortage of finished construction lumber. Tree growers are getting near historic lows for their trees, and the lumber mills are getting near historic highs for cut kiln dried lumber, nearly triple the price compared with this time last year.

The biggest driver of demand is the number of new millennial buyers. There are now over 45 million people in the 30-39 year age range. This is part of the so-called echo boom generation. The age of first time home buyers keeps increasing and now sits at 33 years of age. That’s two years older than the previous generation.

Over the next five years, the number of people entering that age group is expected to grow to nearly 47 million people.

There is an expectation of 2.5 million new household formations in each of the next two years. This will place a lot of pressure on housing stock.

The folks at Goldman Sachs have predicted an 8.1% increase in GDP for 2021 in the US. This would be the largest economic spike since 1951. Goldman is predicting that unemployment will fall to 4% and inflation will remain in check at 2.1%.

The Federal Reserve had a slightly more cautious forecast for 2021. They’re predicting a 6.5% growth in GDP, unemployment at 4.5% and inflation at 2.4%.

All of this suggests that the boom in the housing market will continue for at least another two years.