U.S. Housing Market Falls Short By 4 Million Homes As Demand Grows

January 22, 2020

The U.S. housing market is short 4 million houses with growing demand for new homes. According to a new analysis from realtor.com, the 5.9 million single-family homes built between 2012 and 2019 aren’t enough to satisfy the 9.8 million U.S. households in demand for housing.

“Simply put, new home starts are not keeping pace with demand,” said Javier Vivas, the director of economic research at realtor.com. “Home builders have a mountain of opportunity, but a big hill to climb.”

Even if construction and housing development were to continue at an above-average pace, Vivas says, it would take home builders between four to five years to meet the needs of the current housing market. But at that point, demand will have climbed again.

“The current inventory crisis and the need for 3.8 million new homes means a nearly insatiable appetite from potential buyers,” said Vivas, “especially in the lower end of the market.”

Why is there such a high housing shortage?

The current U.S. housing shortage is the direct result of the 2008 housing crisis. When the mortgage market changed in the early 2000s, subprime mortgage credit grew and there was an influx of complex and risky mortgage loans. People with credit scores under 500 generally aren’t eligible for FHA loans, but many private mortgage lenders allowed riskier buyers to take out high mortgage loans at the time.

However, the majority of mortgages weren’t taken out by new homebuyers but by homeowners refinancing their houses. Many homeowners believed they were taking advantage of lower interest rates to extract home equity when they refinanced their homes. But instead, these new mortgage loans quickly became unaffordable as economic conditions changed.

According to financial experts, the 2008 crisis was caused by a combination of:

  • A low-interest-rate environment
  • Complex mortgage features
  • Inadequate information on mortgage loans
  • Rising housing prices
  • Minimal government regulation
  • Refinancing options

When the housing market stalled and interest rates hiked, many Americans couldn’t afford to make mortgage payments and had to file for foreclosure. In 2008, there were 3.1 million foreclosure filings. Americans stopped buying homes, housing prices dropped, and many home builders and construction workers were forced out of business.

Since the housing crisis, a lot has changed for home builders. Many companies and workers never came back to the construction industry. According to NAHB, there were 311,000 construction labor positions open in October 2019.

The labor shortage has made it more difficult and expensive for construction companies to build houses. Those expenses alongside the anxieties from the housing crisis have steered many construction companies and real estate developers away from the housing market. As a result, the U.S. housing market has had a growing shortage, which has driven up both housing costs and rental rates.

“We need home builders to step it up and build at least twice the pace they have been,” said Vivas. “It has to get better because builders now see how fast orders come in for what they build.”

How could the real estate market change?

Housing supply is expected to remain low for at least the next five years and housing prices across the country will continue to climb. In an effort to find more affordable housing, many Americans have been moving outside major cities to the suburbs and smaller surrounding towns.

In fact, landscaping today can add up to 14% to the resale value of your home because 90% of Americans now prefer to live in homes surrounded by grass lawns.

Northeastern states like New York have been losing residents at an alarming rate because of climbing housing costs and rental rates. The average sales price in Manhattan was $1.9 million for condos in existing buildings in 2017.

Meanwhile, Michigan’s population has been steadily growing for the last decade with living costs remaining 11% lower than the national average.

But housing affordability and supply aren’t the only factors that will change the real estate market in the next decade. Many Americans are also looking for smaller houses than the ones listed on today’s market.

In 2018, the average size home in the U.S. was 2,386 square feet and a new asphalt shingle roof had an ROI of 62%. But the “bigger is better” trend has started to taper off with millennial homebuyers who are looking for smaller homes that fit their smaller families, their budget, and resource conservation.

For instance, your heating system typically makes up 42% of your utility bill. The larger the home, the higher the utility bill. This is why tiny houses began trending a few years ago.

That being said, to entice new buyers in the next decade, not only should home builders consider constructing more houses but they should also start to think smaller and more eco-friendly.

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