There are many reasons property values have ballooned over the last decade: favorable demographics, monetary policy (low interest rates), stimulus, and migration patterns, just to name a few.
But one of the most powerful and enduring variables that has pushed up pricing over the last decade is a shortage of housing units. Estimates vary on the size of this shortage, but they generally vary from about 1.5 million to 7 million units. And according to Realtor.com, the shortage is actually getting worse.
A Look Back
To truly understand the housing shortage, we need to look back to the lead-up to the great financial crisis and its ensuing fallout.
As seen in the graph, housing starts (new construction projects begun) accelerated in the housing bubble era of 2000-2007, then promptly fell off a cliff. Housing construction did bottom in 2009, but it took until 2020 for construction levels to return to where they were in the “normal” 1990s.
There are several reasons why this recovery was so slow, but the primary reason is that many construction companies closed up shop when housing prices crashed—and it takes a while for an industry to recover from such an event.
Of course, construction continued during this recovery, and according to Realtor.com, an estimated 13.4 million units were built from 2012 to 2023. Of those, 9.5 million were single-family homes, and 3.9 million were multifamily units. Although this may sound like a lot of units, this number needs to be considered in the context of rising demand.
In the housing market, the best way to measure macro-level demand is through a metric called household formation. A household in this context is any independent person or group of people who live on their own.
So a family living together is a household. A group of unrelated roommates living together is a household. An individual living alone, also a household. Thus, to understand how demand for housing is changing, we need to see how many new households are formed (or dissolved).
From 2012 to 2023, 17.2 million households were formed. This means that even though 13.4 million housing units were constructed, there was a deficit of nearly 3.8 million units, according to Realtor.com’s research.
If we zoom in to just the last year, we can see that this problem is not improving. In 2023, 1.5 million units were completed, but 1.7 million households formed, growing the deficit by 200,000 units.
Implications of the Trend
This has big implications for investors and the broader housing market: A housing shortage will provide sustained upward pressure on housing prices. To me, this seems clear, but I want to offer two caveats.
First, as mentioned, there are many variables that impact the housing market, and the supply of homes is only one of them. I believe supply-side forces will help support housing prices for years (decades?) to come—but that doesn’t mean housing prices cannot fall, nor does it mean they will grow rapidly. There are other forces in the housing market, like affordability or the labor market, that could provide downward pressure and counteract the impact of low supply.
Secondly, as with all real estate, the impact of this trend will be regional. Some markets will have sufficient supply or even an excess, but most will not. According to Realtor, 73 of the top 100 markets face a deficit, with some high-growth markets in Texas and Florida facing the largest shortage.
So just remember that this trend won’t be felt equally everywhere. For investors, I recommend that you research the relationship between housing construction and household formation in any market that you’re investing in. Understanding supply dynamics is super important.
Once you’ve done that analysis, let me know what you find in the comments below.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
