The Great Housing Imbalance: Understanding America's Supply-Demand Gap
Introduction
The United States is facing a significant housing shortage, marked by a pronounced imbalance between supply and demand. Our proprietary analysis, a joint effort by our Portfolio Management, Securitized Credit Research, and Quantitative Research teams, estimates this shortage to be between 2.5 and 5.25 million units, depending on the starting point of analysis. New home construction has not kept pace with demand due to high land costs, regulatory challenges, labor shortages, and escalating construction expenses. This supply constraint is exacerbated by low existing inventory levels, as current homeowners, particularly those with low mortgage rates, are hesitant to sell. On the demand side, factors such as population growth and increased household formation, driven by immigration and demographic shifts, have intensified the need for housing. The resulting scarcity of affordable housing options, coupled with rising home prices and rental costs, underscores the challenges in meeting the housing needs of middle- and lower-income families and strengthens our positive fundamental outlook on single and multifamily residential exposure.
Inputs & Measurement
To assess the housing shortage in the United States, we examine supply and demand metrics provided by the Census Bureau. On the supply side, we consider the completion of new residential housing units and the shipment of new manufactured units, while also accounting for the loss or retirement of existing housing stock. On the demand side, household formations serve as the primary inputs. This process involves the creation of new households through marriage, divorce, leaving the parental home, migration, or changes in economic conditions. The data is primarily sourced from the decennial comprehensive count by the Census Bureau and supplemented by more frequent surveys. During the pandemic period (2020 Q2 andQ3), a haircut factor is applied to mitigate the noise introduced when the Census Bureau suspended in-person data collection and switched to telephone interviews. By comparing these supply and demand metrics at both national and regional levels, we can quantify the extent of the housing shortage and identify trends over time.
Results
The measurement of the housing shortage is highly dependent on the starting point of analysis. Using 2001 as a baseline, the shortage is estimated at 2.5 million units, whereas starting in 2012 shows a larger deficit of 5.25 million units. This variation highlights how the baseline year affects the perceived extent of the shortage. Leading up to and immediately following the Global Financial Crisis (GFC), the housing market had a surplus due to overbuilding and the decline in the formation of households as living arrangements changed. However, that surplus quickly diminished as demand surged due to improved economic conditions, millennials entering peak household formation ages, and baby boomers continuing to hold a growing stock of homes. The pandemic further fueled this trend, with consumers experiencing greater wealth accumulation and additional socio-economic changes. No matter the timeline, it’s clear the United States is facing a mismatch between supply and demand.
Implications
The housing shortage in the United States is poised to continue, fueled by persistent demographic trends and ongoing underbuilding. With robust population growth, especially in regions like the South where significant population influxes account for over half of the national shortage, the demand for housing is expected to consistently surpass supply. The K-shaped consumer economic recovery, marked by higher income brackets accumulating wealth and potentially purchasing multiple homes, further intensifies the national shortage by restricting housing availability for middle- and lower-income families. This trend is likely to continue. The shortage may be even larger than our calculation, as it’s been estimated that household formations may be understated by up to 0.4 million because of 'missing' households that did not form due to the lack of available housing units. Shifting to investment implications, the current housing shortage reinforces our positive fundamental outlook surrounding single and multifamily housing exposure. Opportunities in securitized credit, such as single-family rentals, credit risk transfers, and residential transition loans remain attractive, offering effective financing solutions to meet the housing needs of various income groups.