Freddie Mac: Housing Inventory Shortage Will Last For Years to Come

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For more than a year now, housing experts and economists have been saying that a lack of inventory is the main obstacle holding home sales back.

Although inventory now appears to be increasing in a few select markets, the problem is so widespread that it will take years before it returns to a level that keeps pace with demand.

Meanwhile, home prices will continue to rise, eroding affordability.

A new report from Freddie Mac finds that if supply continues to fall short of demand, home prices and rents are likely to outpace income – and household formation will fail to reach potential.

The firm’s latest Insight report shows that inventory levels are likely to lag for years to come.

“From 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017- and this despite rising demand in a growing economy,” explains Sam Khater, chief economist at Freddie Mac, in the report. “We estimate that over the next decade, young adults will add about 20 million households – and those households will need a place to live. Until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households.”

It’s been well-established that household formation is a key driver of homeownership. As the report points out, the U.S. population has become younger in recent years, which means household formation will soon be back on the rise.

Nearly 90 million residents were between 15 and 34 years old in the U.S. in 2016 – 6 million more than those aged 35 to 54, according to the U.S. Census Bureau. With the median age of first-time home buyers at 31 years old, these young adults comprise a larger share of the first-time home buyer population and therefore drive demand higher.

According to thew report, the current annual rate of construction is about 370,000 units below the level required by long-term housing demand. Freddie Mac baseline estimates show 1.62 million units are needed annually to meet the housing demand: 1.1 million to accommodate household growth; 300,000 units to replace depreciated existing stock; 100,000 to meet the demand for second homes; and 120,000 units to provide enough vacant homes to maintain an efficient marketplace.

Even the low-end estimate of 1.30 million units per year exceeds the current rate of housing construction of 1.25 million units in 2017. At the low level, at least 50,000 American households each year can’t buy or rent a home because it hasn’t been built.

“Conventional wisdom suggests that the following factors would have an impact on household formation: housing costs, income, employment, education, marriage and children, race, and geography,” Khater says. “Of these factors, we have identified housing costs to be the biggest impediment to household formation, followed by labor market outcomes.”

For example, the U.S. construction industry is suffering from a shortage of skilled workers. The count of unfilled jobs in the construction industry reached post-Great Recession highs in 2018, according to the National Association of Home Builders.

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