Many people mistakenly think the pandemic is to blame for the current housing shortage and pricey market for both renting and buying. There is no doubt the pandemic has exacerbated the housing situation by intensifying the desire for personal space. In addition to people leaving urban markets to work from home in suburban and vacation locations, the pandemic has also caused disruption in the supply chain. So yes, the pandemic has increased certain types of housing demand as well as increased costs. However, the tight housing supply/demand trend has been in the making for years due to construction trends and as well as demographic shifts.
According to a recent report by Rosen Consulting Group, from 2010 to 2020, new-home construction fell 6.8 million units short of what was needed to meet household-formation growth and replace units that were aging or destroyed by natural disasters. The large gap in housing construction vs. demand has contributed to a significant increase in the cost of rent and home prices.
In addition, there are several structural demographic factors in play that further complicate the housing situation:
- There is an increase in the number of households due to high divorce rates as well as younger generations staying single longer and delaying marriage/family.
- Empty nester Baby Boomers are not selling their homes. Older adults are aging in place more than earlier generations.
- Many Millennials are starting families and want to buy a house after years of renting but now there are not enough sellers to meet their demand.
- Sole-person households are increasing.
According to a recent Freddie Mac report, sole-person households in the U.S. have almost doubled in the past 40 years. In 2020, 36 million U.S. households – or 28% of all households – are sole person, compared to just 18 million or 22% of households in 1980. Yet in neighborhoods all over the country, smaller homes are being knocked down and replaced by much larger homes. I understand the math behind building a larger house to amortize the high price of land, however the irony is that the average household size has been declining over the past 40 years from 3.3 to 2.5 people. According to this study, sole-person households make up 44% of the growth in total households from 2010 to 2020. Freddie Mac’s study predicts there will be an additional 5 million sole-person households by 2030, mostly made up of Baby Boomers, followed by Gen Xers.
Much of the growth in residential supply has been on two sides of the barbell – either detached large single-family homes or higher-density apartment developments. What’s missing? The type of housing my grandmother lived in. Some people call it the “missing middle” of the market. Think cottages-style housing, duplexes, triplexes, small apartments and condominium buildings. These types of housing units could be developed as for-sale or for-rent. As reference, production of new two-to-four-unit structures fell by nearly 75% during the past 20 years compared to the long-term average from 1968 to 2000.
So, let’s think about basic supply/demand principals. If there are more buyers than sellers, what happens? Pricing goes up. More housing is needed – but the cost of land is getting more expensive because developing new housing where most people want to live often requires tearing something down. The low hanging fruit has been picked over in decades past – both intown urban and in suburbia.
What are the obstacles in creating more housing to make the supply/demand equation more in balance? Rising costs are certainly a factor, but so is lack of imagination, zoning codes and NIMBYism (aka Not In My Back Yard). The real estate industry needs to create more diverse housing types to address the housing shortage and housing affordability crisis. However, so many communities, especially in suburbia, are limited to single family residential homes with onerous land use restrictions that have created an inefficient use of land resources. Developers face near impossible obstacles embedded in land use codes, covenants, as well as neighborhood opposition.
What can you do? Consider rethinking your own NIMBYism. Perhaps talk to your local elected officials about zoning. Consider supporting new housing developments instead of opposing them.
How do you think we can address the housing shortage? I’d love to know your thoughts. And if you have a project you would like to discuss, feel free to call or email me.
As always, I hope you and your family are well. As a real estate investor and student of real estate, I enjoy studying macro trends and local markets to come up with investment strategies for value creation. I think the macro supply/demand trends tell a very compelling story for the need for more housing – both rental and for-sale. Of course, all students need some feedback mechanism so I will leave it up to you to determine my grade 😊.