U.S. needs almost 4 million more homes
Analysis by Freddie Mac has revealed that the U.S. needs almost 4 million more homes to be listed for sale in order to meet the current high level of demand.
Freddie Mac said in its analysis that there’s a total shortfall of 3.8 million homes for sale in the U.S., a 52% increase in the housing shortage since 2018.
“This is what you get when you underbuild for 10 years,” Sam Khater, Freddie Mac’s chief economist, told the Wall Street Journal. “We should have almost four million more housing units if we had kept up with demand the last few years.”
The report echoes comments made by the National Association of Realtors’ chief economist Lawrence Yun last month. Yun, who has been one of several real estate economists leading calls for more homebuilding to solve the inventory shortage, told NPR that home builders haven’t been building enough homes for more than a decade now.
“We need to build more homes,” Yun told NPR.
The shortage of homes for sale, added to the strong demand from buyers since the COVID-19 pandemic emerged, has pushed up the prices of homes rapidly in the last year. The median existing-home price for all housing types in February was $313,000, up almost 16% from a year ago, Khater said. The shortages are most keenly felt in the market for entry-level homes, and that is making it incredibly difficult for first-time buyers to buy their first piece of real estate, he added.
In its analysis, Freddie Mac said it calculated the almost 4 million home shortfall by factoring in the amount of single-family home building that’s needed to meet the demand from household formation, second-home purchases and replacement of damaged or aging homes. Freddie Mac’s researchers than compared that data to the pace of construction to try and gauge the level of demand.
The homebuilding decline dates back to the Great Recession that lasted from 2007 until 2009, the Journal said. Following that period, which saw millions of homes foreclosed upon and repossessed, builders refused to step up their construction of new homes. Only in the last year or so have builders stepped up construction, but they have faced challenges including a shortage of lots, labor and appliances, as well as the rising costs of building materials.
National Association of Home Builders’ chief economist Robert Dietz told the Journal that builders would need to construct between 1.1 million and 1.2 million homes each year in order to meet current demand, and even more than that in order to reduce the existing deficit.
The Boston real estate market has been in flux this year with record-low mortgage rates and a pandemic that created wave of relocations made possible by remote work.
As we near the end of 2020, here’s a look at the expectations of real estate experts for 2021.
Danielle Hale, Realtor.com chief economist:
We expect sales to grow 7 percent and prices to rise another 5.7 percent on top of 2020’s already high levels. While we expect mortgage rates to tick up gradually, sales and price growth will be propelled by still strong demand, a recovering economy, and still low mortgage rates. High buyer demand and still-lagging supply will keep prices growing, but at a slower pace than 2020 as buyers contend with mortgage rate and price increases that create affordability challenges.
While younger Millennial and Gen-Z buyers are expected to play a growing role in the housing market, fast-rising prices will create a bigger barrier to entry for the many first-time buyers in these generations who don’t have existing home equity to tap for down payment savings. Although supply is expected to lag, we do expect the declines to slow and potentially stop by the end of the year as sellers grow more comfortable with the market environment and new construction picks up. Single-family housing starts are expected to grow another 9 percent in 2021. On the whole, the market will remain seller-friendly, but buyers will still have relatively low mortgage rates and an eventually improving selection of homes for sale.
But supply-side headwinds will persist. Residential construction continues to face limiting factors, including higher costs and longer delivery times for building materials, an ongoing labor skills shortage, and concerns over regulatory cost burdens. For apartment construction, we will see some weakness for multifamily rental development particularly in high-density markets, while remodeling demand should remain strong and expand further.
While the exploding Covid-19 infection rates suggest weighty economic uncertainty remains, housing markets continue to receive positive tailwinds, including the largest cohort of Millennials, age 28 to 30, are coming closer to the typical first-time, home-buying age. Additionally, mortgage rates are expected to remain at or below 3% into 2021. These two factors will bolster the home-buying market and continue propping up home price growth. The national Case-Shiller Index surged 6.95% in September, reaching yet another new high and advancing at the fastest rate since May 2014.
Daryl Fairweather, chief economist of Redfin:
Although the U.S. may be able to vaccinate most of its citizens by the end of 2021, many countries will struggle to distribute vaccines. Thus, the global economic recovery could take much longer, which would make U.S. mortgage-backed securities attractive to international investors, keeping mortgage rates low. Even as the pandemic hopefully nears its end, Americans will continue to buy homes that fit their new lifestyle. As a result, 2021 will see more home sales than any year since 2006. Annual sales growth will increase from 5% in 2020 to over 10% in 2021.
Rising prices for existing homes will increasingly drive more buyers to consider a new one. And because home buyers are now more eager to buy in suburban and rural areas where land is cheaper than in the cities, there will be more areas where homes can be built profitably. By the end of the year, the homeownership rate will rise above 69% for the first time since 2005.
Lawrence Yun, National Association of Realtors chief economist:
Home sales surprised with a surge in the second half of 2020 and the momentum will carry into 2021. The record low mortgage rates have been the key factor for home buying even in a difficult job market condition. As we enter 2021, jobs will steadily recover especially knowing that the vaccine distribution is just around the corner.
The interest rates will continue to be favorable since the Federal Reserve has indicated such. And supply will rise based on the higher number of housing starts of single-family homes. This will give consumers more choices, and more importantly, will tame home price growth. Demand could be stronger in the outlying suburbs and in more affordable metro markets, while the downtown locations could witness softer demand.
Tendayi Kapfidze, LendingTree chief economist:
The housing market should continue to be a bright spot in 2021. Key to this will be mortgage rates that we expect to remain low as the Fed keeps up its security purchases. A less appreciated factor is a savings rollover from 2020 that will support home purchases by wealthier households. Additional fiscal stimulus could also find its way into the housing market. The new Biden administration’s policies may also increase access to the housing market through things like down payment support. Finally, student loan forgiveness could boost the ability of many to afford buying a home and saving for down payments.
There are some downside risks to this outlook. The economy will be recovering as vaccines lead us down the path of normalcy, but the labor market could remain weak. A tepid labor market recovery would be accompanied by tepid income growth. Job losses are moving up the income scale and transitioning to permanent losses from temporary. Lending standards are likely to tighten further as the end of forbearance and foreclosure moratoriums are a wild card, potentially weighing on home prices in some areas. The rent crisis is another wild card and could bleed in the owner-occupied market via adding supply or affecting the financial markets.
Susan Wachter, Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania:
The residential real estate market will prosper in 2021, even as Covid-19 continues to ravage the economy, delaying full recovery to 2022. Low interest rates will prevail, resulting in lower mortgage costs for home buyers who can qualify. We will see slower price rises in the mid-single digit range, as affordability gaps cut demand.
Although 2021 will not see the spike in demand for residential property that characterized 2020, I expect to see a continuation in 2021 of trend shifts catalyzed by the pandemic. While 2021 will see home builders responding to higher prices, supply and inventory will still be limited. Fed policy will enable lower mortgage rates for highly creditworthy borrowers, while inflation may begin to emerge. Finally, the Millennial generation will continue to be the defining demographic group in the housing market for years to come.
Jeff Tucker, Zillow senior economist:
We expect to see the housing market continue its bull run from this summer and autumn well into 2021. Home value appreciation will approach 9% or even 10% by July, before cooling somewhat down toward 7% appreciation. This rapid price growth will be driven by the same factors that took the steering wheel in 2020: strong demographics, low mortgage rates, and inadequate supply.
The Millennial generation is moving into their mid-30s, bringing a wave of demand from renters looking to buy their first homes. Mortgage rates may inch back up to around 3%, but even at that level, they will be making home purchases more attractive all along the price range. And although builders are finally firing on all cylinders delivering new homes to the market, it will take them a long time to make up for the home building deficit we accumulated from 2008 to 2019.
The clearest barometer we have that reflects all these dimensions of the housing market is active inventory, which is down more than one third year-over-year. That suggests continued fast price appreciation ahead and fierce competition between buyers.