Posted on 07/26/2010 2:07:03 PM PDT by SeekAndFind
With all the talk of excess inventory and flood of foreclosures, the idea of a looming housing shortage sounds unrealistic if not fanciful.
After all, the most recent data from the National Association of Realtors (NAR) out last week showed a 5.1% decline in existing home sales in June. Meanwhile, total housing inventory increased 2.5% to four million homes available for sale, an 8.9-month supply, up from an 8.3-month supply in May.
Foreclosures, too, are an issue with a vast backlog of distressed properties and underwater loans sitting just below the surface, according to RealtyTrac, an online foreclosure marketplace. The company forecasts that more than three million properties will get hit with foreclosure filings by the end of the year.
But if you take a step back from the current doom and gloom of foreclosures and declining sales and focus on the low construction levels over the past few years, some economists say a housing shortage might be in the offing. A 2009 report by Massachusetts Institute of Technology economics professor William Wheaton says that despite the glut of existing homes, with current depressed levels of construction, there might be “excess demand” for newly constructed homes.
In the past seven years, housing starts first exceeded – but then fell short – of the historical norm of 1.6 million, according to the NAR, with a deficit forecasted to grow into 2011. The chief economist of NAR said last month that the big drop in home construction suggests a shortage could become an issue later.
Longer-term demographics support this theory, says Ross DeVol, executive director of economic research at the Milken Institute, an independent think tank based in Santa Monica, Calif. We’re only adding about 600,000 new housing units a year now, and the long-term growth in new households is 1.3 million to 1.4 million per year, says DeVol.
That household formation rate has fallen off somewhat because of the recession. But that decline is misleading because college graduates have chosen to live at home with their parents while they find their financial footing, and people defer getting married for a year or two. But long term, that household growth says that “if we build substantially less than that amount, which we’re doing now, in four, five or six years, if we don’t ramp up housing starts, we could see a shortage,” DeVol says.
There’s a tendency in any market that when you overshoot on the upside – which we did through 2007 in real estate – you undershoot on the downside, DeVol says. But underlying growth in population demographics – namely, how many people will be entering the work force – is somewhere in that range of 1.3 million to 1.4 million, he says. One risk is that so many home builders leave the field during the current downturn that there could be “capacity constraints” in the long term as the U.S. population continues to grow, says John Vogel, professor of real estate at the Tuck School of Business at Dartmouth.
Consider that at the peak of housing bubble in 2005 nearly 2.1 million new units were built. In 2006, that number dropped to 1.81 million; in 2007, as the bubble deflated, new units fell to 1.34 million. By 2009, only 550,000 new units were built, says DeVol.
There won’t likely be constraints in overbuilt places like Las Vegas, Phoenix, Riverside, Calif., or Miami and Ft. Lauderdale. But if the pace of home construction doesn’t pick up, “we are going to begin to see some tightness in some areas of the country that didn’t have the boom and bust occur,” DeVol says.
The regions most likely to be undersupplied by mid-2012 are those where supply and demand are now in balance, says Celia Chen, senior director of housing economics at Moody’s. Chen includes states like Washington, Oregon, New Mexico and Utah in this group. This is where strengthening demand, combined with construction that will remain below trend, would result in undersupply, she says.
There are and estimated three million homes in the so called "shadow inventory". Homes that their occupants have gone for foreclosure and left or still live free there but the banks have not yet put these homes on their books as foreclosed properties for the fear of greatly damaging their books and stocks.
Yep.
I saw a thread at ZeroHedge yesterday by Reggie Middleton that had 6,270 homes in shadow inventory foreclosed in just Orange County CA alone. Only 227 of those were listed, and only 85 of those were over the 300K value.
YIKES!!!!
Yes demographics are going to be in play here, as in the baby boomers retiring and having to sell their homes to regain retirement equity. Plus there is the natural tendency to downsize when you retire. Both outcomes put a lot more houses on the market.
Dead on accurate.
We have a glut of housing (apartments, houses, etc) and, apart from all the illegals going home, I can sum up why we will continue to have a glut with an obscure reference in two words:
G’night Johnboy.
If the market is allowed to work without government helpfulness, including extensive “codes” and such, there is no shortage. Perceived shortages are always the result of government determinations and meddling.
Wrong .... try 5.8 million.
Two quick comments:
1. I have read a lot of DeVol’s work. If he says so, you can believe that it’s well researched and well thought out.
2. The article makes it sound like we’re talking about single family homes. With the economy the way that it is, the only way that some of these new households will be able to get housing might be multi-family homes (either rental or purchased). I have seen a resurgence in lower cost condos recently.
When people express demand for new homes, they will be built.
There’s a tendency in any market that when you overshoot on the upside – which we did through 2007 in real estate – you undershoot on the downside
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Yeah Right ... we’re not talking about having made an extra basket of fries that will go cold and be thrown out ... the empty houses that are here today will be here tomorrow , at a further 20% discount ... I know some people will only buy “new” but in many parts of the country that are fully developed and no new inventory exists even those types of people are just fine buying a “previously owned” house.
Thoughts on this.
Builders quit adding new units 2-4 years ago. There are more people around now than that period.
The top builder in our area said the same thing for building lots, nothing new is being developed.
Yes we lots of inventory; but where are the people living?
Yes some have moved in relatives; but that won’t last forever.
WOW... those are scary statistics.
Then it is much worse of a disaster than I thought.
Agreed. Here are some stats to puke over. From 2010 to 2030, 77 million people will reach the age of 65. As these try to transistion into retirement, everything will change. Consider the following areas:
Real estate as mentioned; real estate glut particularly in northern states
Politics: largest demographic is seniors - the boomers will dominate - AARP will be among the mightiest lobbying group in D.C.
Jobs: over half will not be able to retire or retire fully -p/t jobs and contract jobs with no benefits
Stock market: less and less will be paying into 401k's but more and more actually drawing out - bear market as far as the eye can see
SS and medicare reform: it ain't gonna happen - if anything benefits will increase - see politics
Just for starters, FWIW. please feel free to add.
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