The Housing Shortage is Expected to Worsen—Insights for Investors

Over the past decade, property values have seen remarkable appreciation due to a combination of factors including demographic shifts, low interest rates, stimulus programs and migration trends.

One of the primary factors driving up housing prices over the last decade has been a shortage of units – estimates generally range between 1.5 million to 7 million, according to Realtor.com; it seems this shortage is getting worse.

To understand the current housing shortage, it’s necessary to trace its genesis back to the great financial crisis and its subsequent aftermath.

As shown by the graph, housing starts (new construction projects started) experienced significant acceleration during the housing bubble era of 2000-2007 before rapidly declining thereafter. Housing construction did reach bottom in 2009 but took until 2020 for levels to return back to those seen during “normal” 1990s construction levels.

Recovery was slow for various reasons, the primary one being that many construction companies closed when housing prices crashed – it can take an industry some time to recover after such an event has taken place.

Of course, construction kept going during this recovery, and Realtor.com estimates an estimated 13.4 million units were built between 2012-2023 – 9.5 million single-family homes and 3.9 multifamily units were created during that time frame. Although this seems like a large number, its significance should be understood against rising demand.

Household formation provides the most accurate indicator of macro-level housing demand. A household is defined as any group or individual who live together independently in one home.

So a family living together constitutes one household; roommates living together without being related are another; an individual living alone can also count as one household. Therefore, to understand how demand for housing is shifting we need to know how many new households have been created or disbanded since 2000.

From 2012-2023, 17.2 million households were created. While 13.4 million housing units were constructed during that time, Realtor.com research indicates there was still an estimated shortfall of approximately 3.8 million housing units.

Implications of Trend
This development holds big ramifications for investors and the wider housing market: A housing shortage will exert sustained upward pressure on housing prices. Although this seems obvious to me, I want to offer two caveats.

As previously noted, many factors play into the housing market and one of these is supply-side forces; I believe they will help to sustain housing prices for some time to come; however, that doesn’t guarantee they won’t fall or grow quickly – there could be other forces such as affordability or labor market dynamics that provide downward pressure and mitigate against an impactful low supply situation.

As is true with real estate trends in general, the effect of this one will differ by region. Some markets may experience sufficient supply or even surpluses; however, most do not; according to Realtor, 73 of the top 100 markets face shortages with Texas and Florida seeing some high growth areas experiencing the greatest shortages.

However, investors should keep this in mind and research the relationship between housing construction and household formation in any market they invest in – understanding supply dynamics is extremely crucial to making good investments decisions.

Once you’ve conducted an analysis, please share what you found by posting in the comments below.