America needs about 17.1 million housing units built this decade, including single-family, multifamily, and oft-overlooked manufactured housing to satisfy current and future demand.
Until recently, builders were very much on pace to build what was needed, starting 1.71 million homes in 2021 and 1.65 million homes in 2022. Due to the current affordability crisis, they will fall far short this year, although they will finish many of those homes and offer them for sale or for rent sometime in 2023.
We combed through significant local market detail and concluded that the 5 most undersupplied markets, based on current vacancy rates lower than their historical norms, are:
- Riverside-San Bernardino
- West Palm Beach
- Fort Worth
We also looked at undersupply based on overcrowding conditions, measuring the number of adults per household in every age category compared to historical norms. The 5 most undersupplied markets using this methodology are:
- Riverside-San Bernardino
- San Diego
Riverside-San Bernardino is very undersupplied, no matter how you slice the data. All of these markets are seeing softening rents and declining home prices right now because, although undersupplied, many aspiring homeowners and apartment dwellers can’t afford the homes.
The complete analysis and conclusions for the 50 largest metro areas is in our 50 page paper we recently released to our clients titled America’s Needed Housing Construction. The paper goes into significant detail on:
- the expected net change in total households due to demographics,
- the expected demand for second homes,
- the expected demand for replacing old homes, and
- the need to build 1.7 million homes we estimate the country was undersupplied in 2020.
We used the same methodology we used in our 2016 book Big Shifts Ahead: Demographic Clarity for Businesses. A shift in the time horizon, changing demographics and the fact that housing has moved from being oversupplied years ago to undersupplied today all provide a tailwind for housing demand over the longer term.
The housing demand and supply imbalance is a much-debated topic, with a wide range of estimates from a variety of perspectives, and often with self-serving headlines. Important factors such as lack of developable land (especially in New York and San Francisco) and poor affordability (even in historically affordable markets like Charlotte and Nashville) are often left out of the discussion.
While a lot of focus has been on the national estimates of undersupply, what really matters is what is happening at the local level. Different local housing dynamics mean the balance between these two housing fundamentals do not play out the same everywhere.
While the demand is there, it needs to make financial sense for builders and developers or they won’t build it. We expect the numbers to fall short the next few years until affordability adjusts through a combination of rising wages, falling home prices and falling mortgage rates. The good news for builders is that the demand is there if it is priced at a monthly mortgage payment most people can afford.
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