What Will it Take to Reduce the Housing Supply Deficit?
Written by First American Chief Economist, Mark Fleming
Last week, the Census Bureau released its Residential Construction report for December. Housing completions decreased 8.4 percent compared with last December and continued to fall short of the number of new housing units necessary to keep pace with household formation. Housing starts also decreased 10.9 percent in December compared with a year ago, falling to their lowest level since September 2016.
The bright spot in an otherwise underwhelming report comes from the overall number of permits issued, which can signal how much construction is in the pipeline. The overall number of permits edged up 0.5 percent compared with December of last year. The overall increase in permits was largely driven by multi-family homes (5 or more units), which increased 13.6 percent compared with a year ago. Building permits increased in three of the last four months, indicating that we should expect construction growth in the months ahead.
Building the Housing Deficit
Since 2007, household formation has significantly outstripped housing construction, creating a substantial housing supply deficit. While housing completions are above their post-crisis lows, they remain well below is the level needed to meet demand.
We estimate that over one million new households were created in 2018, adding to the demand for housing. Yet, only 761,000 new housing units completed – the net number of units completed when accounting for single-family dwellings, apartments, manufactured homes and obsolescence. This leaves a shortage of just over 648,000 housing units today, the highest housing deficit since December 2016.
“For more than a decade, home building has not kept up with the demand for shelter, creating a housing supply deficit that has proven difficult to reduce significantly.”
During the housing boom, builders overbuilt relative to demand (new home construction exceeded new household formation), hitting a peak of nearly two million units in January 2004. The excess supply, as well the housing collapse and Great Recession, put downward pressure on prices. Home builders dramatically reduced construction to adjust and have struggled to ramp up construction in the years since.
For more than a decade, home building has not kept up with the demand for shelter, creating a housing supply deficit that has proven difficult to reduce significantly. In fact, the housing deficit in September 2016 was nearly 800,000 units – the widest gap between new household formation and housing completions in 18 years. While the monthly deficit has moderated substantially since then, home building has not increased sufficiently to close the gap left from more than a decade of underbuilding. Why? Construction faces several supply-side headwinds: increasing material costs, a chronic lack of construction workers, a dearth of buildable lots and restrictive regulatory requirements in many markets.
Despite these headwinds, there are signs of promise. January’s month-over-month gain of 9,000 residential construction jobs bodes well for more completions, and the modest growth in building permits, a leading indicator of housing starts, represents the green shoots of much-needed new housing supply. Home builder confidence echoes this sentiment, with builder confidence jumping to a four-month high this month. As builders begin to break ground on additional housing, we will inch closer to balancing our housing deficit.
Deputy Chief Economist Odeta Kushi contributed to this blog post.