There aren’t enough homes being built in the US to accommodate the number of people starting their own households. A recent analysis by Realtor.com found that there is a significant scarcity of new homes following more than a decade of under-building in comparison to population growth.
Details about 6.5 million homes are short in the US housing market
Between 2012 and 2022, the difference between single-family home construction and household formation increased to 6.5 million dwellings. This number exaggerates the housing need, though, as new multifamily housing provides options for both purchasers and renters. If multi-family building, which consists primarily of rental units, is taken into account, the shortfall is reduced to 2.3 million dwellings.
15.6 million households were created between 2012 and 2022. 13.3 million housing units were started during the time period, while 11.9 million were finished. 9.03 million single-family dwellings and 4.2 million multi-family homes are included in this. Just 8.5 million of those are finished single-family homes, while 3.4 million are multi-family homes.
Single-family homes were being started and finished at the quickest rate in the past ten years in the second half of 2021. Up until the middle of the year, the first half of 2022 followed the previous year’s pattern. At that point, mortgage rates spiked as a result of the Federal Reserve’s unprecedented initiative to control inflation. Mortgage rate increases had an effect on the housing market; soaring buyer demand dropped; and home builders began to reduce the number of single-family home starts.
According to Hannah Jones, an economist at Realtor.com, “cooling buyer demand and builder confidence contributed to slower single-family development and a shift in builder attention to multi-family last year.
In 2022, the rate of overall housing starts decreased while the rate of completions increased. Even though there were 10.6% fewer single-family homes started in 2022 than there were in 2021, there were still more than in any other year since 2012.
Although there will be more supply available, most of it will be used for rentals and won’t help with the current affordability issues in the for-sale market, according to Jones.
By increasing the number of rental properties, multi-family housing can help with the ongoing problems with housing affordability. However, multi-family housing normally takes 15 months to finish compared to a single-family home’s typical 7 months, so it will take longer for those units to hit the market.
The analysis found that from 2012 and 2021, multi-family houses accounted for an average of 32% of housing starts. However, in 2022, as a result of rising mortgage rates and rising buy market prices, demand for single-family homes declined. As a result, developers changed their focus to the multi-family sector, which is dominated by rentals. The majority (almost 95% of multi-family units) were built with the intention of being rented out, according to the first three quarters of 2022.
Notwithstanding this increase in multifamily construction, a supply deficit still exists.
With 2.06 million new households created in 2022, however, the number of new households in the country exceeded housing starts for the first time in the past ten years. According to the analysis, this resulted in an increase in the gap between total housing starts and household formations from 1.8 million units between 2012 and 2021 to 2.3 million units at the end of 2022.
As household formations increased and single-family home construction decreased, the difference between single-family housing starts and new households increased, from 5.5 million at the end of 2021 to 6.5 million at the end of 2022.
The trend of underbuilding is evident in the vacancy rates for both rentals and homes.
The number of vacant dwellings decreases as households grow and construction starts don’t keep up. By the end of 2022, the homeowner vacancy rate has decreased from 2% in 2012 to 0.8%. The research states that at the same time, rental vacancy rates fell, hitting a low of 5.6% at the end of 2021 and once more at the beginning of 2022 before slightly increasing to 5.8% at the end of 2022.