As supply chain issues and labor shortages continue to impact the housing market, builders have not been able to make progress toward closing the gap in new home demand. A new report released this week by Realtor.com found that the gap between single-family home construction and household formations grew from 3.84 million homes at the beginning of 2019 to 5.8 million homes at the end of 2021.
The findings:
- Not enough homes are being built to meet demand. Between 2012 and 2021, 8 million single-family homes were started, and
7.5 million were completed. This was not enough homes to meet the demand generated by the 13.8 million households created during the same time. - Builders would need to produce 3x more homes to close the gap. Assuming household formations continue at their current 5-year average, the average rate of home completion would have to triple to close the gap between home completions and household formations in five to six years.
- Supply chain issues limit completions. In 2021, 1.1 million homes were started, 13.4% more than in 2020. However, housing starts were 16.1% (156,000 units) higher than home completions, a 37+ year high, highlighting supply chain and labor issues that slowed the process.
- Affordability at the forefront. Fewer affordable homes were built and sold in 2021 compared to 2018-2020, creating a challenging environment, especially for first-time buyers. Only 25% of new homes were sold for less than $300,000 in 2021, down from 42% in 2018.
The takeaway:
“It has been nearly two years since the Coronavirus pandemic changed daily life worldwide, and the housing market has not settled back into old ways,” the report stated. “As discussed in the previous housing supply update, being stuck at home led to a re-examination of home life at a time when demographics were already favorable for housing, resulting in increased housing demand across the country.
However, as housing demand ramped up, the construction industry ran into material and labor scarcity issues, driving the cost of both inputs up and widening the already large gap between home construction and household formations. Housing demand was strong enough that these hang-ups did not stifle home sales growth, but these trends exacerbated the preexisting shortage. In the second half of 2021, single-family homes were being started and completed at the fastest pace in the last decade.
However, home completions did not keep pace with starts as supply chain issues hindered building activity. Additionally, though household formations led to an all-time high number of U.S. households, the formation rate was just slightly slower than in 2020. Despite the rapid pace of home construction and slower household formations, the housing supply gap widened because once again, housing formations outpaced construction, exemplifying just how much structure is needed to catch up to demand.”
To view the full report, visit https://www.realtor.com/research/us-housing-supply-gap-expands/.