Housing shortage: 5 more million homes needed for supply to catch up to demand

There are roughly 140 million homes in the United States, but according to a recent report by Realtor.com, that isn’t quite enough. In fact, there’s such an imbalance in the supply of homes and the number of people who want to become homeowners that the U.S. needs 5.24 million more homes.

To be sure, this shortage didn’t spring up overnight, and housing demand from homebuyers being a little ahead of supply isn’t uncommon. For example, in 2019, the same report found a shortage of 3.84 million. But the red-hot 2021 housing market has certainly made it worse.

Why do we have a housing shortage?

There are a few reasons why we’re short more than 5 million homes. Just to name some of the most significant:

• High rate of household formation: It’s a known fact that the millennial generation is the largest, and this is a group that is in its prime household-formation years. As a result, 12.3 million new households have been formed since 2012, while just 7 million new homes were built during that time.
• Low supply of homes for sale: To be sure, the 5.24 million home shortage includes those that would end up being rented, but one reason for the problem is the historically low supply of homes for sale. And due to soaring home prices in the U.S. over the past year or so, the inventory issue is even worse at the lower price points that newly formed households tend to gravitate toward. Many U.S. markets, like Central Florida, for example, have less than one month of inventory on the market, while six months would be considered a balanced market.
• Supply chain disruptions: Did you go to Home Depot (NYSE: HD) when wood prices were spiraling out of control earlier this year? And have you been to any new car lots recently? If so, you’ve seen the supply chain disruptions in the economy firsthand. This has hit the homebuilding industry hard, as essential items ranging from lumber to paint are exceedingly expensive and hard to come by in large quantities.
• Labor shortages: There were 10 million job openings in the United States in August – 1.4 million more than the pool of workers who could take those jobs. This labor shortage hasn’t spared the homebuilding industry, and a shortage of available workers has caused many homebuilders to be unable to meet demand.

What does it mean for investors?

Not surprisingly, several homebuilders have specifically mentioned their inability to keep up with demand. In its latest earnings report, D.R. Horton (NYSE: DHI) chairman Donald Horton said: “Housing market conditions remain very robust, with homebuyer demand exceeding our current capacity to deliver homes across all of our markets. As our top priority is to consistently fulfill our commitments to our homebuyers, we have slowed our home sales pace to more closely align to our current production levels, while building out the infrastructure needed to support a higher level of home starts.”

In other words, D.R. Horton is deliberately selling fewer homes than it could right now in order to avoid building up an excessive backlog. Other homebuilders are reporting similar trends. NVR (NYSE: NVR), the parent of Ryan Homes, reported that its backlog grew 19% year over year, just to name one example.

One thing investors should keep in mind is that supply chain disruptions won’t last forever. And neither will the labor shortage. But the fact will remain that there is demand for millions of new homes, which could be a long-tailed catalyst for the homebuilding industry.

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Published by USA Today