Thoughts on Persistently Low Market Supply

[Collin Van der Veen]

As a relatively new real estate investor, barely a day goes by that I don’t see another headline about the lack of supply plaguing today’s housing market. And like so many, I’ve experienced the challenges of sourcing that next home run deal in such a competitive environment. With so many investor boots on the ground attempting to navigate this unhealthy housing climate, I’ve taken a 30,000-foot view and summarized the core drivers of today’s housing shortage.

Housing supply consists of 1) existing homes and 2) new construction, and both sectors have experienced dramatic inventory downturns.

Starting with existing homes, as they account for ~90% of homes on the market, below are 3 reasons why the supply of existing homes has remained so stubbornly low.

1.) People are holding on to their homes longer. Prior to the GFC, people tended to stay put for 5-7 years at a time. Today, 11-13 years is the average length of stay, with 15-18 the norm in many markets. As people remain in place for longer, there is less turnover in the market.

2.) Relatedly, the size of the average home has increased over time while the average family size has decreased. After purchasing a home, families are less likely to find themselves in need of more space relative to homeowners in prior decades.

3.) Unlike previous generations, baby boomers by and large are not selling their homes as they age. Boomers possess the largest share of real estate wealth in the country (~45%) despite representing ~28% of the population. As this generation spends their golden years in the same home they raised their children, fewer homes are listed for sale.

Turning to the supply of new homes, let’s analyze 2 reasons why new home construction is lagging demand:

1.) In the run-up to the GFC, the consumer credit boom caused demand for single-family homes to skyrocket, and builders responded by breaking ground on a record number of homes. When the party ended and credit dried up, new home sales crashed, leaving countless builders holding the bag. In today’s rising-rate environment, builders are acutely aware of the slack developing in the demand for new homes, and they are slowing construction accordingly. Additionally, as interest rates rise, builders’ margins are falling under increasing pressure. When rates were at historic lows, and builders had ample pricing power, it was easier to pass rising costs on to homebuyers. That luxury has all but evaporated.

2.) With zoning regulations largely instituted at the local level, NIMBY opposition tends to prevent high-density housing projects from being developed. Existing homeowners generally have the largest influence over zoning laws, and restricting new development both inflates the value of the assets they already possess and prevents undesired traffic in their communities. Given the unhealthy state of today’s housing market, one would expect local government to encourage new development, but in most cases they are doing just the opposite.