Housing Shortage...or Housing Bubble? How to Tell the Difference

[Nick Gerli]

The terms Housing Shortage and Housing Bubble get thrown around a lot. And for good reason. Areas with a Shortage tend to see higher rent and value growth. Areas in a Bubble situation tend to see slowing growth and eventually a loss of rents/value.

So it's important to be able to understand the dynamics in your market. Knowing what markets are facing a Shortage or Bubble scenario can lead to much better decisions on where and when to buy. 

Fortunately, you can use publicly available data through the Census to understand these dynamics. 

First Step:

-Gather data on new single-family and multifamily permitting in your market. You can do this through the US Census Bureau, which tracks monthly permitting across metros. https://www.census.gov/construction/bps/

-Aggregate this data historically and see how your market's permitting situation has changed over the last 10-15 years. https://www.census.gov/construction/bps/msaannual.html You'll be shocked to see how much things have shifted in certain markets.

-The more permitting goes up, the more likely a Bubble situation is developing. The more permitting goes down or stays the same, the more likely a Shortage situation is developing. Looking at Permit data is great because it also gives you a window into what the supply situation looks like in 12-24 months, since that's how long it takes to usually complete the units after a permit is pulled.

Second step:

-Layer on data on Population/Household growth in your market to see how it compares to permitting. This is a bit trickier to pull. Head to the Data.Census link below and go to "Filter" then "Geography" then "Metropolitan Statistical Area" and pick yours. https://data.census.gov/cedsci/table?q=households&tid=ACSST1Y2019.S1101&hidePreview=false

-If Household Formation greatly exceeds permitting over the previous five years (as is the case in a place like Phoenix), then it's a Housing Shortage. Expect higher rent and value growth. If Permitting greatly exceeds Household Formation, then you're more likely in a Bubble scenario, where the supply of new housing is exceeding demand. Expect lower, and perhaps negative, rent and value growth.

I put together a "how-to" video for how to use this data here if you would like more information.