Key Takeaways:
- Realtor.com puts the shortfall at 5.2 million, while Freddie Mac says it’s 3.8 million;
- Fewer homes are being built under 1,400 square feet, limiting Millennials’ purchasing options;
- The sharp decline in the number of starter homes built since 1999 is a major contributor to the shortage.
By Manuel Gutierrez, Consulting Economist to NKBA
Given the strong demand for housing and rising home prices, it’s easy to conclude that there is a housing shortage. But questions linger about the magnitude of the shortage and its severity.
Two independent agencies gauge the shortage differently. Realtor.com, a real estate listings website, recently published an estimate that the U.S. is short 5.24 million single-family homes to meet the needs of the population.
An alternative estimate has been derived by Freddie Mac, the huge semi-private housing finance organization. Freddie Mac says the housing gap is a more modest 3.8 million units.
So which figure is more accurate?
A review of their corresponding methodologies can help determine the answer. Realtor.com looked at the change in the number of households in the U.S. between 2010 and 2021 and compared it to the number of new single-family homes built over that same period. Households grew by 12.3 million over those 11 years, but builders added only 7 million new houses. Their conclusion is the shortfall of 5.24 million homes. The flaw in this analysis is ignoring the fact that a household, by definition, is already living in a housing unit. If 12.3 million households were added over that period, it means they found 12.3 million housing units to live in, otherwise they would not be called households. Also, this analysis only includes single-family units as the type of housing to meet the shortage. Realtor.com ignores apartments or condominiums in multifamily buildings, manufactured homes, or even conversions of nonresidential buildings, such as vacant offices or warehouses, into residences. This analysis also does not take into consideration the 15 million vacant homes that can be used to fill the shortage.
Freddie Mac took a different approach, looking at the potential number of households as well as the gap in the number of vacant homes. The shortage of homes is due to labor or material shortages, zoning restrictions that prevent supply in areas that have the most demand, lack of land and several other factors. Freddie Mac also considers the most important aspect of the shortage to be “severe underbuilding of entry-level homes, where most of the demand exists.”
The number of starter homes under 1,400 square feet sold since 1999 has dropped dramatically, from 28% to 7% of all homes. This is a major factor in the housing shortage, as options for Millennials are limited.
Figure 1 shows the decline in the percentage of new single-family homes under 1,400 square feet built since 2000. In 1999, the earliest year shown in the chart, 28% of the homes sold were below 1,400 square feet. That proportion has dropped dramatically, comprising just 7% last year.
Over the same period, the number of people likely to purchase their first home — those between 25 and 40 years old — has grown by 6.5 million. This age group roughly corresponds to the demographics of Millennials, and is the largest population block in the U.S. Freddie Mac estimates that because of the decline in the number of entry-level homes available, there are 400,000 fewer households today.
Another source of the housing shortage is the number of vacant homes. Freddie Mac’s assumption is that there is a relationship between the number of occupied housing units and vacant units. A well-functioning housing market requires some vacant properties for sale and for rent. They calculate that the number of vacant units, which amounted to 15.4 million at the end of last year, is short by approximately 3.5 million units.
Between 2000 and 2019, vacant units represented 13% of all housing units in the U.S., but the lack of new building combined with stronger demand over the last year brough the vacant percentage to just over 10%. That 3% difference between the long-term average and the current vacancy ratio translates into 3.5 million homes.
To summarize, Freddie Mac’s estimate of the housing shortage is the sum of the 400,000 gap in the number of households along with the 3.5 million shortfall in the number of vacant units. (The 3.8 million figure cited earlier is a result of rounding.)