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Amid the pandemic, housing has been one area of the economy that has been doing relatively well as reflected by a rise in both builder confidence and housing starts.
But housing construction has lagged demand in the years since the Great Recession, with single-family housing starts in particular declining in the last decade despite a continuously growing population.
Home construction and sales have quickly rebounded after being slammed by the economic turmoil caused by the pandemic in the spring. New privately-owned housing starts rose for three-straight months before declining by 5.1% in August from July’s revised figure of 1.492 million.
A large monthly decline in starts for multi-family units, like apartments, contributed to the overall decline. Single-family starts also rose by 4.1% in August to 1.021 million, the highest rate since February’s figure of 1.034 million as reported by The Wall Street Journal. US existing home sales also jumped by 24.7% in July for a second-straight record month.
But that recovery may not be enough to make up for years of underbuilding amid growing housing demand. After Business Insider reported on low housing starts compared to the years prior to the Great Recession and 2008 financial crisis, we decided to take a closer look at housing research and talk to experts to see if the US really has been underbuilding.
That is, “housing production not being able to meet buyer demand,” as defined by Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis at the National Association of Home Builders.
Housing starts over time
The following chart highlights housing starts for single-family and multi-family units at seasonally adjusted annual rates. Unlike multi-family units, starts for single-family units have not returned to their pre-2007 highs. Starts for multi-family units declined in 2008 and 2009 before slowly rising to similar previous levels.
The data shows that in the years leading up 2007, there was more home construction than there was demand. This led to a housing bubble and a financial crisis. After this period, it seems the US has had the opposite problem, where there is buyer demand but not enough new homes are being built.
In March 2009, there were only 353,000 single-family homes that began construction, well below pre-financial-crisis highs that extended back decades before the housing bubble.
“During the Great Recession, the single-family starts fell about 80%, and we have not even gone back anywhere close to it,” Nanayakkara-Skillington told Business Insider.
As the population continues to grow and age, it is important for there to be enough supply to keep up with demand. To see if the US has been keeping up with new construction as the population increases, the National Association of Home Builders adjusted single-family housing starts for each decade by the size of the population.
Using NAHB’s calculations, the following chart highlights population-adjusted single-family starts averaged over each decade:
The low number of single-family starts is even more pronounced using this population adjustment. There were about 20,000 less starts per million people in the 2010s than in previous decades.
“So we definitely have been underbuilding, we haven’t kept up with population increases at all,” Nanayakkara-Skillington said.
That shortage doesn’t just apply to single-family homes. In terms of multi-family housing units like apartments, a 2017 analysis by the National Multifamily Housing Council and National Apartment Association as reported by HousingWire said to meet demand, at least 325,000 new units need to be built per year. “The annual average of newly delivered units over the past decade is a lesser 250,000 units,” reported HousingWire.
How new houses affect the overall housing market
Lawrence Yun, the National Association of Realtors’ chief economist, told Business Insider that people who are typically buying new homes are existing homeowners in part because these new homes are typically more expensive than existing ones.
But that means that older existing homeowners trading up to a new home will put their existing house on the market, opening housing up to younger and first-time homeowners.
“So current homeowners will trade up to the new home, but now they get to release their existing home onto the market, and [this] will help the overall housing, both existing home inventory as well as new home inventory as builders build more,” Yun said. “They certainly need to do this given the acute shortage that we are encountering.”
Older adults also seem to want to age in place, more so than in previous years, which affects available inventory. NAHB found that in 2012, 32% of remodeling homes were due to aging in place reasons. This number rose to 52% in 2018.
That cycle has been broken during the pandemic, however. Some people are choosing to hold off selling their homes during the pandemic because of employment changes, concerns about not finding a new place, and other reasons, according to reporting from Nicole Friedman of The Wall Street Journal.
This, coupled with a rise in buyer demand, is contributing to an inventory shortage and is reflected in rising prices. Based on data from the National Association of Realtors, median existing-home prices in July were over $300,000 for the first time ever.
Yun notes 10 years of cumulative underbuilding means a shortage of about five to six million homes.
While there was too much housing built in the 2000s-era bubble, since the Great Recession, the opposite problem has taken hold. A previous analysis conducted by Chief Economist Mark Fleming of First American Financial Corporation used Census Bureau figures to calculate the ratio of housing units completed to new households formed.
The analysis shows that in the years following the financial crisis and the housing bubble burst, the ratio was under 1, indicating underbuilding from that point until 2017, the most recent year used in the 2018 analysis. The ratio was above 2 between 2006 and 2008, indicating overbuilding.
First American Financial Corporation provided Business Insider updated ratios using data from the Census Bureau:
“We haven’t been building enough new housing to keep up with new households looking for shelter for a decade now,” Fleming told Business Insider in an email. “And even as the pace of completions has increased recently, household formation (demand) has increased faster. The housing deficit is growing when in a time of pandemic, ‘home’ is the ultimate stay-at-home ‘stock.'”
Household formation for younger Americans dropped after the Great Recession
Household formation, the number of new households created by things like young adults moving out from their parents’ home to their own place, can also show demand for homes. Slower rates of formation can be a sign of economic circumstances preventing potential homeowners from moving out on their own, leading to pent-up demand for housing.
Jeff Tucker, an economist at Zillow, said millennials, who were young adults in what are typically the prime home-buying years of life in the Great Recession, saw lower rates of household formation than in previous generations. He notes there is a similar shortfall now for Gen Z.
The State of the Nation’s Housing 2019 by the Joint Center for Housing Studies of Harvard University looked at changes in headship rates, or the share of people who are the head of a household, by age. The researchers wrote “between 2006 and 2017, headship rates for 25–29 year olds—the age group hardest hit by the Great Recession—dropped 9.1 percentage points in the 25 largest metros with the highest rents” and dropped 6.4 percentage points for the 100 largest metro areas.
Similarly, Pew Research Center found “in 2017 there were 31 households headed by an adult younger than 35 for every 100 adults in that age bracket (adjusted for the age bias in head-of-household status), among the lowest rate of household formation for this age group since the early 1970s.”
One reason we see these low estimates is because more adults are living with their parents or other adults, other than spouses. NAHB found the share of young adults 25-34 years old living with their parents in 2017 was 21.5%, while in 1990 the percentage was only 12.2%. The shares are around 35% and 20% respectively when also adding the number of adults living with roommates and other adult relatives.
“I think that it is definitely connected to the lack of home supply out there. The lack of which is a consequence of the lack of building in the last 12 or 13 years, translated through the fact that it has gotten really expensive to have your own place,” Tucker said.