The US housing market lacks 6.5 million homes

The United States is not building enough homes to account for the number of people starting their own households. As a result, there is a marked shortage of new homes after more than a decade of underbuilding relative to population growth, according to a new Realtor.com analysis released Wednesday.
The gap between the construction of detached houses and the formation of households increased to 6.5 million houses between 2012 and 2022. However, this figure increases the housing shortage, as new multi-family homes offer options for both buyers and renters. If multi-family construction - which is mostly rental units - is included, this gap is cut to 2.3 million homes.
In the decade between 2012 and 2022, 15.6 million households were created. During that period, 13.3 million housing units were commissioned and 11.9 million housing units were completed. This includes 9.03 million single-family homes and 4.2 million multi-family homes. Of these, only 8.5 million single-family homes and 3.4 million multi-family homes have been completed.
In the second half of 2021, single-family homes were both started and completed at the fastest rate in the last decade. The first part of 2022 continued the trend of the previous year until the middle of the year, when mortgage rates rose as part of the Federal Reserve's historic campaign to curb inflation. The housing market felt the impact of the rise in mortgage interest rates, the red demand of buyers cooled and builders began to withdraw from the beginnings of detached houses.
"Cooling buyer demand and builder confidence led to a slowdown in single-family construction and a shift in builder focus to multifamily last year," said Hannah Jones, economic data analyst at Realtor.com.
The rate of overall housing starts slowed in 2022 while completions increased. In 2022, about 10.6 million single-family homes were built, which is 2021% less than in 2012, though still more than in any other single year until XNUMX.
"While this brings a larger supply to the market, most of it will be used for rental and will not address ongoing challenges of affordability in the area for sale," said Jones.

Multifamily construction helps, but household formation outweighs construction

Multifamily housing can alleviate ongoing housing affordability challenges by providing more supply for renters. But while a single-family home typically takes 7 months to complete, multi-family housing takes much longer, 15 months, so it will take longer for these units to hit the market.
According to the analysis, multifamily properties accounted for an average of 32% of housing starts between 2012 and 2021, but grew to 35% in 2022 as mortgage rates soared and buying market prices led to a pullback in demand for single-family homes. This has led builders to turn to the multifamily market, which is dominated by rentals. Almost all - 95% - of the multi-family units started in the first three quarters of 2022 are intended to be used for rent.
Despite this boost in multifamily construction, a supply gap persists.
But in 2022, the US saw its highest level of annual household formation in a decade, with 2.06 million new households, outpacing housing starts. This widened the gap between total housing starts and household formations from 1.8 million housing units between 2012 and 2021 to 2.3 million units at the end of 2022, the report found.
The gap between single-family housing starts and household formations increased from 5.5 million at the end of 2021 to 6.5 million at the end of 2022, as the number of households increased and the construction of detached houses decreased.
This trend of underbuilding can be seen in the vacancy rates, both for homeowners and renters.
As households are formed and housing starts fail to keep pace, the number of homes sitting empty declines. Landlord vacancy fell from 2% in 2012 to 0.8% by the end of 2022. At the same time, rental vacancy rates dropped to a low of 5.6% in late 2021 and again in early 2022, before rising. slightly to 5.8% at the end of 2022, according to the report.

What needs to happen to close the housing gap?

If the construction and formation of households were to continue at their current rate - growth of households combined with a slowdown in housing starts - the gap will never close.
Closing the overall housing gap requires an increase in both single-family and multi-family supply to help restore balance to the housing market by removing pressure on both sales and rental prices, the analysis found.
If you look only at single-family homes, the rate of housing starts will have to triple to meet demand and close the existing gap of 6.5 million homes within 3 to 4 years.
However, if the rate of total housing starts (including both single-family and multi-family construction) increases by 50% from the 2022 rate to an average rate of 2.3 million housing starts per year, it will take 3 to 2.3 years to close the existing gap of 1.3 million homes , assuming an average rate of household formation in the last decade of about 70 million households per year, the report found. This would bring construction back to levels seen in the early 2000s and some of the peak months of construction in the mid-XNUMXs.
"As inflation and mortgages are expected to soften later this year, buyers are expected to return to the market and look for an affordable home, and the ongoing shortage of housing supply will only continue to put pressure on the market," said Daniel Hale. Chief Economist of Realtor.com.
The good news is that overall inventory levels are increasing from their epidemic lows.
"With less competition in the market from other buyers today, some home builders are now offering potential buyers incentives that may help some new home buyers find success in this challenging market," Hale said.