How to Solve the Housing Inventory Problem

One way to solve the ongoing shortage of available homes for sale, which has put consistent upward pressure on home prices and caused some affordability issues due to price appreciation outpacing wage growth, is for the pace of building to increase.

While some recent analysis shows the shortage of inventory may continue for a while, some reports indicate that the problem may begin to subside in 2017.

The current supply of homes for sale is at 2.02 million, which calculates to a 4.3 month supply, which falls short of the 6 to 7 month supply needed for a balanced market, National Association of Realtors (NAR) Chief Economist Lawrence Yun said. Homeowners merely selling a home does not alleviate the inventory shortage, since most sellers are likely to turn around and buy another home. The large number of single-family homes snapped up by investors for rental have also contributed to the shortage of homes for sale, but investors are not likely to sell these properties in large numbers due to recent healthy rent appreciation—which leaves new construction as the most likely way to solve the lack of inventory problem, Yun said.

Yun said that logically, 1.5 million new homes need to be built each year in order to keep up with household formation and lost inventory, since 1.1 to 1.2 million new households are formed each year and 300,000 to 400,000 homes are demolished (it so happens that 1.51 million was the 50-year annual average for housing starts from 1950-2000).

November’s New Residential Construction data from HUD and the Census Bureau reported an annual pace of just 1.09 million for housing starts, including both single- and multi-family (just 828,000 for single-family), falling short of the 1.5 million needed. Since the crash in 2007, housing starts have averaged just 870,000 annually, according to Yun.

“The bottom line is that we need a few years of above-normal construction activity, say 1.7 million housing starts per year,” Yun told Forbes. “Only then will we see a slight rise in vacancy rates to help lessen the rent growth pressure and bring the inventory of homes for sale to a more balanced market.”

Economists’ forecasts for housing starts for the next few years fall way short of that number, however, leading Yun to predict the shortage could last another four years.

The good news for housing inventory is that the National Association of Homebuilders reported for December that builder confidence was at its highest level in more than 11 years largely due to the incoming administration’s promises of regulatory relief for the homebuilding industry.

NAHB Chief Economist Robert Dietz stated, “While the significant increase in builder confidence for December could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing as we head into 2017.”

More possible good news for the supply of homes for sale: Redfin, in its forecast for 2017, predicted that inventory will rise by 1.7 percent by the end of next year and that 2017 would be the “fastest housing market on record” in terms of how quickly homes are selling. In November, the number of days a home stayed on the market declined over-the-year from 56 to 50 days, according to Redfin.