The Growing Housing Gap: A Challenge and Opportunity for Savvy Real Estate Investors

In a recent analysis by Realtor.com, it has become evident that the United States is currently facing a significant shortage of new homes. This housing deficit has been steadily growing over the past decade, primarily due to an inadequate rate of construction relative to the rising number of households being formed. For educated and astute real estate investors, this presents both a challenge and a promising opportunity.

Between 2012 and 2022, the gap between single-family home constructions and household formations ballooned to a staggering 6.5 million homes. However, it's crucial to note that this number somewhat overstates the housing shortage when considering multi-family units, predominantly rentals. If we include multi-family construction in our calculations, this gap is reduced to 2.3 million homes.

During this same period, approximately 15.6 million households were formed, while only 13.3 million housing units were initiated, with 11.9 million being completed. These figures include 9.03 million single-family homes and 4.2 million multi-family homes. Regrettably, only 8.5 million single-family homes and 3.4 million multi-family homes were finalized.

The housing market saw a surge in single-family home construction in the latter half of 2021, continuing into early 2022. However, this momentum was disrupted by an abrupt rise in mortgage rates as part of the Federal Reserve's efforts to curb inflation. Consequently, demand cooled, and builders began to scale back on single-family home starts.

Hannah Jones, an economic data analyst at Realtor.com, noted, "Cooling buyer demand and builder confidence led to slower single-family construction and a shift in builder focus to multi-family last year."

While multi-family housing can alleviate ongoing affordability challenges for renters, it takes significantly longer to complete, approximately 15 months compared to 7 months for single-family homes. In 2022, multi-family properties accounted for 35% of housing starts, up from an average of 32% between 2012 and 2021. Notably, 95% of multi-family units started in the first three quarters of 2022 were intended for rental purposes.

Despite this boost in multi-family construction, a supply gap remains, with 2022 witnessing the highest yearly household formations in the past decade, outpacing housing starts. The gap between total housing starts and household formations widened from 1.8 million units between 2012 and 2021 to 2.3 million units by the end of 2022.

This trend of underbuilding is reflected in vacancy rates for both homeowners and rentals. Homeowner vacancy dropped from 2% in 2012 to 0.8% by the end of 2022. Rental vacancy rates reached a low of 5.6% at the end of 2021, rising slightly to 5.8% at the end of 2022.

To close this housing gap, both single-family and multi-family supply must increase to restore balance to the housing market and alleviate pricing pressures. If the current pace of building and household formation continues, the gap will persist indefinitely.

For single-family homes alone, the rate of housing starts would need to triple to close the existing 6.5 million home gap in 3 to 4 years. However, if the rate of total housing starts (including both single-family and multi-family) increased by 50% from the 2022 rate to an average of 2.3 million starts per year, it would take between 2 and 3 years to close the 2.3 million home gap.

As inflation and mortgage rates are expected to soften, buyers are likely to return to the market, further intensifying the housing supply shortage. Nevertheless, there's some good news—overall inventory levels are increasing from their pandemic lows.

Real estate investors with a keen eye for opportunities should closely monitor these market dynamics. With the potential for increased incentives and less competition in the market, this challenging housing landscape may present favorable conditions for those who are well-prepared and strategic in their investments.