Is a Housing Shortage Coming?

Is a Housing Shortage Coming?

As the nation struggles to shrug off the worst housing crisis in decades, it may be hard to believe a housing shortage could be on its way. The nation is simply not building enough homes to keep up with potential demand. Just 672,000 new homes were started in April, less than half the long-term run rate needed to meet the nation's natural population growth. "It is ironic, but there is a growing consensus that there may be a new housing shortage coming," said James Gaines, a real estate economist with Texas A&M.

So far, the shortfall has been masked by a weak economy that has put a damper on homebuying. Once the job market rebounds, however, people will look to have their own homes again. This pentup demand could be unleashed on unprepared markets, causing shortages and rising local prices. Household formation has been on hold during the past few years as young people, especially, have been unable to find jobs. In the past, an average of more than 1.3 million households were formed each year, causing demand for 1.5 million new homes, including replacement homes. In 2009, only 398,000 new households were formed, according to the Census Bureau. That is much lower than average and a quarter of the number formed just two years earlier. "The decline in household formation is artificial," said Gaines. "The young are moving in with their parents. There's even doubling up among working class people. There's a pent-up demand coming if and when the economy recovers."

Those doubting a new bubble is near point to a large inventory overhang. The inventory number, however, can be deceiving for two reasons: People may not want to live in hard-hit areas where the houses are or the homes may be beyond repair. "Many of these vacant homes may not be habitable or are in locations where nobody wants to live," Gaines said.