CoStar Predicts Housing Shortages and Construction Boom

A new report by the CoStar Group shows that those worrying about housing shortages are justified, and an increase in construction should begin within the next year or two.

Washington, D.C.—A new report by the CoStar Group shows that those worrying about housing shortages are justified, and an increase in construction should begin within the next year or two.

“New houses are being built to meet two forms of demand—for newly formed households, and to replace existing units that become obsolete due to deterioration, disaster or abandonment,” Ruijue Peng, chief research officer at the CoStar Group, tells MHN. “The first type of demand depends on population growth and size of the household but the second depends on the size of the existing home inventory and more construction is going to be needed to maintain that stock.”

Historically, about four percent of all inventory has been replaced each year, generating a larger demand than the addition of new households where the replacement requirement is even bigger. The report shows that today’s new construction is not able to meet this demand.

“The shortage is very real in the sense that in the last 40 years, our nation’s housing inventory has never been so aged or under-maintained,” Peng says. “Obviously, the situation is not sustainable unless the U.S. endures a drastic reduction in living standards, which is not only unlikely but also undesirable.”

The report chronicles the boom and busts of the housing cycle showing that from the mid ’70s to 1989, new construction outpaced demand for 15 years, except for a short pause during the 1982 recession. This boom eventually led to a decade of housing slumps in the 1990s, followed by another boom in the 2000s, which is known as the bubble.

“After the bubble burst in 2008, housing construction plunged to a historically low level,” Peng says. “While today’s new housing construction still covers the addition of new households, it leaves little room for retrofitting or replacement of the existing housing stock.”

Looking at the multifamily sector, Peng believes a change is coming.

“The report is for total housing but if you look at the new construction for multifamily, it has been kept low ever since 1986,” she says. “Multifamily has been underbuilt ever since then and I think it will do well soon. I expect new construction to rise in multifamily.”

In September, the charts of the report shows a 15 percent jump in housing construction, which Peng believes is a leading indicatory of a potential new boom.

“The pent up demand is so high, the boom to follow is likely to be either vibrant or long-lasting,” she says. “The economy is all about correction and we should see this soon.”