Housing Stock Lags Demand

Freddie Mac has released a report revealing that the short supply of new single-family homes could impact the multifamily market in years to come.
Supply of New U.S. housing – Freddie Mac

A new report from Freddie Mac revealed that, after nearly ten years of low levels of building, available housing stock is lower than what is needed in the United States.

“We have a chronic shortage of single-family new supply, particularly for the starter and middle-income segments of the market,” Sam Khater, Freddie Mac’s vice president and chief economist, told MHN. “The stock of entry-level single-family detached homes, two- to four-unit homes, and manufactured housing is significantly constrained.”

Is Multifamily the Answer?

The research showed that if supply continues to fall short of demand, home prices and rents are likely to outpace income and household formation will fail to reach potential. That could have an impact on the multifamily market.

“The multifamily market has shown resilience in absorbing high levels of new supply,” Steve Guggenmos, Freddie Mac’s vice president, research and modeling, multifamily, told MHN. “Although vacancy rates have increased slowly, they remain below their long-run average. As a result, rent growth has outpaced target inflation due to strong demand.”

Guggenmos added that this may in part be due to the tightness in the single-family market, where the affordability of homeownership is under stress. Moreover, the cost to own due to single-family price appreciation and mortgage rates has grown faster than the cost to rent and that is expected to continue into 2019, although fundamentals may soften slightly.

For instance, in the Tampa/St. Petersburg area of Florida, multifamily is on the rise due to demand for housing. This is true elsewhere around the country as well.

A Look at the Numbers

In the 40-year span from 1968 through 2008, only one year recorded lower single-family housing units than what was built in 2017. The report projects that in the next 10 years, young adults will add approximately 20 million households, which will only increase the demand for housing.

In fact, almost 90 million residents were between the ages of 15 and 34 years old in the U.S. in 2016—six million more than those aged 35 to 54, according to the U.S. Census Bureau.

Therefore, Khater said, unless construction ramps up, housing costs will likely continue increasing, constricting household formation and preventing homeownership for millions of potential households.

“There is a lot of pent up demand and a lot of it is being driven by millennials who are forming households and looking to purchase homes,” he said. “The result is that our housing shortage is even more acute because we have a large wave of entry-level, owner-occupied demand coming into the for-sale market. We just don’t have the supply, and that puts even more upward pressure on home prices.”

 Freddie Mac research estimated that the current annual rate of construction is about 370,000 units below the level needed by this demand, with 1.62 million units needed annually to meet the housing demand.

 Chart courtesy of Freddie Mac