1. - RealEstateEconomyWatch.com - http://www.realestateeconomywatch.com -
Ready for a Housing Shortage this Year?
Posted By Steve Cook On February 15, 2010 @ 12:55 pm In Beyond Today's News, Crisis Watch,
Forecasts | 4 Comments
With healthy inventories, 3 million foreclosures, more and more short sales, falling values,
rising vacancy rates, shrinking rents and one third of all homeowners underwater, could we
possibly be heading for a national housing shortage this year?
Get ready, say several leading economists.
Brian Wesbury, chief economist at First Trust Advisors, told Forbes this week that we’re building
only one-third of the houses we need just to keep up with population growth.
Wesbury figures America needs to add 1.5 million housing units per year just to keep up with
population growth plus another 100,000 for fires and tear-downs, et al, we need 1.6 million or
more per year. Right now we’re down to about six and a half, seven months’ inventory, whether
you look at new homes or existing homes. Housing starts are now between 500,000 and
600,000 a year.
“I think one of the secret investments, if you will, over the next decade is going to be housing.
It is extremely cheap, inflation is on the way. But people are running away from it. You know,
it’s that old adage, ‘When there’s blood in the streets, that’s when you invest.’ And this is the
time, I think, for real estate,” Wesbury said.
Wesbury, dubbed “Mr. Sunshine” for his sunny forecasts, including his prediction that by the
third quarter of this year there could be a seller’s market for new homes, is not alone in
expectation of a housing shortage.
Last week, William Strauss, senior economist at the Federal Reserve Bank of Chicago, said that
though he sees a growth in housing production, he foresees a potential shortage in housing
units.
“Kids who have graduated are mostly still living at home, more people are sharing houses and
divorce rates go down in a recession. It’s a lot cheaper to be together than to separate,” he
said. “The housing market is looking better on affordability measures. After World War II we
had a boom with 170 million people living in this county. Now we are over 300 million, and we
have fewer houses for these people to live,” said Strauss.
Writing in the Vox economic site, MIT economist William C. Wheaton made a case similar to
Wesbury’s in an article last July.
“During the last decade, net new household formation averaged approximately 1.4 million per
year. Last year, the Census reported that the US added only 544,000 new households - during
severe contractions the young stay at home, singles “double up”, and household formation
(normally) slows. Even with declining demographics, however, most analysts foresee new
household growth resuming to a level of at least 1 million by 2010 and beyond. If we
conservatively add 200,000 demolitions per year, the US economy will “need” at least 1.25
million new units yearly in the near future. With today’s currently depressed construction, this
generates a yearly deficit of 750,000 units. At that rate, the current excess inventory of units
for sale or rent will be back below normal by 2011. Prices historically have a strong relationship
with sales “duration” - the ratio of inventory-to-sales. Hence under reasonable conditions, in
two years we will have to increase construction considerably and prices will have to justify the
cost of that construction,” wrote Wheaton.

2. Not surprisingly, home building industry leaders concur. At the International Builders’ Show
(IBS) in Las Vegas last month, they predicted that demand for multi-family housing units will
outstrip current supply by mid-2011, with increasing shortages of rental housing through 2014.
This is very likely to increase market-rate rents as much as 8 percent to 10 percent per year in
2011 and 2012, and by 4 percent to 7 percent per year thereafter through 2015.
“Lack of debt and equity is crippling the private companies’ ability to start new development,”
said Jerry Durkin of Wood Partners in Atlanta. “Over the last 10 years, our company built about
3,500 apartment and condo units a year. In 2009, we closed on one development deal, in
December.”
In fact, in high growth communities across the nation, local housing shortages are already here
or on the way. Dallas, Austin, coastal California, Pendleton, Ore., Greater New York City,
certain Washington, DC suburbs and dozens of college towns report low inventories and rising
demand that is not being met by new construction. Yet in California last year, a bank
demolished 18 completed new homes whose builder had defaulted rather than try to sell them.
Home building across the country is almost non-existent compared to a few years ago. In 2005,
2 million housing units were built in this country. Last year, that number dropped to nearly a
quarter of that. Home builders have lost half their share of the U.S. housing market in the past
two years, largely because of competition from cheap foreclosed houses. In 2009 only 7.6
percent of the homes sold were newly constructed, down from the average of about 16 percent
over the previous two decades, according to the Wall Street Journal. From June 2007 to June
2008, residential construction lost nearly 115,000 jobs, according to the Bureau of Labor
Statistics.
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