A “housing shortage” amid a building boom that is outpacing household growth?

Something has to give.

By Wolf Richter for WOLF STREET.

Builders began construction of 147,400 private homes of all types in March, the biggest March since 2006. Housing starts are highly seasonal and peak in the summer. This included:

  • 99,100 single-family homeswhich was lower than March 2021 (102,800 homes), but both were the largest March starts since 2007.
  • 46,700 units in buildings with 5+ units, such as rental apartments and condos. It was the biggest month — any month, not just March — since 1986, as the boom in multi-family building construction continues, undisturbed by rumors of some sort of urban exodus.

In terms of seasonally adjusted annual rateBuilders began construction at a pace of 1.79 million housing units of all types in March, the highest for any month since June 2006.

Single-Family Homes vs. Units in Multi-Family Buildings.

Single-family housing starts, on a seasonally adjusted annual basis, fell from February to 1.20 million in March, in the same relatively high range that has prevailed since the end of 2020 and is measured up there with 2007 (red line in the graph below).

Housing starts in buildings with five or more units reached a seasonally adjusted annual rate of 574,000 units. This and the January 2020 spike were the largest multi-family housing starts since 1986 (purple line):

Construction and the industries it supports are important parts of the US economy. A downturn in the construction industry can significantly contribute to an overall economic recession.

Prior to the Great Recession, housing starts peaked in 2005, after years of overbuilding, and then experienced a long period of slowdown. The Great Recession didn’t begin until December 2007, by which time housing starts had plunged. Housing starts bottomed out in early 2009 and sat in the trash for another two years before starting to recover.

Today, housing starts are booming and there are no signs of a slowdown in construction, beyond the problems imposed on the industry by shortages of materials and labor that are delaying construction projects.

The “housing shortage?

On a theoretical level, let’s compare the annual rate of housing starts to the annual rate of increase in the number of households. It’s not 100% on target because housing starts alone don’t include the (relatively few) housing units demolished to make way for new housing units. But this serves as a rough indication of the trend over time.

In the chart below, the horizontal purple line marks the average annual increase in the number of households since 2000, according to Census Bureau annual data through 2020, an average increase of 1.17 million households per year. Annual household growth varies from year to year. In 2020, household growth actually turned negative for the first time in annual data dating back to 1948.

A household is defined by the people living in a dwelling (an address), whether it is a single person or a multigenerational family or a group of roommates. As long as they live in the same dwelling, it is a “household”.

Where the red line – the seasonally adjusted annual rate (SAR) of housing starts of all types – is above the purple line, housing units were built faster than households were added in mean.

As the chart shows, during the housing construction boom up to 2005, there was significant overbuilding, which later contributed to the housing slump.

Even as the housing crisis took hold and the land was flooded with vacant and newly built housing units, housing starts continued to outpace household growth until 2007, when housing starts had plunged enough that there were fewer housing starts over the next few years. than average household growth, and these additional households began to absorb housing units (purchased or rented).

Between 2015 and 2019, housing starts and household growth were roughly in balance. But they’re not in balance now – with housing starts significantly outpacing average household growth, especially in light of negative household growth in 2020.

The much-quoted “housing shortage” picture is clouded by many factors, including the construction boom that is outpacing household growth. Many households have acquired more than one dwelling, with the remaining dwellings vacant most or all of the time. It could be a second home or third home, a vacation rental, or a home they haven’t sold yet after moving in order to ride the market all the way and resell it (I know a few people who do precisely that).

However, when investors buy homes and then put them on the rental market, there is no impact on the overall “housing shortage”. It is when someone buys a second home or vacation home that sits mostly unoccupied, or is converted into a vacation rental, that a dwelling is retired as a dwelling.

What there is, however, is a shortage of housing that is so priced that people can actually afford to live in it, renting or buying, after the massive price increases in recent years. years and rent increases in many cities.

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