Over the past year, a prevailing macroeconomic theme that we focused on was the critical undersupply of housing in the US. Typically, we looked at this on a month-to-month basis to understand the trajectory of the economy and whether interest rates were having an impact on housing inflation. However, in reviewing the past year’s housing production data in the context of the past couple of decades, we find that conditions are likely to become tighter despite a near-term surge in supply—beginning with the single-family ownership market.
In the decade-plus since the Global Financial Crisis, a stark reality has emerged: people are forming households faster than we can build homes. The implications are meaningful and are likely to increase demand-side pressures and impact affordability across product segments. From 2010 to 2023, household formation rose by 11.1%, but housing stock overall lagged behind, growing only 6.2%. This glaring mismatch signals that, even with a short-term construction boom post-2020, the market is unlikely to meet demand over the long-term. This mismatch is likely to contribute to an ongoing increase in home prices and an expansion of the renter population, particularly as the barrier to homeownership becomes more significant.
Existing home sales are down—can new home production pick up the slack?
Despite the dominant story that rental housing, particularly multifamily housing, is expected to experience a near-term supply surge, the single-family market is falling behind demand by many measures. This is likely to have meaningful knock-on effects for rental demand. For example, in the past year we saw a year-over-year decline in existing home sales of approximately 0.9 million units. From another angle, in comparison to the annual average from 2020, existing home sales were down over 21%. Conversely, while new home sales experienced an uptick in 2023, the annual levels were down over 8% compared to the average annual from 2020.
On the new home supply side, we have seen a meaningful year-over-year decline in all four stages of production. The longer-term perspective paints a clearer picture. On the one hand, completions and units under construction remained stable on an average annual basis from 2020, exhibiting modest increases of 2.5% and 2.0%, respectively. Permits and starts, on the other hand, saw a decline of 10.2% and 8.2%, respectively, in 2023 compared to the average since 2020. The downward trend is likely to continue given tight credit conditions and labor availability.
What is not readily clear in these comparisons (and made clearer in the accompanying visual) is how new home production falls well short of closing the gap created by a decline in existing home sales. This is not a situation that we can build our way out of, and, again, the knock-on implications for rental demand are significant.
Why it matters: locked-in mortgages and declining affordability
Housing production dynamics alone are sufficient to create imbalances weighing on affordability. Adding to this, the mortgage rate lock-in effect has exacerbated the limited supply of existing homes in the market post-pandemic. This is unlikely to change in a higher rate environment, particularly with elevated yields in US Treasurys.
Current trends indicate a decline in housing affordability, primarily driven by persistently high housing prices rather than household income. In 2022, the National Association of Realtors’ (“NAR”) Housing Affordability Index (“HAI”) stood at 108.8, suggesting that a median income family could just about afford a median-priced home. The index, however, has seen a consistent decline throughout 2023. Over the past seven months, it has reached a point where the average family can no longer afford an average-priced home. Given the ongoing supply-demand imbalance, we expect housing to remain unaffordable for the near future. This situation hits renters the hardest, particularly in competition with existing homeowners who are likely to be able to use equity in their current home to price out others in a lower supply market. The result? We are likely to see even more renters staying out of homeownership in 2024 and beyond, bolstering incremental rental demand as the hurdles to homeownership continue to rise.