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Market Insider: How Long Will this Housing Shortage Last?

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housing_shortage_house_objectHome prices have risen at a double-digit rate since early spring. The Case-Shiller reading was up 11 percent in March compared to a year earlier, while the NAR median price was higher by roughly the same amount in April. This robust appreciation appears nearly certain to last for the remainder of 2013 and the reason is basic economics: increasing demand and tight supply.

Data on pending contracts and closed sales are at five-year highs, while data on homebuyer traffic activity (an element of the REALTORS® Confidence Index) is almost moving off the charts. Multiple bids are increasingly common in many local markets. With so few homes on the market – as evidenced by a 13-year low inventory of existing home listings and a 50-year low for newly constructed home inventory – buyers are increasingly forced to bid with an escalation clause in hopes of winning a home.

The rise in housing demand in conjunction with the improving economy is not surprising. It was bound to happen after an unprecedented five consecutive years of deeply suppressed household formation – less than half the normal rate at 500,000 new households per year from 2007 to 2011. But the renewal of household formation in 2012 and 2013 induced by six million net new job additions since early 2010 has rejuvenated demand for home purchases and rentals. The rebound in household formation will likely continue for several years, perhaps averaging 1.2 to 1.3 million per year over the next five years. Even if that growth is not realized, a return to the historic average of 1 to 1.1 million additions per year implies healthy future demand for home buying and renting.

But where is the supply to meet this new demand? First, the logic that rising prices will unlock underwater homeowners who will add to supplies of for-sale homes does not have merit. Yes, they may list their home for sale, but the intent is to move and buy another home, and not to sell to become a renter. The result is a net wash for inventory.

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