In previous blog posts, we discussed the significant shortage of available homes for sale in the nation’s real estate market. We thought it would be a good opportunity in this article to explore how longer-term trends in housing supply and demand have contributed to the shortage.
With regard to supply, we used our Black Knight public record data to count the number of new single-family (SF) homes and condominiums (condo) added to the overall inventory each year between 1981 and 2020. We did not include new multifamily units, such as apartment buildings, which comprise most of the units that show up as rental housing.
With regard to demand, the most basic measure is population growth and how it translates to the number of new households each year. Reinforcing demand, is the fact that the average household size has been steadily decreasing for the past 40 years, as seen in Figure 1 below. This means that over time, increases in population have led to even greater demand for housing units.
In 1981, a million person increase in population meant 362,319 more households. Today, that same population increase would translate into 395,257 households, or 9% more households, even if population did not increase. Yet, the population of the U.S. did increase — from 231,636,058 in 1981 to 332,915,073 in 2020, a 43.7% increase. With the decline in household size, this meant the number of households increased by 56.6%.
From 1981, the U.S. produced about as many units of SF homes and condos as the change in the number of households (see Figure 2 below.) This does not include multifamily units, but it still represents a consistent ratio that we can apply in aggregate or by metro market to help explain the lack of inventory and the recent surge in home prices.
From 1981 through 2009, the nation produced enough units to provide for 92.8% of the new households. Add to this some multifamily production and there was sufficient housing produced to prevent runaway housing shortages.
Since 2010, however, the situation has been quite different. We have only produced enough new SF and condo units at the national level to provide for 60.5% of the new households.
Figure 2 – Overall U.S. Supply vs. Demand
As with all of our analyses at the national level, these figures hide the reality behind shortages in many individual markets where there has been strong resistance to adding new housing and/or significant economic growth.
San Francisco, Los Angeles, San Jose, San Diego, Boston, Seattle and the Washington DC metro have been among the most restrictive markets for adding new housing. Traffic and environmental pollution, parking congestion and other negative externalities are the descriptors used by opponents of any new development.
Many markets with strong economic growth correspondingly ramped up more obstacles to development. The housing shortfall and affordability problems have been the result of a clear turning point in 2010, when the production of new housing was stymied by the Great Recession and never fully recovered.
Again, this imbalance between units added and household growth is not evenly distributed. It is much worse in the metro markets that have continued to see significant economic growth such as Seattle, where the ratio of household growth to housing added (via our measure) is 227% from 2010-2020 or Los Angeles and San Francisco, where the figures are 348% and 461% respectively. At the same time, in the slow or no growth markets, we see a balance between the two, such as Dayton at 93% and Akron at 114%.
Figure 3 – Seattle Supply vs. Demand
Figure 4 – San Francisco Supply vs. Demand
Figure 5 – Akron Supply vs. Demand
In Austin, the ratio is 147%; in Houston it is 164% and in Charlotte it is 144%. In these three markets, economic growth has been strong, but so has the supply of new housing — until recently, with labor shortages and material supply-chain problems.
Figure 6 – Houston Supply vs. Demand
Figure 7 – Charlotte Supply vs. Demand
This straightforward way of looking at supply vs. demand can be very helpful in explaining home price cycles. As seen in Figures 8 and 9, Boston home prices increased significantly during periods when new households far exceeded new housing units. In contrast, many interior U.S. markets were able to build enough new housing units to meet new household demand between 1981 and 2010. A good example is Kansas City which, as seen in Figure 11, exhibited a balance between new supply and demand until 2010. This led to relatively moderate increases in home prices over this time period compared to most U.S. markets. However, since 2010 new demand has far outstripped new supply, which has led to a much sharper increase in the median home price as seen in Figure 10.
Figure 8 – Boston Median Single Family Price
Figure 9 – Boston Supply vs. Demand
Figure 10 – Kansas City Median Single-Family Price
Figure 11 – Kansas City Supply vs. Demand
The housing production shortfall has become much worse since 2010, and it does not appear it will get better anytime soon. At the same time, the problem is worse in markets with faster economic and population growth, particularly those that are supply constrained. In the slower growth markets, home prices have not moved up nearly as fast as the nation as a whole.
For the U.S. overall, median household income has risen approximately 43% since 2010 through 2020, compared to the 71% increase in the median home price. Low mortgage rates and tight inventory will continue to support these prices for the foreseeable future.
The affordability problem for first-time home buyers is greater than ever, especially in markets with the most job growth or where supply constraints and difficult regulatory environments are greatest. With labor and material shortages and other supply-chain problems, it will take some time to get back to more normal production levels, whatever those are. Certainly, the new supply trends of the last decade will not solve the inventory problem, but will fall well short.