The U.S. Housing Shortage Not as Bad as Some Fear

Despite rising concerns about an affordability crisis, demand for new and existing homes continues to outpace historical averages. Strong nationwide demand for housing has outstripped supply, contributing to soaring home prices. While we agree that more homes are needed in the United States to accommodate household formations, we think some estimates of the housing shortage are too severe. For example, the National Association of Realtors and Rosen Consulting Group recently published a report that concludes that U.S. housing stock is undersupplied by at least 5.5 million units. To calculate this figure, the report compared average annual home completions during 1968-2000 (1.5 million) to the average pace of annual completions during 2001-20 (1.23 million). The difference between these two figures (0.276 million) is viewed as an annual deficit that has accumulated to a 5.5 million-unit shortage over the last 20 years. However, this approach doesn't consider that population growth has been on a downward trend since the late 1990s, nor does it account for demographic changes. Based on our calculations, which consider household formations and the historical ratio of completions to new households (1.16), we estimate the shortage is closer to 3.8 million units.

Nonetheless, more homes are needed, and homebuilders are doing their best to keep up with demand while negotiating supply chain bottlenecks and rising construction costs. After taking a fresh look at housing data trends, we now expect housing starts will increase 12% year over year in 2021 to 1.55 million units (up from 1.475 million previously). We project starts will average around 1.6 million units over the next six years before moderating closer to the long-run average. We're modeling about 15.6 million cumulative starts over the next decade, about 1% higher than our previous projection. We don't expect our revised starts forecast to materially affect our valuations for housing-related stocks.

While our revised near-term housing starts projections are near the low end of consensus estimates, we've seen some signs of moderating (albeit still strong) demand. For example, weekly mortgage applications for home purchases have declined year over year for four consecutive weeks, and mortgage applications for newly constructed homes declined about 6% year over year in May. We're hearing that some buyers are suffering from sticker shock. For example, according to Fannie Mae's May 2021 Home Purchase Sentiment Index, only 35% of respondents see it as a good time to buy a home, down from 47% in April and the lowest reading since the index's inception in 2010.

The median price for an existing home in the U.S. has increased 15% year over year, on average, over the last six months, and homebuilders are currently enjoying significant pricing power. Historically low mortgage rates have helped keep the median mortgage payment relatively affordable despite rising home prices, but recently, the median mortgage payment/income ratio has exceeded 19%, the highest level since December 2018. However, we believe home price appreciation will moderate over the coming years as more supply enters the market and mortgage rates move higher.

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