Freddie Mac: U.S. Housing Stock Not Keeping Up with Demand

After nearly a decade of low levels of building, housing stock is well short of what the United States needs, said Freddie Mac, McLean, Va.

New research from Freddie Mac said if supply continues to fall short of demand, home prices and rents are likely to outpace income and household formation will fail to reach potential.

Housing supply has been a major challenge facing the housing market in 2018 and will continue to be for years to come, said Freddie Mac Chief Economist Sam Khater.

“From 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017–and this despite rising demand in a growing economy,” Khater said. “We estimate that over the next decade, young adults will add about 20 million households–and those households will need a place to live. Until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households.”

The report noted the U.S. population has become younger in recent years. Nearly 90 million residents were between 15 and 34 years old in the United States in 2016, six million more than those aged 35 to 54, according to the U.S. Census Bureau. With the median age of first-time home buyers at 31 years old, these young adults comprise a larger share of the first-time home buyer population and therefore drive demand higher.

Freddie Mac estimated the current annual rate of construction is about 370,000 units below the level required by long-term housing demand. It estimates show 1.62 million units are needed annually to meet the housing demand: 1.1 million to accommodate household growth; 300,000 units to replace depreciated existing stock; 100,000 to meet the demand for second homes; and 120,000 units to provide enough vacant homes to maintain an efficient marketplace.

“Conventional wisdom suggests that the following factors would have an impact on household formation: housing costs, income, employment, education, marriage and children, race, and geography. Of these factors, we have identified housing costs to be the biggest impediment to household formation, followed by labor market outcomes,” Khater said.

In a separate report, Fannie Mae, Washington, D.C., said higher household income is making Americans more optimistic about homeownership, for now.

The Fannie Mae Home Purchase Sentiment Index increased slightly in November, rising 0.5 points to 86.2. The increase can be attributed primarily to an increase in the net share of Americans who reported significantly higher income, which hit a new survey high after jumping 5 percentage points. The net share of Americans who said it is a good time to buy a home rose 2 percentage points, while the net share who said it is a good time to sell a home remained unchanged. Meanwhile, the net share of survey respondents who expect home prices to go up fell 4 percentage points, and the net share who expressed greater job confidence fell 1 percentage point. Finally, the net share who expect mortgage rates to go down increased 1 percentage point.

“The HPSI has moved within a tight range over the past five months, as positive sentiment regarding the overall economy continued to offset cooling housing sentiment,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Consumers’ perceptions of growth in their household income reached a survey high this month, helping to absorb some of the impact of increasing mortgage rates on housing market activity.”