Today’s tight real estate market is already oversized, analyst says


Construction of residential single-family homes by KB Home is shown under construction in the community of Valley Center, Calif., June 3, 2021.

Mike Blake | Reuters

Anyone who is currently looking for a home knows the choices are slim, the competition is fierce, and the prices are high, but one analyst said there are actually too many homes under construction.

The supply of homes for sale at the end of August stood at 1.29 million units, down 1.5% from July and 13.4% from August 2020, according to the National Association of Realtors. This represents a 2.6 month supply at the current selling rate, which is one of the lowest supplies on record. A 6 month supply is considered a balanced market between buyer and seller.

Analyst Dennis McGill, research director at Zelman & Associates, however, said the current supply of homes for sale is not indicative of the overall need to build more homes. Demand is high right now, he said, due to an unusual emotional surge caused by the pandemic. Demographics, which have been a better measure of housing demand historically, do not support construction any further.

“There is a downward trajectory of population growth, of household formation as well, that is really going to undermine the need for what is built,” McGill said. “On the other side of that, you have the development community who are actually very optimistic about the housing shortage and actually very optimistic about how much to build, and they’re actually pushing the accelerator harder. than we probably think. to be. “

McGill cited data from the last decennial census of the U.S. Census showing that household formation is about 24% lower than it was in the previous four decades.

McGill partner Ivy Zelman, who is perhaps best known for one of the first warnings about the subprime mortgage crisis over a decade ago, agreed.

“The market is too hot. There is just a huge amount of capital coming into space,” Zelman said, referring to investor interest in the housing market. “In fact, we think the industry is already oversizing single-family to normalized demand by around 20% and around 10% for multi-family homes, so we couldn’t be more at the opposite end of the market. and industry. is, frankly. “

Home builders, however, seem to disagree. Housing starts are still not where they were over a decade ago, but they are slowly declining and homebuilder sentiment is high. Inventories of public house builders across the country were also down, although much of that was due to pandemic demand.

“I’ve seen Ivy’s thesis, and I agree that population growth is slowing down, and that’s one of the reasons the old normal (single-family and multi-family buildings combined of 1.8 million yard per year) is too high, ”said Rob Dietz, chief economist at the National Association of Home Builders.

Soft patch on the housing

But Dietz doesn’t agree that the industry is building too much.

“We need 800,000 to 900,000 single family homes for the growth of household formation and another 200,000 to 300,000 per year for replacement housing and second homes,” he said.

Dietz pointed out that 2018 was a more informative year for the real conditions in the housing market. It was the last period of mortgage interest rate hikes, and it produced what he calls a housing blight.

“The challenge now is that we have limitations on the supply side, including the lack of building materials and a growing shortage of skilled workers, as well as higher house prices relative to incomes,” Dietz said.

If the market is already oversized, that would pose even bigger problems for house prices, which are most certainly overheated. Most expect price gains to decline as interest rates rise, but if there is a glut of homes for sale over the next decade, prices could drop more significantly. .

The only real wild card is the vibrant single-family rental market, fueled by new investor demand. If rental demand were to decline and those same investors decided to sell and cash in, supply would surely exceed demand, and the tight and expensive market that we are currently seeing would swing to the opposite.

“You have home builders bringing in supply, you now have single family rental companies bringing in a lot of supply, building for rental, and you have multi-family developers bringing in supplies, so those three rooms have There has been a very big leap in development optimism, and it will take time for that to hit the market, ”said McGill. “But it’s going to be pretty aggressive.”

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