“We expect the housing supply shortage to continue to be one of the largest obstacles to inclusive economic growth in the US.”
A shortage of starter homes will be one of the biggest challenges the economic recovery will face going forward, according to a new analysis from Freddie Mac.
The long-term decline in construction of SFRs has been the main driver of the current housing shortage, even prior to COVID-19. In 2018, Freddie Mac estimated a housing shortage of about 2.5 million units measured against long-term demand; that number rose to 3.8 million units by the end of 2020, according to Freddie Mac data. That sustained increase is “extremely unusual,” Freddie Mac economists say, particularly since recessions typically see demand slow and supply rise.
The answer lies in the lack of starter SFRs: in 2020, only 65,000 entry-level homes were completed while 2.38 million first-time homebuyers entered the market. Contrast that number with figures from the late 1970s, when construction of entry-level homes averaged 418,000 units per year.
The supply of entry-level homes has dwindled steadily since that peak, and even at its cyclical peak in 2004—the same year homeownership peaked—only 186,000 starter SFRs were constructed.
“We expect the housing supply shortage to continue to be one of the largest obstacles to inclusive economic growth in the US,” writes Sam Khater, Vice President and Chief Economist, Economic & Housing Research at Freddie Mac. “Simply put, we must build more single-family entry-level housing to address this shortage, which has strong implications for the wealth, health and stability of American communities.”
Separately, the most recent NAHB/Wells Fargo Housing Market Index showed builder confidence in the SFR market up one point to 83, despite supply chain constraints and rising lumber prices. “While mortgage interest rates have trended higher since February and home prices continue to outstrip inflation, housing demand appears to be unwavering for now as buyer traffic reached its highest level since November,” NAHB Chief Economist Robert Dietz said.
The problem is despite strong buyer traffic, builders continue to face challenges to add much needed housing supply to the market, NAHB Chairman Chuck Fowke said, pointing to a tight supply chain for residential construction, particularly the cost and availability of building materials such as lumber.