A version of this post originally appeared on Redfin.
Since 2009, housing demand has significantly outstripped supply, quite significantly in some areas. In 2015, we estimate that more than a million new households were created, but only 620,000 new housing units were completed, creating a shortage of just over 430,000 units. This gap has pushed up home prices and rents, a trend that will continue for the foreseeable future absent imminent policy changes.
The United States entered the 2008 economic crisis with more housing than was needed, putting downward pressure on price. But construction hasn’t kept up since then, and that surplus has been substantially eliminated.
Recent single-family starts and completions are above their post-crisis lows but are still well below levels seen between 1968 and 2008. Construction on new apartments is higher than it has been since 1986, but it has not increased enough to compensate for the low level of single-family construction. In 2015, there were just 968,000 housing completions; from 1968 to 2008, annual completions always exceeded a million units.
Supply: Fewer than 620,000 new homes
We added together single-family, multifamily, and manufactured housing construction in 2015, and subtracted units lost to various causes. The bulk of the new 968,000-unit supply was single-family and multifamily construction; manufactured housing, such as mobile homes, adds another 69,000 units, bringing the total to just over one million.
To calculate the loss of existing stock, we borrow from a study by Eggers and Moumen, which suggests that demolition, disaster, or other events reduce the US housing stock by 0.31 percent every year. There were more than 134.7 million housing units in the United States last year, so by that calculation, we lost 418,000 units in 2015, resulting in a net new supply of only 619,630 houses, condos, and apartments.
Demand: More than one million new households
There were 968,075 new households in 2014, according to the US Census Bureau. Data for 2015 aren’t yet available, but we know household formation has been rising. Let’s assume between 1 million and 1.1 million new households were created last year.
Supply outstripped demand leading up to the financial crisis by as much as a million units in 2006. By 2009, housing supply began to slow enough that the market was able to work off the precrisis excess inventory. This excess inventory is now substantially gone on the national level.
As builders start work on more new houses, supply will eventually catch up to demand, but the supply-demand gap is expected to continue growing for several years, even if household formation is flat. Chances are it won’t be. Millennials are still forming households, and baby boomers are living longer and more independently than ever.
It’s also important to remember that we don’t have a national housing market. In some areas, such as the coasts, housing supply significantly outstrips demand. Many areas are closer to balance, while a stubbornly large number have a long-term surplus—places like Detroit, Cleveland, and Buffalo, where net household formation has slowed or stopped.
Moreover, most new construction targets upper-income renters and owners; the lack of affordable stock is already at crisis levels. We need federal, state, and local strategies to boost construction in undersupplied areas, provide better affordability for renters, and extend mortgage credit to would-be first-time buyers.