The Housing Shortage and Its Impact On the Real Estate Market
One of the most devastating effects of COVID-19 has been its effect on housing market supply, causing an extended shortage in the amount of available houses. This housing shortage, estimated to be between 5.5 to 6.8 million residential units, has deeply impacted the real estate market -- in particular when it comes to affordable housing units.
We were recently joined by a few experts to talk about this pressing issue. The webinar panel included:
- Larry Andelsman, Principal at Andelsman Law
- Sasha Bernier, Managing Partner, Hestia Holdings
- Jeffrey Nabi, Executive Director, Imperial Fund
Drawing from the panel’s wealth of experience, many interesting ideas were discussed around the current situation regarding the housing shortage. Here are some of the main takeaways from the conversation.
What Specifically Precipitated This Housing Shortage?
Surprising no one at this point, COVID caused the world to completely stop and upended society-at-large in innumerable ways. It doesn’t take a rocket scientist to see that this would impact the real estate industry.
But we can observe some trends stemming from the pandemic. There are two main causes of the housing shortage: lack of labor and a critical blow to the supply chain. When something stops, as the real estate market did, it has to start again -- and to date, it has been slow in doing so. In its current form, the housing market simply doesn't have the requisite amount of labor to work.
This was only exacerbated by a lumber shortage, which needed time to start up again after work stopped. In fact, lumber went up nearly fourfold in only a matter of a few short months. For example, 2x4s, a crucial component of any form of construction, have risen dramatically in price during COVID-19. Before the pandemic, a 2x4 cost about 2.60. Now, the price has risen 350% to $7 or $8 on average. If the price of lumber trends down, the housing inventory will be better able to catch up to the demand. But this is hard to predict.
Sasha added to this discussion by mentioning the significance of governmental policy in regard to the housing shortage. In states like California or New York, where regulation is heavy, housing costs remain high. Due to heavy regulation, these major areas keep a large amount of supply under a price threshold that doesn’t keep up with the times. These price controls cause massive imbalances and ultimately force people to move to more cost-effective locations.
On the other hand, the states that have been growing the most have been those in the Sun Belt region in the southeast. Just to give a few examples, in the last United States census, Utah's housing development grew by 17.5%, Texas’ grew by 16.5%, and Florida’s by 9.7%. In the same time period, California only grew by 5.2%.
To drive the point home, just look at the difference in housing prices in these two key areas. The disparity in average housing in Los Angeles and San Antonio is massive -- Nearly 1 million in LA versus 220,000 in San Antonio.
Until these states change their policies and loosen up some of their regulatory measures, we will likely continue to see more people migrating to places in the Sun Belt where they can live more affordably. California and New York have long taken for granted their prime real estate. We may soon start seeing the consequences of their strict regulatory actions.
What Can Be Done to Fix the Housing Shortage in the Country Today?
Each panelist agreed that these are unprecedented times that require unprecedented solutions. Going forward, everyone needs to work together: the builders, the investors, developers, and lenders need to continue to drive the market.
Forbearance also bears mention here: what happens when the moratorium lifts and forbearance run out? What happens when the foreclosure machines start up again? This is when we will start seeing more housing units come available and investors having more inventory available.
An important thing for all of us to remember is that we lost an entire year of building. Right now, there are fewer than three months of supply of homes on the market. This is the lowest this has been since 2000. At its current rate, it will take roughly three years for supply to meet this demand.
Sasha compared the situation to the financial crisis of 2008 where statistics showed that there were about 2 million homes built per year leading up to the great recession. Now the average is about 1.6. When will inventory meet demand? It will likely be between a year and half and two years just to play catchup. This can be impacted by the Fed or changes in the market, but it will likely take a while to catch up.
So how do we solve this? Much of it is through policy, but we also need a vibrant private sector. The private sector plays a vital role in providing liquidity.
Build to Rent and New Housing Stock
Large institutions such as KKR and Blackstone are currently investing billions of dollars in build-for-rent buildings -- hundreds of units at a time. This could be wishful thinking, but perhaps one of the most realistic ways to address the housing shortage is to have these big institutions build housing stock in states with favorable regulations.
And these new build-to-rent houses likely won’t be in the major hubs of New York or California. Many places in the Midwest, South, and the Sunbelt are seeing a rise in the number of housing units as tenants take advantage of livable cities with affordable housing. Columbus, Ohio in particular is a place on the rise when it comes to new housing units.
The bigger void is how do you find a way to prioritize middle and lower-income housing and find a way to build out the market. We would need a huge builder to make it affordable. If the bigger players were to build homes and bring in supply, there may be less pressure on the supply metrics.
Should You Buy a House Now?
So is now a good time to buy a house? The important thing you need to ask yourself is where do you think rates are going? Our panelists believe that rates will stay low for years. What goes down must come up. But when will they come up: who knows?
We are seeing many homes quickly rise in value and price people out, who get cold feet with the new price point. But if you are looking into buying this as a place to live, this extra 30 or 40k doesn't really matter as long as you can afford to do it. Lock in the lower rates and enjoy a new residence for you and your family to enjoy for years. In the whole scheme of things, you can't look into the past and wish you bought it then. Make the assessment now and if you can afford it, buy it!
Learn more by watching our webinar below: