In a few cases, “accidental landlords” may provide additional supply. This concept refers to an underwater homeowner who needed to move, but could not sell her original home, opting to rent it in order to cover the mortgage payments and other costs. Some of these accidental landlords will choose to sell when price growth elevates their rental properties above water. But the prevalence of this special circumstance is unknown and unlikely to add much to supply. However, pure investors who bought in recent years could provide fresh supply by unloading those properties to take advantage of higher prices. But the strength of rental yields relative to other investments implies high investor demand in the near term. The prospect of a mass dumping of properties by the investors is not in the cards this year.
A more direct means to increase supply is through new-home construction. Housing starts fell to historic lows for several years during the housing market crash. The initial decline was certainly justified to compensate for over-building during the bubble years.
However, my estimate suggests we have already overcompensated and are facing a housing shortage to the tune of 900,000 million. That is, cumulatively from 2001 to 2012, there were 15.7 million housing starts, while household formation along with the need to replace demolished units created demand for 16.8 million units (2001 was chosen for the beginning year since it was a non-eventful and very normal year for the housing market). Furthermore, if household formation is 1 million in 2013 along with 300,000 demolished/uninhabitable units and 100,000 in new demand for vacation homes this year — a reasonable and conservative assumption — then it will take 1.4 million housing starts just to meet the new demand this year without solving the previously accumulated shortage. This year’s consensus economist forecast on housing starts estimate is around 1 to 1.1 million. Consequently, the housing shortage is likely to worsen, sustaining robust price growth through the end of 2013.
Lawrence Yun is the chief economist for the NATIONAL ASSOCIATION of REALTORS®. He will be sharing his insider insights on the national and regional housing markets in a new, exclusive column for RISMedia’s Power Broker Report.
