Real Estate

Freddie Mac: Housing market is short 2.5 million units

Housing inventory will remain a problem for years to come

The housing market needs an additional 2.5 million units just to match what is needed for long-term demand, according to a new analysis from Freddie Mac.

As it turns out, housing inventory is far behind what is needed for the housing market, driving up rent and home prices, which will continue to outpace income growth, according to the report. And what’s more – this will continue to be a problem for years to come.

“From 1968 to 2008, a span of 40 years, there was only one year in which fewer new housing units were built than in 2017—and this despite rising demand in a growing economy,” Freddie Mac Chief Economist Sam Khater said. “We estimate that over the next decade, young adults will add about 20 million households — and those households will need a place to live.”

“Until construction ramps up, housing costs will likely continue rising above income, constricting household formation and preventing homeownership for millions of potential households,” Khater said.

Freddie Mac explained that the share of young adults has increased to nearly 90 million residents between the ages of 15 and 34. These young adults will soon lead the drive for demand in entry-level housing.

At the current rate of construction, the housing market continually loses ground. Freddie Mac estimates the current rate is about 370,000 units below the level required by long-term housing demand.

The low estimate of 1.3 million units needed per year exceeds the current rate of housing construction – 1.25 million units per year. This means that each year, about 50,000 Americans can’t buy or rent a home because it hasn’t been built yet.

“Conventional wisdom suggests that the following factors would have an impact on household formation: housing costs, income, employment, education, marriage and children, race and geography,” Khater said. “Of these factors, we have identified housing costs to be the biggest impediment to household formation, followed by labor market outcomes.”

One of the reasons for this lack of new homes built is a shortage of skilled workers in the construction industry. After the housing crisis, many construction workers left the industry and have yet to return. This shortage not only prevents builders from meeting the housing demand, but also pushes home prices up so that homes are not being built where they are needed the most – at the entry level.

Another factor is the lumber tariffs, which are increasing the cost of homebuilding and driving up home prices, according to the National Association of Home Builders.

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