Really? Yes, that is exactly what some economists are saying. According to Lisa Swerzer for SmartMoney, in an article at MSN Money, this view is held by several presumably impartial people. The people making such predictions do not appear to be shills for the NAR (National Association of Realtors) or the NAHB (National Association of Home Builders). They come from such places as MIT (Massachusetts Institute of Technology) and the Milken Institute.
From the Swerzer article:
In the past seven years, housing starts first exceeded -- but then fell short of -- the historical norm of 1.6 million, according to the National Association of Realtors, with a deficit expected to grow into 2011. The chief economist of the Realtors group said last month that the big drop in home construction suggests a shortage could become an issue later.
Longer-term demographics support this theory, says Ross DeVol, the executive director of economic research at the Milken Institute, an independent think tank in Santa Monica, Calif. The U.S. is adding only about 600,000 housing units a year now, and the long-term growth in new households is 1.3 million to 1.4 million per year, DeVol says.
Swerzer points out that there is a significant inventory overhang for housing from a large number of foreclosures still to come. She mentions 3 million foreclosure filings in 2010 alone. It should be clarified that this is not the number of homes involved because many foreclosure processes involve at least two filings and some involve three: intitial default notice, auction notice and eviction notice (if necessary). The legal procedures vary from state to state and in some states foreclosures can be completed, under certain conditions, with only one foreclosure filing. For details and state to state variations, see ForeclosureProcess.org.
For the purpose of this discussion, we will make the approximation that the number of foreclosure filings is double the number of properties involved. Using Swerzer's 3 million filings, that would give 1.5 million properties in the foreclosure process for 2010. I have been following the development of the foreclosure story for some time (see here and here). The best current estimates that I have are for between 5 and 7 million additional properties to be foreclosed. If we pick the middle of the range (6 million) and divide uniformly that into the four years 2010-2013, that is 1.5 million foreclosures per year.
The second factor that will come into our calculation is the number of homes that are destroyed each year. Homes are destroyed by such processes as fire, wind or flood damage and simple decay and abandonment. (Yes, homes do wear out.) Using the numbers that Swerzer quotes, this is estimated to be 300,000 per year. That is 1.6 million average new housing units per year minus 1.3 million new household formations, on average.
The number of vacant residential units also represents a potential supply. The U.S. Census Bureau provides estimates of vacancies on a regular basis. The table below, for second quarter 2010 (.pdf) shows the latest data. A box has been added to draw your attention to the vacancy data.
click to enlarge
The current vacancy number can be compared to the third quarter of 2006 (.pdf), shown below, which we will use as a base line for a reference vacancy rate.
The difference between the total vacancies in 2Q/2010 and 3Q/2006 will be considered potential available housing inventory. This is 2.35 million units.
We can now calculate the trajectory of supply and demand for housing units. We start with the following two tables.
The table contains an estimate that 80% of foreclosures result in the occupancy of another residential unit. The remaining 20% either weren't occupied at the time of foreclosure or resulted in a combination of households. In 2009, 12% of all moves resulted in a combination of households, so 20% doesn't seem to be an aggressive assumption since some foreclosures are not occupied at time of foreclosure.
The following graph shows how the housing inventory balance might change from surplus to shortage under three scenarios.
These projections indicate that a housing shortage might be possible in 4-5 years. A number of things could make reality differ from the scenarios suggested. Among these:
1. A stronger recovery could improve employment more rapidly than envisioned here and demand could be higher creating a housing shortage in less than four years.
2. The occurrence of another recession during the 4-5 year projection could move the date for the surplus further out in time.
3. Changing demographics and personal habits could lower housing demand. Examples:
a. Multi-generational households may increase from the normal number for the past several decades. This would reduce demand.
b. The popularity of second homes (occasional use and seasonal) could decline and reduce the current total of 11.8 million significantly. This has the potential to effect supply nearly as much as new construction for a few years.
Although a strong economy could cause a housing shortage to arrive sooner than four years from now, there are a number of other possible scenarios that could extend the surplus beyond the 4-5 years suggested.
Yes, a housing shortage is probably coming. The question is when. This analyst thinks later rather than sooner.
Disclosure: No positions.
