Analyst Note| Brian Bernard, CFA, CPA |
Despite rising concerns about an affordability crisis, demand for new and existing homes continues to outpace historical averages. Strong nationwide demand for housing has outstripped supply, contributing to soaring home prices. While we agree that more homes are needed in the United States to accommodate household formations, we think some estimates of the housing shortage are too severe. For example, the National Association of Realtors and Rosen Consulting Group recently published a report that concludes that U.S. housing stock is undersupplied by at least 5.5 million units. To calculate this figure, the report compared average annual home completions during 1968-2000 (1.5 million) to the average pace of annual completions during 2001-20 (1.23 million). The difference between these two figures (0.276 million) is viewed as an annual deficit that has accumulated to a 5.5 million-unit shortage over the last 20 years. However, this approach doesn't consider that population growth has been on a downward trend since the late 1990s, nor does it account for demographic changes. Based on our calculations, which consider household formations and the historical ratio of completions to new households (1.16), we estimate the shortage is closer to 3.8 million units.