Housing Disequilibrium

• The U.S. faces a significant housing shortage – Using a 10-year moving average, the percentage of housing starts vs population is down 50% from a 37-year trend, indicating a 5+ year potential shortage in housing units.1, 4 

• Bidding wars appear to be the rule, rather than the exception – Real estate transactions with competitive offers are now at 70%, more than doubling over the last two years.2 Nationally, the length of time a house is on the market is a median of 54 days, down 16.9% from 2020 and down 32.5% from 2019.5

• Housing prices have more than doubled in the past decade – The S&P/Case-Schiller US National Home Price Index has more than doubled in the past decade, up 106.1% since the end of 2011.3

• Rising interest rates may not temper demand – Recent transaction data indicates that although interest rates are rising, they may have de minimis impact on demand, given the acuity of the housing supply/demand imbalance.6

Disequilibrium implies a loss or lack of equilibrium or stability, especially in relation to supply, demand, and prices. The current housing disequilibrium pre-dates COVID shutdowns and supply chain issues as housing starts dropped dramatically after the Great Financial Crisis in 2007 and have yet to fully recover. Let’s look at supply, demand and prices in more detail.

Housing Supply – For some insights on housing supply trends, we can look at housing starts vs. population growth. As seen in the chart below, the range of the 10-yr moving average for housing starts vs population between 1970 and 2007 was consistently between 0.40% and 0.50%. After the financial crisis and the subsequent housing crash, the 10-year moving average ratio declined, with the current ratio at 0.24%, which is approximately 50% lower than the pre-financial crisis long-term trend.

Although the ratio has increased since the crisis, it remains far below the longer term pace, resulting in an estimated shortage of 5.24 million housing units, an increase of 1.4 million from the 2019 gap of 3.84 million.⁴

Housing Demand – As of December 2021, the typical home spent 54 days on the market, down 16.9% from 2020, and down 32.5% in 2019.⁵ Anecdotal data from more competitive markets indicate far shorter listing periods, multiple offers, and selling premiums to listing price.⁵ Work-from-home and larger space requirements, demographic shifts, and new family formations have all contributed to an increased demand for housing. As illustrated in the chart below, bidding wars appear to be the rule, rather than the exception, in real estate transactions.²

Housing Prices – One of the key impacts of this supply/demand disequilibrium has been a significant run-up in prices. As illustrated, below, the S&P/Case-Schiller US National Home Price Index has more than doubled in the past decade, up 106.1% since the end of 2011.³

Existing home sales in January 2022 showed strong growth, with 119 consecutive months of year-over-year gains in median home price.⁶ This recent data indicates that the potential for a housing slowdown from rising rates may be muted by continued strong demand.

Low inventories and strong demand, coupled with changing demographic patterns, consumer preferences, post-COVID recovery, supply chain issues, and monetary policy, among other factors, all play significant roles in the current housing market quagmire. Looking at the current U.S. housing market, disequilibrium appears to be present, with little evidence that conditions will change materially in the foreseeable future.

In short, it may take years for the housing supply to catch up with demand, which provides a compelling dynamic that is supportive of continued home price appreciation.

Important Disclosures & Definitions

1 Source: U.S. Census Bureau and U.S. Department of Housing and Urban Development, as of 12/31/2021

2 Source: Redfin, as of 01/31/2022

3 Source: S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index, Federal Reserve Bank of St. Louis, as of 12/31/2021

4 Source: National Association of Realtors, as of 12/31/2021, latest information available

5 Source: National Association of Realtors, as of 09/30/2021, latest information available

6 National Association of Realtors, as of 02/23/2022

Great Financial Crisis: a severe worldwide economic, banking and real estate crisis that occurred between 2007-2009. It was the most serious financial crisis since the Great Depression (1929).

S&P/Case-Shiller U.S. National Home Price Index: an index that measures U.S. residential real estate prices, tracking changes in the value of residential real estate nationally. One may not invest directly in an index.

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