- In 2020 and the first half of 2021, there were 2.1 million new households in the United States, resulting in 12.3 million new homes between 2012 and June 2021. During this period, 7.5 million single-family homes were founded and 7 million single-family homes were completed.
- The gap between building single-family homes and starting a new household grew from 3.84 million apartments at the beginning of 2019 to 5.24 million apartments as of June 2021.
- Given the five-year average rate of housing construction and household formation, the gap would only widen.
- Assuming that household start-ups continue at the current 5-year average, the average house completion rate would have to triple to close the gap in house completions and households in 5 to 6 years.
- Instead, if household formations maintain the sluggishness of 2021 and house completions remain strong, it will only take twice the house completions rate (as estimated in 2021) to fill the gap in 5-6 years.
- Builders accelerate production:
- In the first six months of 2021, 565,000 new homes were started, which is 57% of the total number of new homes that were started in 2020. If this is sustainable, it will mean a 15% increase in home starts in 2021 compared to 2020.
- New births per 1,000 households rose slightly in 2020 from 7.1 in 2019 to 7.9 in 2020, indicating an acceleration.
- The data on new home sales suggests a decreasing proportion of affordable homes will be built and sold in 2021 compared to 2018-2020. In the first half of 2021, only 32% of new homes sold for less than $ 300,000, up from 43% in 2018.
- Builders are increasing the most in the south and west:
- Over 50% of home starts by June 2021 took place in the south and almost 25% in the west.
- As of June 2021, 13.8% of all building permits had been granted in the metropolitan areas of Dallas, Houston and Austin, Texas.
- Cities like Austin (TX), Nashville (TN), Raleigh (NC), Phoenix (AZ), Denver (CO) and Tampa (FL), see an oversized proportion of housing permits.
- Smaller quaint towns like Boise City, ID, and Provo, UT as well as beach towns across Florida are seeing a significant proportion of building permits for their size.
- Builders’ confidence suggests that this trend could continue. The mood among builders is strong and has risen year-on-year, but has fallen from its peak in November 2020.
The gap between starting a home and starting a household is widening
As discussed in the the last time we examined the question of the adequacy of the housing supply, 2012 to 2019 marked a period of economic expansion and prosperity. Immediately after the research in January 2020, the coronavirus pandemic changed daily life worldwide. Stuck at home led to one Review of home liferesulting in increased demand for housing across the country. However, as the demand for housing increased, the construction industry ran into problems of material and labor shortages, which drove up the cost of both inputs and widened the already large gap between housing and starting households. Housing demand was strong enough that these deadlocks did not stifle home sales growth, but these trends exacerbated the pre-existing shortage and made the problem worse.
Between 2019 and 2021, a further 2.1 million households were formed, so that a total of 12.3 million new households were created between 2012 and June 2021. A total of 7.47 million new homes will be built between 2012 and 2021. Since the combined number of new homes in 2020 and 2021 exceeded the number of new homes, the gap between these indicators widened to 5.24 million fewer homes than new homes.
This trend of under-building in relation to household formation is carried over to the vacancy rates of homeowners. As households form and housing construction does not keep pace, the number of vacant apartments is decreasing. Homeowner vacancies fell from 2% in 2012 to 0.9% in 2021.
Accelerating home construction can help fill the gaps
Between 2015 and 2020, the average household formation rate was 1.5 million households per year, while the average home completion rate was 806,000 apartments per year. If construction and household start-ups continued in this clip, the gap between these metrics would never be closed. If the house completion rate doubled to an average of 1.6 million house completions per year, it would take more than 20 years to close the existing gap. In order to keep pace with demand and to close the existing gap within 5 – 6 years, the housing completion rate would have to be three times as high as it is now (2.4 million completed homes per year). Should the establishment of households and housing completions continue in the first half of 2021, however, the scenario is somewhat more favorable. If the trends of the first half of the year continue, there will be 850,000 new households and 1,066,000 new homes in 2021. With this accelerated pace of development and the lower household formation rate, it would take more than 30 years to close the gap. In order to close the gap in 5 – 6 years, the construction rate would only have to double instead of triple as in the worst case.
However, construction of 565,000 homes began within the first 6 months of 2021, representing roughly 57% of total housing starts for 2020, suggesting that home construction is accelerating slightly to catch up with demand. If the pace of the first half of 2021 is maintained, this year will be the first time since 2016 that new home startups have overtaken household startups in a single year. Household formation is much lower than in recent years, but this trend could help the housing supply gradually catch up. However, new home sales indicate that construction activity is not focused on affordable housing. In both 2018 and 2019, 43% of new home sales were below $ 300,000. In 2020, however, that number dropped to 39%, and by the first half of 2021, only about 32% of new homes were selling for less than $ 300,000.
Building permits indicate investments in the south and west
More than half of all housing starts in the first half of 2021 occurred in the south. This trend will continue, as the share of building permits in southern metropolitan areas shows. In the first half of 2021, 13.8% of all building permits were granted in Dallas, Houston and Austin, Texas. Together, these cities make up only 6.0% of the US population. The volume of permits in relation to city size shows that significant investments are flowing into growing cities, such as: Austin (TX), Nashville (TN), Raleigh (NC), Phoenix (AZ), Denver (CO) and Tampa (FL). Investments in real estate developments also reflect a noticeable consumer shift towards markets with higher quality of life, larger housing, strong economies and relative affordability. This trend away from coastal urban inner cities to suburban and medium-sized cities has also been reflected in our Report on the hottest postal codes in 2021.
Interestingly, many smaller cities (<0.5% of the US population) are seeing significant investments relative to their size. Most of these smaller towns have the advantage of natural beauty, be it in the mountains (Boise City, ID, Provo, UT, Greeley, CO) or on the beach (many towns on the Florida coast).
The builders’ trust remains high
In the period 2010-2021, the client’s mood increased. In 2010, confidence was still bouncing back from the property crash, but the next decade marked a period of confidence-building expansion. Even the pandemic hiatus served to boost builders’ confidence to new all-time highs and stay above pre-pandemic levels after the initial shock subsided. Notably, the sentiment of builders dropped dramatically to a property market index (HMI) of 30 in April 2020 when the pandemic hit but recovered and climbed steadily in the fall of 2020, peaking at an HMI of 90 in November Sentiment fell slightly in the first six months of 2021, but has leveled off with a six-month HMI average of 83. The average home builder sentiment was 66 in 2019 and 70 in 2020. This suggests that builders will be positive about the market and their prospects for future business in 2021. The building owner mood is highest in the south and west, where the start of construction and building permits are going through the roof. In August 2021, the sentiment of builders dropped from 80 in July 2021 to 75. Although sentiment is still relatively high, this decline suggests that builders’ optimism is waning.
Overall, the market looks strong for homebuyers, builders and sellers alike. The low level of household formation in 2021 offers building owners the opportunity to catch up with demand. The pandemic served as an opportunity for thought, pushing many homebuyers to larger homes in lower-cost cities. The southern metropolitan areas, as well as Denver and Phoenix, have particularly high construction and approval rates, suggesting growth in cities that offer lower costs of living and more space.
For the annual household formation, the increase in households between December of the previous year and the current year was calculated. This value was used as the number of households started in the current year. Construction starts, completions and permits relate to the key figure single-family houses as a whole in the construction data of the Census. HMI and vacancy data were pulled and displayed as specified in the data source.
To understand how long it would take to bridge the gap between new households and new homes, it was assumed that each forecast year would show the average annual number of household startups from 2015 to 2020. The assumed base rate for housing construction was the 2015-2020 average. Any reference to the doubling or tripling of the house build rate refers to the average house build rate 2015-2020.
To talk about the affordability of the started and completed housing, the census data on sales of new housing was used as a proxy. In 2018-2020, it is $ 300,000 below the average home price. This price was used as the high end of affordability, with anything under $ 300,000 being considered “affordable”. To assess affordability, the relative share of home sales for less than $ 300,000 in each year, 2018-2021 was used.