Joseph is CEO of TenantCloud, a cloud-based property management solution that helps landlords maximize revenue from rental properties.
The housing market has, simply put, gone insane. I’m writing this article from Austin, Texas, where my neighbor’s house just sold within four days for $40,000 over the $1 million asking price. That same house sold in 2008 for $263,000. If my street was the only place where this was happening it would be one thing, but the same phenomenon is happening all over the country, every day.
It’s easy to want to put the blame for this phenomenon on today’s exceedingly low interest rates, but it’s actually clearly a case of a mismatch between supply and demand. Prior to 2020, rents were increasing and pushing many states to develop rent control policies, so when the pandemic forced everyone to stay home, it only created a larger bottleneck of demand for homes with ample space. City dwellers in apartments headed to the country to find a home with a yard, internet and open air. Many people who were, until then, always renters, decided to put down roots and become first-time buyers.
Redfin, a real estate brokerage company, estimates the rural supply of homes dropped 44% in 2020 due to high demand and many homeowners choosing to stay put. So where did all these homebuyers come from? We can attribute the increase in home buying, at least in part, to Millennials.
Millennials, the generation aged between 25 and 40, comprise an estimated 72 million of the population and make up the largest group of potential first-time homebuyers in the country. Baby Boomers, who are established as homeowners, total around 71 million. Generation X, the “ignored generation,” number approximately 65 million, and there are still around 20 million of our oldest citizens who make up the Silent Generation.
While Millennials make up a significant portion of the adult population, in 2019, they had the lowest percentage of homeownership, at 43%. However, more recent data has found the rate of Millennial home buying is increasing steadily.
One would then reason that, of the 1.3 million (download required) new homes built in 2020, most of them would be starter homes, given the vast amount of young people entering the housing market. But new construction for entry-level homes has been on a decline for the last five decades, with 2020 only adding 65,000 new entry-level homes to the market. In the same year, there were nearly 2.4 million first-time homebuyers. In some cases, the low supply of entry-level homes resulted in younger homebuyers either being priced out of the market or having to buy a much larger and more expensive home.
Freddie Mac estimates that there is a shortage of 3.8 million homes as of the end of 2020. After the Great Recession in 2008, new home construction dropped significantly. Since then, construction rates have risen, but the demand for new homes still far exceeds the supply.
New Housing Units
You might imagine that the high demand for new housing would spark a lot of new construction from developers, but the rising costs of building a new home may slow that as well. Copper, steel, gypsum, lumber, soft lumber, plywood and ready-mix concrete have all seen record-setting price increases. These price increases are thought to be pandemic-related and, therefore, not long-term spikes, but it could still be a couple of years before pricing comes down and the market levels itself.
In addition, I’ve found that many builders who were burned during the 2008 recession do not want to invest in speculative homes and now build primarily based on sales. This means only those who have great credit or money upfront will be able to build homes, as many builders won’t risk the high prices of construction of speculative entry-level developments.
If we continue building at the current rate, I’ve seen estimates that we’ll likely need at least five years to get back to a construction rate of 1.5 million new homes every year, which will then alleviate the demand and potentially lower prices.
Loco, Loco, Location
Over the last decade, many people have moved to other states; 16 states have seen a population decline with the largest decline happening in California. States such as Texas, Utah, Arizona and Oregon saw net increases in movement. It’s no coincidence that some of the states with net increases are also those with the least dense population per square mile.
Whether or not this trend will continue is unknown, but we’ve recently seen one of the highest rates of employment resignation in decades. The way I see it, as the pandemic ends, people may not want to move back to the office and city life; instead, they may choose to take on new jobs that better accommodate their new rural lives.
It’s worth considering that some markets have more supply than others. Freddie Mac has compared vacancy rates, home sales and inventory to determine which states have a potential supply for new homebuyers. At the top of the list is Arkansas. Not surprisingly, many states on the list are those considered to be “fly-over” states, including North Dakota, Wyoming and Oklahoma. States with the least inventory include Oregon, California, Texas and Florida.
While this market is indeed crazy, if you’re living in Oregon, California, Florida or Texas and considering retiring — or can work remotely — then perhaps you might want to consider selling your home and moving to a state with more inventory, like Arkansas, South Dakota or Wyoming. This would give you the opportunity to sell in a market with less inventory (sell high) and buy in one of the markets with the most supply (buy low). In addition, you may want to consider only purchasing an already existing home, as new home construction costs may continue to rise and outprice existing homes.
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