Sept. 22, 2021
SEPTEMBER 9, 2021
In 2020 and the first half of 2021, the U.S. saw 2.1 million household formations, resulting in 12.3 million household formations between 2012 and June 2021. In this time period, 7.5 million single-family homes were started, and 7 million single-family homes were completed.
The gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021.
At the five-year average rate of home completion and household formation, the gap would only widen.
Assuming household formations continue at current 5-year average, the average rate of home completion would have to triple to close the gap in home completions and household formations in 5 to 6 years.
If instead household formations sustain the sluggishness of 2021 and home completions continue to be strong, it will only take double the rate of home completions (as assessed in 2021) to close the gap in 5-6 years.
Builders are accelerating production:
In the first six months of 2021, 565,000 homes were started, which is 57% of the total homes started in 2020. If sustained, this will mean a 15% increase in housing starts for 2021 compared to 2020.
Home starts per 1000 households increased slightly in 2020 from 7.1 in 2019 to 7.9 in 2020, indicating acceleration.
New Home Sales data suggests that a decreasing proportion of affordable homes are being built and sold in 2021 compared to 2018-2020. Only 32% of new homes were sold for less than $300,000 in the first half of 2021, down from 43% in 2018.
Builders are ramping up most in the south and west:
Over 50% of home starts through June 2021 were in the south, and almost 25% in the west.
Through June 2021, 13.8% of all building permits were granted in Dallas, Houston and Austin, Texas metro areas.
Cities such as Austin (TX), Nashville (TN), Raleigh (NC), Phoenix (AZ), Denver (CO) and Tampa (FL), are seeing an outsized proportion of housing permits.
Smaller scenic towns such as Boise City, ID, and Provo, UT as well as beach towns across Florida are seeing significant proportions of building permits relative to their size.
Builder confidence suggests that this trend could continue. Home builder sentiment is strong and up year-on-year, though dropping from its peak in November 2020.
The Gap Between Home Starts and Household Formations Continues to Widen
As discussed in the writeup the last time we examined the question of housing supply adequacy, 2012 to 2019 marked a period of economic expansion and prosperity. Right after the January 2020 research, the Coronavirus pandemic changed daily life worldwide. Being stuck at home led to a re-examination of home life, resulting in increased housing demand across the country. However, as housing demand ramped up, the construction industry ran into issues with material and labor scarcity, driving the cost of both inputs up and widening the already large gap between home construction and household formations. Housing demand was strong enough that these hang-ups did not stifle home sales growth, but these trends exacerbated the preexisting shortage, making the problem worse.
Between 2019 and 2021, an additional 2.1 million households formed, resulting in a total of 12.3 million new households between 2012 and June 2021. Through 2020 and the first half of 2021, homebuilders started construction on about 1.55 million single-family homes, bringing the 2012 to 2021 housing starts total to 7.47 million homes. As combined household formations outpaced housing starts in 2020 and 2021, the gap between these metrics widened to 5.24 million fewer housing starts than household formations.
Housing shortage of 5.24 million homes between 2012 and 2021
This trend of underbuilding relative to household formation carries over to homeowner vacancy rates. As households form and housing starts fail to keep pace, the number of vacant houses dwindle. Homeowner vacancy dropped from 2% in 2012 to 0.9% in 2021. Homeowner vacancy decreases from 2.0% in 2012 to 0.9% in 2021
Acceleration in Home Building Can Help Close Gap
Between 2015 and 2020, the average rate of household formation was 1.5 million households per year, while the average rate of home completion was 806,000 homes per year. If building and household formations were to continue at this clip, the gap between these metrics would never close. If the rate of home completions doubled to an average rate of 1.6 million home completions per year, it would still take over 20 years to close the existing gap. The rate of home completions would have to be three times the current rate (2.4 million homes completed per year) to keep up with demand and close the existing gap within 5 – 6 years. However, if household formations and home completions continue on pace with the first half of 2021, a slightly more favorable scenario plays out. If the year’s first-half trends continue, 2021 will see 850,000 household formations and 1,066,000 home completions. At this accelerated rate of building and decreased rate of household formations, it would still take over 30 years to close the gap. However, to close the gap in 5 – 6 years, it would only require the rate of building to double instead of triple, as would be necessary in the worst case scenario.
However, within the first 6 months of 2021, construction has started on 565,000 homes, which is about 57% of total housing starts for 2020, indicating home construction is accelerating slightly to catch up to demand. Notably, if the pace of the first half of 2021 is sustained, this year will mark the first time since 2016 that home starts have outpaced household formations in a single year. Household formations are much lower than in recent years, but this trend may help housing supply begin to catch up. However, new home sales data suggests that construction activity is not concentrated in affordable housing. In both 2018 and 2019, 43% of new home sales were priced below $300,000. However, in 2020, this figure dropped to 39% and through the first half of 2021, only about 32% of new homes have been sold for less than $300,000.
Household Formations vs Home Starts
Building Permits Indicate Investment in the South and West
More than half of all housing starts in the first six months of 2021 were in the South. This trend is on track to continue as shown by the proportion of building permits granted in southern metro areas. In the first half of 2021, 13.8% of all building permits were granted in Dallas, Houston and Austin, Texas. Combined, these cities only make up 6.0% of the US population. The volume of permits relative to city size reveals that significant investment is going into growing cities such as Austin (TX), Nashville (TN), Raleigh (NC), Phoenix (AZ), Denver (CO) and Tampa (FL). The investments in real estate developments also reflect a noticeable consumer shift toward markets with higher quality of life, larger homes, strong economies and relative affordability. This trend away from coastal urban downtowns and toward suburban and mid-sized cities was also captured in our 2021 Hottest Zip Codes report.
Growing cities see increased building permits
Interestingly, many smaller cities (<0.5% of US population) are seeing considerable investment relative to their size. Most of these smaller cities have the benefit of natural beauty, whether it be mountains (Boise City, ID, Provo, UT, Greeley, CO) or beach (many towns around Florida’s coast).
Smaller cities with access to nature see significant permitting activity
Builder Confidence Remains High
In the 2010-2021 time period, home builder sentiment climbed. In 2010, confidence was still recovering from the housing crash, but the next decade marked a period of confidence-boosting expansion. Even the disruption of the pandemic served to ultimately boost builder confidence to new all-time highs and to remain above pre-pandemic levels after the initial shock wore off. Notably, home builder sentiment fell dramatically to a Housing Market Index (HMI) value of 30 in April of 2020 as the pandemic took hold, but recovered and climbed steadily through the fall of 2020, peaking in November at an HMI of 90. In the first 6 months of 2021, sentiment came down slightly, but has leveled off with a six month HMI average of 83. Average home builder sentiment was 66 in 2019 and 70 in 2020. This indicates that in 2021, home builders are feeling positive about the market and their prospects for future business. Homebuilder sentiment is highest in the South and West, where housing starts and building permits are through the roof. In August of 2021, home builder sentiment dropped to 75 from 80 in July 2021. Though sentiment is still relatively high, this drop indicates home builder optimism is beginning to wane. Builder sentiment becomes more positive between 2012 and 2021
Overall, the market is looking strong for homebuyers, builders and sellers alike. Low household formation in 2021 is giving builders the opportunity to catch up to demand. The pandemic served as an opportunity for reflection, pushing many homebuyers towards larger homes in lower cost cities. Southern metro areas, as well as Denver and Phoenix are seeing especially high rates of construction and permitting, indicating growth in cities that offer lower cost of living and more space.
Household Formations (https://fred.stlouisfed.org/series/TTLHHM156N)
Single-family housing starts (https://www.census.gov/construction/nrc/index.html)
Metro-level residential permits (https://www.census.gov/construction/bps/msamonthly.html)
Metro-level population (https://www.census.gov/data/tables/time-series/demo/popest/2010s-total-metro-and-micro-statistical-areas.html)
Home builder sentiment (HMI) (https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index)
Homeowner vacancy rate (https://www.census.gov/housing/hvs/index.html)
To arrive at yearly household formation, the increase in households between December in the previous year and the current year were calculated. This value was used as the number of household formations in the current year. Home starts, completions and permits refer to the total single-family homes metric in the Census construction data. HMI and vacancy data were pulled and displayed as stated in the data source.
To understand how long it would take to close the gap between household formations and housing starts, the assumption was made that each projected year would see the yearly average number of household formations as assessed from 2015-2020. The assumed base rate of home building was the 2015-2020 average. Any reference to double or tripling the rate of homebuilding is referring to the 2015-2020 average rate of home building.
In order to speak to the affordability of the homes being started and completed, the Census data on new home sales was used as a proxy. For years 2018-2020, $300,000 is below the median home price. This price was used as the upper end of affordability, considering anything less than $300,000 as ‘affordable’. To assess affordability, the relative proportion of home sales for less than $300,000 in each year, 2018-2021, was used.