Will an expected housing shortage cause another bubble market?

by Dan Krell © 2010

housing shortageLast week’s statements by Brian Wesbury may have startled the real estate industry. The chief economist for First Trust Advisers stated in an interview with Steve Forbes that the United States is headed for a housing shortage in 2011 (“Housing Shortage Coming In 2011” by Alexandra Zendrian, Forbes.com; 2/15/2010).

Mr. Wesbury’s dire prediction is predicated on housing statistics that indicate that the United States needs to add an annual average of 1.5 million homes to stay on par with population growth. The fact that housing starts and completions in the last two years have only been a fraction of the 1.5 million home target may be an indicator of a housing shortage. Even though the foreclosure crisis has added many homes to the market, the number of homes being built is significantly deficient in maintaining a reasonable pace with the population growth, according to Wesbury.

The last time people spoke of a housing shortage was in 2004, when monthly peek single family inventory for Montgomery County never exceeded 2,000 units and absorption rates of single family homes approached 80% during winter months (as reported in the 2005 Year in Review by the Greater Capital Association of Realtors). The following year, winter inventory soared and housing absorption rates did not exceed 40%. The result was a bubbling real estate market that exhibited an appreciation of 18% of single family home prices in Montgomery County from November 2004 to November 2005, even though inventory increased from 1,692 to 3,100 units for the same time period.

Cole Kendall, of Understanding Markets LLC (understandingthemarket.com), explains that the annual addition of 1.5 million homes is a benchmark that is widely used by economists to predict housing trends. The benchmark is based on a decade of demographic and economic data.

The problem is that since 2008, the Country’s economy and demography may have changed significantly, such that predictions based on historical data may be flawed. In fact, in 2008 Mr. Kendall was emphatic that over building occurred during the housing bubble. He stated that housing starts must remain low just to catch up with diminished demand, “It is impossible to know how many houses there should be in the U.S. at any time, but we can say that the gap between demographic demand and the supply of homes has been getting smaller.”

The national and local economy is vastly different today than it was earlier this dhousing shortageecade; so even if the demand for housing once again equaled the levels that existed in 2004, any resulting market gains may be expressed differently. Currently, unemployment and stricter lending policies are only a couple of changed factors that have significantly impacted the housing market in recent years. Compared to a time when many home buyers did not even need to prove they had a job (much less an income) to qualify for a mortgage, today’s lending environment is such that a home buyer not only needs to provide evidence of employment and income, they need a higher down payment as well as evidence of financial reserves to make their case for a mortgage.

There is no doubt that the housing supply is being reduced because of decreased demand. The result may not be a housing shortage, but more likely it is the manifestation of economic forces seeking equilibrium.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 22, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell