Barron’s has conducted an interview with Ivy Zelman, in which the famed housing analyst warns of a critical shortage of housing inventory in America. Zelman, who rose to prominence for betting against home builders in 2006, states in the interview that, four years into the post-recession housing recovery, America is still 35% below a normal level of housing starts.
Broadly, she observes that the cycle has been “elongated” and that the recovery slope has not been as steep as analysts previously believed it would be. The sluggish recovery has, in turn, impeded growth in home building and created a shortage of shelter, even as demand for homes has grown and driven prices up.
First-time homebuyers are being crowded out by the lack of affordable housing, whereas would-be sellers are shying away from putting their starter homes on the market due to fears that they cannot afford the next step up. Investors have snapped up low-end properties looking for returns, further exacerbating the shortage. Overall, the number of starter homes on the market has declined 43.6% in the past four years.
The National Association of Realtors found that total housing inventory by the end of 2015 dropped 12.3% to 1.79 million existing homes available for sale. Currently, total housing inventory is 3.8% lower than a year ago. Zelman concurs, noting that the “ U.S. is at a 30-year low of inventory available for sale.” As such, she predicts “double-digit housing-starts growth this year, next year, and in 2018.” Moreover, Zelman notes that there is a shortage of affordable housing concentrated at the low-end of the market, which large builders are only now addressing and making a killing while doing so.
This shortage comes at a time when millennial unemployment rates have dropped from a 14% peak to 7% and nonbanks are experiencing a boom in requests for FHA loans. Millennials, the oldest of whom are turning 34, are approaching an age where they are more likely to live in or seek single-family shelter, especially if they are married. Zelman cites figures showing that 70% of households 40 years of age or older and 80% of married couples live in single-family shelters.
One impediment to housing starts is impact fees, which can reach prohibitively high levels and make it impossible for builders to profit from low-end housing construction. There is a positive correlation between low impact fees and robust housing start growth, Zelman observes.
In addition, the occupancy rate of single-family rentals in the U.S. is a staggering 97%. Sensing demand and an opportunity, single-family rental operators continue to snap up 10% to 15% of new single-family homes. As new houses are acquired by rental operators and people are pushed to rent due to low inventory levels, the market becomes more susceptible to inflationary increases in housing costs.