The Curious Case for a Real Estate Shortage

by BRIAN DAVIS

At a time when almost everyone in the real estate industry, and most homeowners trying to sell, are desperate for more buyers and market activity, some analysts are predicting a real estate shortage in the next few years.

Really? Is a real estate shortage even possible in the foreseeable future?

David Crowe, the head economist for the National Association of Homebuilders, is arguing forcefully that America will in fact see a real estate and rental lease shortage in the coming years, and points to the relatively little real estate development currently underway (about 591,000 new homes in 2010, and 87,000 new rental lease units). Population growth and its subsequent demand should outstrip those figures pretty easily.

But wait a minute – is David Crowe a reliable source? He’s paid to push for more real estate development! Still, the argument is so brazen, so counterintuitive, that perhaps there’s something there.

Consider for a moment that the number of distinct households has contracted quite a bit since early 2008, as more people are living under a single roof to consolidate resources and slash expensive rental lease or mortgage costs. Single and young people in particular who lose their jobs or take pay cuts are often quick to move in with a friend or with family, or to sign a rental lease on an extra bedroom in their home to help pay the bills.

Then there are the people who would likely have moved out on their own, but didn’t because of the poor job market. Many in Generation Y are camping out with Mom and Dad for an extra year or two to save money and slash costs, where a few years ago their counterparts were quick to go sign a rental lease on a flashy apartment in the drinking district of their local city.

In short, the demand for real estate is artificially contracted at the moment, and is poised to expand back to normal levels as soon as jobs reappear and people feel confident in signing a new deed or rental lease.

But here’s where things get interesting: there are currently about 14.2 million vacant homes in America right now, which is a discouraging high number for any real estate professional. It will take years to fill all of those vacant homes, even using the most generous estimates of population growth and expansion in the number of households. And it doesn’t matter.

A hefty percentage of that vacant real estate sits in areas that will either not recover economically, or will recover slowly, and those homes are effectively irrelevant for the housing recovery. Because the demand for real estate will follow the job recovery, what we’ll see is a rental lease and real estate shortage erupt in areas where employment recovery blossoms, as hungry job seekers eagerly move where the jobs are. Rural areas, and systemically depressed areas (such as much of Michigan and Ohio), will sit fallow and all of their vacant real estate will have not the slightest effect on housing demand.

There may well be a housing shortage, as our biased friend Mr. Crowe suggests. If and when it comes, it will be extremely location-sensitive, with hot pockets of demand and large swaths of untouched, unwanted real estate.