The Single-Family Home Drought Is Not An Easy Fix, New Report Warns

The ongoing volatility in the real estate market underlies a shortage of single-family homes, and a new report confirms this assumption. According to information from Realtor.com, the number of single-family homes built over the past several years falls far short of the number of households looking to purchase a new home. For example, 2.06 million new "households" were formed in 2022. In contrast, construction started on only half that number of homes during this time period. That measurement is 10.6% less than the number of new homes that were begun in 2021. This trend has been occurring over the past several years, resulting in a shortage of single-family homes available for sale. A number of factors are contributing to this shortage, and there is not an easy solution in sight.

In recent years, many homebuyers decided to move out of the cities and into surrounding areas where they could enjoy more space, a lower cost of living, and the flexibility of working remotely. This relocation movement compounded the interest in new-home purchases when combined with the increase in new households joining the search. The demand for a single-family home rose higher than the inventory of properties available. This event drove the price of homes to record highs. Eventually, as interest rates began to rise, many potential homebuyers were priced out of the market and turned to rental properties instead.

As a result, the multi-family construction business expanded. Construction loans are more expensive with higher interest rates, and the cost of labor and materials has risen as well, per Marketplace. In a market where new home purchases may not be possible for many households, construction companies have turned to the more profitable multi-family construction projects instead. New construction on these properties rose 15% in 2022 compared to the figure in 2021 (per Realtor.com). Rental prices have risen to new records, making multi-family construction a very profitable business with a high return on investment, per Origin Investments. In fact, profit margins in this area of real estate development are reaching close to 35% in some areas. In contrast, the incentive to build single-family homes is not as strong.

There is not an easy solution to the shortage of single-family homes as long as prices remain high, interest rates keep rising, and construction of multi-family housing continues to outpace other new properties. Some relief may eventually materialize when the Federal Reserve begins to slow its rate hikes, but that may not happen soon. Brian Lancaster, a professor at Columbia Business School, believes that the policies of the Fed may be doing more harm than good, per Marketplace. He says, "In some ways, the Fed, in trying to kill inflation, is shooting itself in the foot ... in terms of housing anyway." Only time will tell how these trends will continue to shape the housing market in future days.