Demand for housing across the U.S. is growing faster than supply as the population expands and young adults leave their family homes.
In the past decade, some 8.5 million single-family homes were completed, about half the 15.6 million new households that were formed, according to a Realtor.com analysis.
Affordability is a key driver of the market’s direction, as rising mortgage rates damping home buyers' enthusiasm and diminishing home builder confidence in turn.
Multifamily housing has filled some of the demand. Such home construction surged throughout 2022, reaching 35.1% of housing starts by the end of the year, a level not seen since 2015.
“Over the last 10 years, the rate of construction just hasn’t kept up with the rate of household formations, which has created this pretty sizable gap,” said Hannah Jones, Realtor’s economic data analyst. “Even when we consider multifamily construction, that may offer rental opportunities to households. But it doesn't really help with this large gap between the number of households that are forming each year and the number of single family homes that are being built.”
Household formation outpacing single-family home construction
The gap between single-family home constructions and household formations grew to 6.5 million between 2012 and 2022. Last year, 2.06 million additional households were created, while homebuilders started construction on about 1 million single-family homes.
- Household formations are outpacing new construction.
- Last year 2.06 million additional households were created, while homebuilders started construction on about 1 million single-family homes.
- Rising costs depressing demand, and homebuilder confidence.
Housing starts have dropped as buyer sentiment drops. There were 1.64 million starts for single-family and multifamily homes in 2021, compared to 1.55 million starts by the end of 2022. Jones said market activity would have to rise significantly to keep up with household formations.
“How long would it take to close the gap? Realistically at the somewhat normal rate of yearly household formation, construction would have to pick up significantly, to levels not seen in decades, to be able to keep up with that level of formation,” she said.
At the same time, multifamily properties made up 35.1% of all housing starts last year, up from 31.8% between 2012 and 2021. The majority of multifamily properties started throughout 2022 were intended to be rentals, Jones said.
Builder sentiment falls along with affordability
Rising housing costs, from construction materials to mortgage rates, are damping demand for U.S. homebuyers for single-family homes. By the end of 2022, just 10% of new homes sold were priced under $300,000, and only 37% of the total were priced under $400,000, down from 66% in 2019.
“Builders see demand wane and what's driving waning demand is decreasing affordability,” Jones said. “Builders see that more and more buyers are taking a step back from the market or reconsidering buying. As they see that signal, they have been pulling back on construction.”
Homebuilder sentiment fell from 83 in January 2022 to 31 in December, according to an index of homebuilder confidence, its lowest level since the early months of the pandemic.
“While the sizable housing gap continues to grow, homebuilders have pulled back on single-family construction as many would-be buyers cannot afford to buy a home given the current cost of financing. Instead, builders have transitioned their focus to the multi-family construction market, which will supply ample rental housing,” the Realtor report reads.
Throughout 2023, single-family affordability will continue to be a sore spot in the housing market, Realtor’s analysis predicts.
“As inflation and mortgage rates soften, buyers are looking for an opportunity to return to the market. The housing supply shortage will continue to put pressure on the housing market as buyers return to the market this spring in search of an affordable home.”