An analysis released Tuesday by realtor.com found that the 5.9 million single family homes that were built between 2012 and 2019 are insufficient to offset the 9.8 million new households formed during that time.
At the end of 2019, home builder confidence reached a two-decade high, driven in large part by robust economic growth. Single family home starts per 1,000 households grew from 4.6 in 2012 to 7.3 in 2019, taking the eight-year average to 6.2. Still, levels still remain well below the two-decade average, according to realtor.com's findings. Realtor.com economists estimate that even with an above average pace of construction, it would take home builders four to five years to get back to equilibrium.
"Simply put, new home starts are not keeping pace with demand. Home builders have a mountain of opportunity, but a big hill to climb," said Javier Vivas, director of economic research, realtor.com. "The current inventory crisis and the need for 3.8 million new homes means a nearly insatiable appetite from potential buyers, especially in the lower end of the market."
According to realtor.com, the 2008 financial crisis led home builders to become much more conservative -- building less and focusing on higher end homes with bigger margins. As such, the gap between inventory and demand is focused largely on entry-level and mid-range homes and is exaggerated by the fact that baby boomers are increasingly aging in place; not freeing up existing homes for new buyers to enter the market.
"Large populations of renters and well-qualified potential buyers with strong incomes are waiting in the wings. Assuming the economy avoids a full-on recession and rates remain low, the window for builders remains wide open. If builders can deliver homes at adequate price points, absorption will continue to strengthen through the first half of the decade," Vivas said.
Heading into the 2020s, growing demographics and strong economic fundamentals should continue to underpin home builder confidence. However, solving the home supply puzzle is more than just a game of volume, and timing can be tricky. On average, consumers need about two to three years of solid income and stability to save for a down payment. With today's strong economy and low likelihood of a downturn in the next few months, now may be the right time for builders to make a move, according to the report's findings.
"It's easy to understand why builders have been cautious in an effort to avoid overbuilding, but we believe that demand for new homes will remain strong, and home builders could represent a bright spot for housing in the decade ahead," Vivas said.