Market Analysis

How the Current Housing Shortage Was Created

The problem of the urban exodus is compounded by a housing shortage. The potential increase in demand for single-family homes away from urban areas arrives at a time when the housing supply has been constrained by two main factors:

  1. A Decline in Building (2008-2018) - A huge decline in new homes being built was caused by the Housing Crisis and subsequent Financial Recession of 2008-2009.
  2. A Huge Increase in Institutional Home Buying (2011-2015) - Institutional Investors, Hedge Funds and Overseas buyers acquired large amounts of residential housing during and after the 2008-2009 crisis as rental properties.

Decline in Home Construction

The table below shows U.S. Annual Housing Starts and Population from 2007 to 2018. Using the average housing starts from 1970 to 2007 (37 years) of 1,590,832 per year, we have calculated the deficit of homes built each year from 2007 to 2018. The cumulative 12-year shortage, as defined by the previous 37 years, is 7.6 million homes or about 4.7 years of construction. Of course, as far fewer homes were being built, the U.S population continued to grow.

While the shortage grew to 7.6 million homes, the U.S. population grew by 28 million people from 2007 to 2018.

-Source: U.S. Census Bureau

The decline in U.S. Housing Starts, and continued increase in population is also shown in the chart below.


Top Panel: U.S. Annual Housing Starts. Bottom Panel: U.S. Population
Source: Bloomberg

Large Institutional Buyers Further Decreased the Housing Supply

At the same time that 7 million Americans lost their homes to foreclosures, Blackrock, Blackstone, Goldman Sachs and other large institutional and overseas investors took advantage of the melee and bought billions of dollars of housing between 2011 and 2015. Realty Trac’s Darren Bloomquist said that “Foreclosures were soaked up largely by investors, who were buying up properties as rentals we saw a lot of the hedge funds and big private-equity groups get into this business.” Bloomquist said they were taking advantage of cheap housing and the fact that people who lost their homes still needed a place to live.

  • Blackstone spent $7.5 billion acquiring 40,000 houses in two years to create the largest single-family rental business in the U.S – South China Morning Post 2013
  • In 2013, Colony Capital, a Los Angeles-based investment firm, was spending $250 million each month [to buy homes]and already [it] owned 10,000 properties – New York Times 2013
  • Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country. In one Atlanta zip code, they bought almost 90 percent of the 7,500 homes sold between January 2011 and June 2012 – The Atlantic 2013
  • Data to March 2013 on 25 metropolitan areas compiled by Radar Logic show institutional investors accounted for 12% of home purchases, up from 9% a year ago. You say 12% doesn’t sound like that much? Stripping institutional investors from the statistic, home purchases actually declined on a yearly basis. – Forbes 2013
  • BlackRock, the world's biggest money manager, and private-equity firm KKR have gained a majority stake in Home Partners of America, a single-family rental company backed by mortgage-backed securities pioneer Lew Ranieri. - Keefe, Bruyette & Woods 2012

The Federal Reserve reported in 2012 that this new activity by large investors was drastically different than past practices and could have serious consequences for the real estate market,

“In 2012, several large firms began purchasing single-family homes with the stated intention of creating large portfolios of rental property. We present the first systematic evidence on how this new investor activity differs from that of other investors in the housing market. In the aftermath of the financial crisis and Great Recession, the supply of vacant homes far exceeded the demand for owner-occupied homes. This severe imbalance presented a unique opportunity for investors to purchase large numbers of single-family homes, often at distressed prices. In 2012, a handful of large private-equity-backed investors began purchasing single-family properties with the stated intention of creating portfolios of rental property that would be substantially larger than any previously-seen holdings of such property.1”

The amount of institutional buying of residential buying can be confirmed by the number of cash buyers. The prevalence of cash buying is consistent with large institutional buying. Goldman Sachs shows that 60 percent of all 2013 home sales are being driven by cash buyers. “Analysis estimates that around 20% of all homes sold before the housing crash were “all-cash” sales” (WSJ 2015). As the FED report states, “Buyers paying cash at the time of purchase have at least two major advantages in the housing market: they can purchase property at foreclosure auctions, where the price discount can be substantial, and home sellers prefer bids that are not contingent on the approval of mortgage financing.”

Indeed, this large buying in order to rent did have huge consequences. Frank Nothaft, an economist with Corelogic stated that from 2006 to 2014, the stock of rental units in the U.S. increased 33%, from 9 million to 12 million units. These are homes that are now no longer available for people to buy. Susan Wachter, a real-estate professor at the Wharton School in Philadelphia, “The housing market has recovered,” she said. “Housing finance has not recovered.” Those higher prices may make investors and current homeowners more willing to sell. But said that’s only half the equation. She says many people who might consider buying or trading up are still struggling to get a mortgage. Renting may be the new normal.”

In a 2016 article, the New York Times explained, “Wall Street’s latest real estate grab has ballooned to roughly $60 billion, representing hundreds of thousands of properties. In some communities, it has fundamentally altered housing ecosystems in ways we’re only now beginning to understand, fueling a housing recovery without a homeowner recovery. “That’s the big downside,” says Daniel Immergluck, a professor of urban studies at Georgia State University. “During one of the greatest recoveries of land value in the history of the country, from 2010 and 2011 at the bottom of the crisis to now, we’ve seen huge gains in property values, especially in suburbs, and instead of that accruing to many moderate-income and middle-income homeowners, many of whom were pushed out of the homeownership market during the crisis, that land value has accrued to these big companies and their shareholders.”

The country now emerges from the worst pandemic in a century, with consumers looking to move away from cities, which have been the epicenter of the crisis. These consumers will face a housing shortage brought on by the double barrels of a decade of underbuilding and a market with large institutional landlords who do not want to sell. Buyers will have to use every tool at their disposal to find homes for sale.

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Jeffrey Sloane

Jeff Sloane is a former Wall Street trader who now provides institutional research for banks and hedge funds. His most recent projects are focused heavily on emerging technologies in the real estate market.

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