The United States is not building enough homes to account for the number of people setting up their own households. As a result, there is a sizable shortage of new homes after more than a decade of under-building relative to population growth, according to a new analysis from Realtor.com released Wednesday.
The gap between single-family home constructions and household formations grew to 6.5 million homes between 2012 and 2022. However, this figure overstates the housing shortage, since new multi-family homes offer options both to buyers and renters. If multi-family construction is included — which is predominantly rental units — this gap is cut to 2.3 million homes.
In the decade between 2012 and 2022, 15.6 million households were formed. During the same time period, 13.3 million housing units were started, and 11.9 million were completed. This includes 9.03 million single-family homes and 4.2 million multi-family homes. Of those, only 8.5 million single-family homes and 3.4 million multi-family homes are completed.
In the second half of 2021, single-family homes were being both started and completed at the fastest pace in the last decade. The first part of 2022 continued the previous year’s trend until mid-year, when mortgage rates surged as part of the Federal Reserve’s historic campaign to rein in inflation. The housing market felt the impact of the ascent of mortgage rates, red-hot buyer demand cooled and builders started to pull back on single-family home starts.
“Cooling buyer demand and builder confidence led to slower single-family construction and a shift in builder focus to multi-family last year,” said Hannah Jones, economic data analyst at Realtor.com.
The rate of overall housing starts slowed in 2022 while completions climbed. In 2022, roughly 1 million single-family homes were started, which is 10.6% fewer than in 2021, though still more than in any other single year back to 2012.
“While that brings greater supply to the market, most of it will be used for rentals and won’t address ongoing affordability challenges in the for-sale space,” said Jones.
Multi-family building helps, but household formation is outpacing building
Multi-family housing can ease ongoing housing affordability challenges by providing more supply for renters. But while a single-family home typically takes 7 months to complete, multi-family housing takes a lot longer, at 15 months, so it will take more time for those units to come to market.
According to the analysis, multi-family properties made up, on average, 32% of housing starts between 2012 and 2021, but grew to 35% in 2022 as mortgage rates spiked and prices in the purchase market led to a pullback in demand for single-family homes. This led builders to pivot to the multi-family market, which is dominated by rentals. Nearly all — 95% — of multi-family units started through the first three quarters of 2022 were intended to be used as rentals.