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We're going to explore some of the Fundamentals of the Housing Market and why I think it's a great place to invest.
We're going to discuss supply and demand trends, supply chain issues, inflation, interest rates, affordability issues and a new demographic shift. We're here to be helpful to investors and I believe, understanding these fundamentals will help you make better investment
decisions.
SUPPLY AND DEMAND TRENDS
The first thing I want to talk about is the supply and demand trends. Many agree new household formation is a great indicator of demand for housing and the U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021. However, during that same time period, only seven million single-family homes were built and that leaves us with a huge supply gap of over 5 million homes.
Assuming household formations continue at the current five-year average, new home completions would have to triple in order to close the supply gap within five to six years and I just don't see that happening with new permitting taking so long and some of the other construction constraints like labor shortages and supply chain issues. I just don't see how builders are going to triple their output for the next three to five years.
This graph represents all of the active inventory of housing for sale. As you can
see, the trend over time is that there is less and less homes available for purchase. Keep that in mind.
This chart is showing the amount of household formation. As you can see, more and more households are being formed and this trend seems to extend into the future. In terms of simple economics, when demand is growing faster than supply, prices are going to rise. We've seen that the price of housing across the U.S. has steeply risen over the past few years and part of this is due to the recent Fed Monetary stimulus and pent-up demand from the pandemic but I think there are some other forces at play here.
INFLATION
Now, let's take a look at inflation. It is currently at its highest rate since the early 80s. It is the highest it's been for the last 40 years and when you look at the increasing cost of both raw materials and labor, all of this is contributing to a higher cost to build. When you couple the inflationary forces with the current supply chain issues, we expect the future cost of home building to continue to rise.
One more thing is the Fed is expected to raise interest rates over the next year and so we've got a lot of forces at play here and due to all of these factors, we project the cost of homeownership will continue to increase making home purchasing less and less affordable.
NEW DEMOGRAPHIC SHIFT
We've seen some unique demographic shifts that I think are important to discuss. There seems to be a fundamental shift in priorities from homeownership into renting and much of
this trend is fueled by a demographic shift as new younger generations are more focused on renting than owning. Not only are millennials more likely to rent than previous generations but now you have generation z entering into their 20s, and they will continue to feed into
the renter pool as their life cycle matures.
These two generations estimated at 157 million people make up about one-half of the U.S population and we're keeping an eye on them because they will shape the future economy with their financial decisions.
IN SUMMARY
We are seeing an increase in demand through household formation that is outpacing the supply of homes for sale.
We've got inflation and supply chain issues increasing the cost to build and;
Interest rates are on the rise increasing the cost to borrow.
All of these forces are decreasing affordability for homeownership and with housing demand split between owners and renters, we expect to shift more towards renting and all of this will
mean higher rental demand for years to come.
I hope this has been helpful for you. When investing, I think it's important to keep your eye on the trend (they say the trend is your friend).
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Until next time!
Go out there and create some passive income.
