The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country's demand, according to a new analysis by mortgage-finance company Freddie Mac.
The estimate represents a 52% rise in the nation's home shortage compared with 2018, the first time Freddie Mac quantified the shortfall.
The figures underscore the severity of the housing deficit, which is a major factor fueling the current red-hot housing market. The shortage is especially acute for entry-level homes, which makes it more expensive for first-time home buyers to enter the market, said Sam Khater, chief economist at Freddie Mac.
"We should have almost four million more housing units if we had kept up with demand the last few years," Mr. Khater said. "This is what you get when you underbuild for 10 years."
Freddie Mac reached its shortage figure by assessing the amount of single-family home building needed to match demand from household formation, second-home purchases and replacements of damaged or aging U.S. homes, and comparing that with the pace of construction.
The supply shortage poses an obstacle to U.S. economic growth, by pushing up housing prices and making it difficult for first-time buyers to enter the market and build wealth, Freddie Mac said.
Home-building activity has been subdued since the 2007-09 recession, when many builders went out of business. While builders have increased activity in the past year, they are hampered by shortages of labor, materials and developed land. Many builders are pacing their home sales to make sure they don't sell more homes than they can build.
Single-family housing starts rose last year to 991,000 units, the highest rate since 2007. But starts fell in January and February on a seasonally adjusted basis as construction costs rose, according to Commerce Department data.
Home builders would need to construct between 1.1 million and 1.2 million single-family homes a year to meet long-term demand, but the start rate would need to be even higher to shrink the existing deficit, said Rob Dietz, chief economist at the National Association of Home Builders.
Freddie Mac in 2018 estimated that the U.S. was 2.5 million units short of what it needed to meet long-term demand. The new estimate is as of the end of 2020.
Some of the current shortage stems from the pandemic-related moratorium on foreclosures, and investors who buy single-family homes to rent them out have also played a small role, Mr. Khater said. But the bulk of the shortage is because of home builders not keeping up with long-term demand growth, he said.
Typically, housing demand declines and supply increases during a recession, he said. But the effect of the Covid-19 pandemic is unusual in that it spurred housing demand because higher-income households who were able to work from home wanted more space and were willing to live farther from their offices. At the same time, the pandemic caused supply-chain bottlenecks and permitting delays that slowed new-home construction.
House prices are rising rapidly as buyers compete for a limited number of homes. In February, there was a two-month supply of homes for sale, near a record low, according to the National Association of Realtors. Median-home prices in the month jumped nearly 16% from a year earlier to $313,000, NAR said.
The mix of newly built homes has also changed, with large, expensive homes making up a greater share of home-building activity. Builders built 65,000 homes smaller than 1,400 square feet in 2020, compared with more than 400,000 such homes annually in the late 1970s, Freddie Mac said.