American's housing shortage won't be solved for years to come

A bounce in supply and lower demand in 2023 wasn't enough to offset years of underbuilding in the US housing market.

• More homes will be built in 2024, but the inventory shortage will persist.
• Moody's estimates a total housing deficit as high as 2 million units in the US.
• "The path to restoring a more balanced housing market is still many years away."

The tight housing market has shown recent signs of easing, but Moody's Analytics still anticipates Americans will face inventory snags for years to come. 

In a Friday note, researchers led by Nick Villa said even if 2024 turns out to be a year of solid home construction, the total housing deficit will remain in the 1.5 million-2 million range, with a shortfall of 1.1 million-1.2 million single-family housing units. 

Based on data from the end of December, the monthly sales pace implies 3.2 months' of housing inventory, according to the National Association of Realtors. Most economists consider a "balanced" market to offer six months' worth of supply for prospective buyers to pick through.

That shortage suggests a recovery in the housing market remains years away, the researchers said. In 2023, multifamily completions climbed by 11.1% sequentially to hit a seasonally adjusted 509,000 units. Single-family completions, too, finished the year strong with a 8.4% jump to hit 1.056 million units. 

But it's still not enough, according to Moody's.

"One good year of 'excessive' supply was only in its relative term when compared with affordability-constrained demand," Moody's researchers said. "There is a long way to go before solving the chronical housing shortage."

The bounce in supply and the lower demand as a result of high mortgage rates, however, couldn't compensate for years of under-building since the Great Financial Crisis, which has created a sizable shortfall in housing stock. From 1968 to 2006, the US averaged about 1.1 million units of single-family completions per year.

Then, from 2007 to 2023, that figure hovered near 765,000 units, as illustrated in the chart below. 

"Assuming each segment of the housing market works the most efficiently at its long-run equilibrium vacancy, housing shortage is created when current vacancy stays consistently below that equilibrium," Moody's researchers said, in reference to the pullback in construction after the Great Financial Crisis. "Facing excessive demand, market rent continued to grow less affordable, which in turn discouraged household formation"

Meanwhile, the national median house price remains "effectively flat" since the all-time highs from 2022, Moody's said.

The limited inventory growth since then has had a much less pronounced impact than the sluggishness in home sales. 

The NAR reported pending home sales climbed 8.3% in December from November to hit 77.3. That squarely beat expectations and marked the biggest spike since June 2020.

At the same time, average mortgage applications last month also increased roughly 8% from November, which suggests demand is ramping up.

Ultimately, to Moody's, increasing housing inventory and rebalancing the market will take years of "joint effort and creativity" across the public and private sectors.