Housing & Mortgage
Your Most Crucial Home Buying Number May Be Local Supply
Shortage of housing units dominates price performance
Owning a home is, for most American families, the largest financial commitment and also the biggest piece of net worth.
A common dream is to watch your house appreciate smartly over the decades, sell it and downsize, and use the excess proceeds to supplement retirement savings. A common nightmare is to faithfully pay your mortgage for years and watch your home’s value slide sideways, or even decline.
If you bought in Los Angeles 20 years ago, based on the S&P Case-Shiller index for the area, you likely would be up 180% or so on your investment; Dallas, not quite 100%; and Chicago, a tad over 40%, though if you took into account inflation, Chicago prices overall wouldn’t have budged in two decades. Ouch.
Before committing to buy a house, along with investigating the schools and local crime and deciding what kind of countertops you want, I suggest you familiarize yourself with three statistics about your chosen city or metro area:
Population growth (or shrinkage): More people means more demand for housing, often pushing prices up, especially in near-in neighborhoods and suburbs. A good resource to see, say, 20-year population trends is Google’s Public Data tool, powered by the U.S. Census.
Job growth: More workers also means more demand. You can search for your county through the Bureau of Labor Statistics.
Housing supply: Perhaps the most important number of all because, while the modern economy produces plenty of just about everything else, it’s failing at home building in many locales and that constricts supply, driving prices up. A good source on this is the National Association of Realtors’ housing shortage tracker.
I’ll offer two strategies for dealing with the housing shortage:
One, if you’re in the mobile minority and, say, can work remotely, you might move to capture lower-cost housing and other positives. I cross-referenced quality of living indices with data showing local markets with the highest predicted growth, and the states with a small-to-medium housing deficit, to find five housing markets with the greatest protection — at a sensible price.
Median home price: $295,000
State housing deficit: 3.13%
Median home price: $230,000
State housing deficit: 3.71%
Rochester, New York
Median home price: $149,000
State housing deficit: 2.33%
Winston-Salem, North Carolina
Median home price: $169,000
State housing deficit: 3.66%
Spokane-Spokane Valley, Washington
Median home price: $252,000
State housing deficit: 1.93%
If you’re like most of us and can’t or won’t move, and plan to buy for the first time or upgrade from your current home, I’ll offer this advice: The house is an investment, so don’t overcommit on something unlikely to rise in value, such as that home in Chicago in 2000. Instead, consider choosing one at a low-enough cost that you can sock away more savings elsewhere to make up for the likely lower gain. And if you’re in a city where home prices — over time, though every market gets hit in a recession, financial panic or pandemic — are rising due to population and job growth, that also has an undersupply of housing units, you can think about committing more fully.
Yes, everything seems up for grabs with the pandemic. But long term, it’s likely that job growth and (perhaps more moderate) population growth will continue in markets that have grown in recent decades. And sadly, there doesn’t appear to be any widespread solution to localized housing shortages, due to political and local regulatory factors. Existing homeowners, who vote, tend to oppose increased density anywhere near their homes, and despite the shortage, they have thus far carried the day in almost every market.
In Washington, D.C., the average home sells for around $655,000 — more than double the national median price of $320,000. D.C. has luxury apartments to spare, but a striking shortage of affordable housing.
It’s the same story, more or less, in some 29 U.S. states: Too many people and not enough affordable housing units. D.C.’s housing stock deficit tops the scale at 9.7%. States such as Oregon, California and Florida are not far behind, according to analysis from Freddie Mac. All of these states have strong economies, encouraging robust national and international migration.
At the same time, 21 states have the opposite problem, with an oversupply of housing stock. Here, West Virginia leads the charge, with a negative deficit (oversupply) of more than 7%.
The U.S. now faces its greatest housing shortage of all time, with an estimated 3.3 million units needed to address the shortfall. Fewer new housing units were built in 2017 than in every year but one between 1968 and 2008, despite significant population and economic growth.
Not enough housing results in more homelessness, brutal commutes for lower-paid service workers, and overcrowding, with too many people crammed into a single unit. Millennials are particularly affected, generally opting to live with their parents well into adulthood or to share housing with friends or strangers. One estimate suggests that there may be more than 400,000 “missing” households headed by 25- to 34-year-olds who have been stymied due to high housing costs.
At the same time, for those already in the market, low supply and high demand have paved the way with gold: In New York City’s Cobble Hill, a one-bedroom apartment bought for $270,200 in 2006 now has an asking price of $550,000, representing expected growth of more than 100%. For new buyers, it’s nightmarish: Over the same period, U.S. salaries have risen by about 16%.