In 2019, residential fundamentals tightened further driven by steady and above-trend demand for housing and a persistent undersupply of new housing
- The vacancy rate of for-sale and for-rent housing averaged 3.1% in 2019 (-10bp Y/Y), the lowest level since 1984.
- Housing demand exceeded supply by 235,000 units in 2019, following undersupply of 400,000 units in 2018. Over the past five years, demand has exceeded growth in housing inventory by 1.4mn units.
- Household formation activity remains healthy; the U.S. added 1.39mn households in 2019, which follows a net gain of 1.54mn households in full-year 2018. Demographic shifts (notably the ageing of the Millennial generation) and a healthy labor market support above-trend household formation activity.
- In contrast, housing supply remains below what is needed to support new demand and replace obsolete units. Starts of single- and multifamily units totaled 1.29mn in 2019 and are expected to increase marginally to 1.31mn in 2020 and 1.32mn in 2021.
We do not see an end to this fundamental imbalance; we forecast supply will fall nearly 500,000 units below demand over the next two years (2020 – 2021)
- We estimate the U.S. will underproduce housing by ~240,000 units annually in both 2020 and 2021, with vacancy rates falling ~15bps each year, supporting heathy home price appreciation (“HPA”) and residential rent growth.
- Consensus expects above-average housing demand over the medium-term. Harvard’s Joint Center for Housing Studies (“JCHS”) forecasts 1.22mn household formations per annum over the next decade, with Morgan Stanley forecasting 1.35mn household formations per annum over the next five years.
- Consensus also forecasts little growth in housing starts in 2020 (+20k vs. 2019) and 2021 (+10k vs. 2020e). If correct, then housing starts net of obsolescence would remain well below demand throughout this period.