The U.S. housing market supply will experience a sudden shock soon thanks to a drastic decline in monthly housing starts. Amid the coronavirus panic and widespread lockdowns, U.S. groundbreakings dropped by 22.3% in March.
According to the U.S. Department of Commerce, last month’s housing starts paced for a seasonally adjusted annual rate of some 1.2 million . That’s a huge drop from February starts traveling for 1.56 million.
The plunge in groundbreakings was worse than expected. Economists obviously anticipated a major slowdown in new housing construction due to the COVID-19 crisis. But the 22% decline was more severe than the forecasted 18.6% drop .
It was the largest one-month decline in housing starts since 1984. In March of that year, new home construction plummeted by 26.4%.
CNBC’s Diana Olick said Thursday:
But when people start comparing this to the subprime mortgage crisis and the housing crash that ensued there, you saw housing starts plummet over four years to the lowest levels at 300,000 starts for a single family. We’re not going to get anywhere near that. And the reason is we don’t have the same kind of housing market that we had back then.
During the housing bubble in the mid-2000s, Olick reminded viewers, there was a massive oversupply of homes. The overstretched supply was part of what made record housing prices so frothy as we began to discover near the end of 2007.
Today we have an opposite mismatch between housing supply and demand:
We had a housing market back then that was completely overbuilt. We were at over two million units back in 2006. Nobody needed that many homes. Right now we have a lack of homes. We have a severe shortage of homes for sale on the existing side. And we’re not even back to where we should be normally in single family construction.
That could buoy housing prices for now, especially in areas with the most critical shortages. Millennials hoping a crashing housing market would make homes more affordable might have to wait longer than they think.
Even before the coronavirus pandemic had reached full force in the United States, home inventory fell to a record low in early February.
Shortages hit in residential real estate markets across the country. U.S. housing supply dropped in January by the steepest year-over-year decrease in over four years. And inventories hit their lowest point since Realtor.com began tracking these data in 2012 .
Danielle Hale, Realtor.com’s chief economist, explained why:
Homebuyers took advantage of low mortgage rates and stable listing prices to drive sales higher at the end of 2019, further depleting the already limited inventory of homes for sale.
She said the sharply contracting supply would be a challenge for Millennials:
This is a challenging sign for the large numbers of Millennial and Gen Z buyers coming into the housing market this homebuying season as it implies the potential for rising prices and fast-selling homes—a competitive market.
Not surprisingly, many of the real estate markets with the worst inventory shortages command some of the highest prices for homes.
California, for instance, leads the nation in low inventory , especially in San Francisco, San Jose, San Diego, and Los Angeles. These markets are some of the most expensive in which to buy a house , along with New York, Boston, Washington DC, Miami, Seattle, and Denver.
Millennials pining for condos in Brooklyn may need to set their sights on Cincinnati or Albuquerque to get the house of their dreams.
Maybe these areas aren’t as hip for a social life, or as brimming with work opportunities. But the inventory is comparatively available and affordable, and buyers get more house for their dollar.