More Construction is Good News. But , Supply Still Lags.

Despite materials and labor shortages, new housing construction finished the year strong. Is this good news for first-time buyers?

New Residential Housing Update From the U.S. Census Bureau:

New privately owned housing units started edged higher in December 2021 - 2.5% higher from a year ago. Altogether the number of new starts was 1,595,000 in 2021 - a nearly 16% increase from the year before. To add context, in 2020, new housing starts were only 7% higher when compared to 2019.

In 2021, 1,337,800 housing units were completed, a 4% increase from the previous year.

These numbers combined with declining population growth means that the housing shortage should be closing rapidly.

HOWEVER, there were 50% more vacant units held off the market than there were available for rent or sale. Using the Housing Vacancy Survey, Berkshire estimated that 60% of vacant units were held off the market in Q3/2021 - 10 percentage points higher than the historical average. The share of vacant homes held off the market has been on an increase since 2006.

In the past, the share of vacant homes held off the market would fluctuate with economic cycles. However, strong policy intervention coupled with a decrease in spending during the pandemic helped to improve many households balance sheets - especially for households at the top of the income distribution. Too much cash in the rich world has also found its way into housing and land. As wealth reached record highs, the wealthy went on a real estate shopping spree.

While more construction is good news, prices of newly built homes have increased so much that sales of newly built homes began to decline at the end of 2021. The price surge for newly built homes was in part caused by the low inventory of existing homes.

As mortgage rates begin to tick up, will the housing shortage turn into a housing glut? As for the existing - vacant - units: will investment buyers cash out or will they double down in 2022?

The answers will shed more light on where housing prices will end up in 2022.