Episode 75: How Many Homes Are Enough?

Transcript

Dean Wehrli:

Hello everyone. Thanks again for joining us here at the New Home Insights Podcast. That’s a John Burns Real Estate Consulting podcast about everything to do with the housing market. I’m your host, Dean Wehrli.

Demographics is one of those topics that we all know is critical to housing, but we don’t talk about it all that much, at least out in the wider world of the housing sector. The housing shortage, though, is something that we do hear a lot about. We hear about that in the media every now and again. There’ll be an article about how large this housing shortage is and how we need millions more housing units to accommodate demand. Today we’re going to talk about both of those things: demographics and the housing shortage. We do that with Chris Porter. He’s a Senior Vice President here at John Burns Real Estate Consulting. He wears a lot of hats, but his main hat, tell me if I’m wrong, Chris is as a demographer and looking at demographics.

In fact, John Burns and Chris co-wrote the “Big Shift Ahead” book that looked at 10 year cohorts and the impact of how differential market forces when those folks will come of age impacts their housing decisions and their housing outcomes. Today, Chris and I are going to focus on how demographic shifts in household formations define housing needs. So it’s really big picture stuff. It’s kind of, does the nation need a lot more housing? How much of that can be reasonably built? Where are the disconnects? How severe are these disconnects? So big picture questions. Chris, I hope that made sense. How are you doing this afternoon?

Chris Porter:

Well, thanks Dean for such a kind introduction. It’s good to speak you today. Yeah, I’m excited to talk about some of this research we’ve been doing and looking at how these long-term demographic trends are ultimately going to shape the demand for housing.

Dean Wehrli:

So a lot of this is going to come from a white paper that you recently completed called America’s Needed Housing Construction. It’s brand new or pretty close to it. We’re recording this, by the way, in mid-January. That really takes a deep dive demographically at what kind of housing shortfall the country is facing, where it’s facing, et cetera. So let’s start with some basics if you don’t mind. Just really high-level, can you explain the gist of this white paper and how national housing, it’s kind of really a national housing supply and demand analysis in a sense. And can you do so in 10 words or less?

Chris Porter:

10 words or less might be a little bit of a challenge but-

Dean Wehrli:

11 words or less, Chris. No, I’m kidding. Go ahead.

Chris Porter:

We updated a graph that we had done in our book back in 2016 where we’re looking at the housing demand from 2015 to 2025. We’ve now updated it for 2020 to 2030 and thinking about all the things that have happened in that five-year window and how that affects the long-term demand for an additional five years. And one of the things I’ll talk about as we talk about this nationally, but one of the things that really matters with this: I mean a national number is great, and that’s the number you get tossed out in the press a lot. We’re short by this many million homes. What really matters is the dynamics at the local level. And so that’s another element of this research that we did was trying to decipher this at the local level, which is where it really matters because if you’ve got an oversupply in places that people don’t want to live and you’ve got an undersupply in the places that people really do want to live, that number is not going to show the true dynamics that are happening in the US.

Dean Wehrli:

Yeah, we’ll talk about that in a minute, but to some extent I think isn’t it a question of not “don’t or do” but “can or can’t afford,” in many cases at least?

Chris Porter:

That certainly plays into it. Affordability is a big factor in these housing shortages or the shortfall of households that have formed over time.

Dean Wehrli:

So the top line that’s going to probably get a lot of headlines and some buzz is that the US has a housing shortfall of about 1.7 million housing units. Can you just sort of, big picture—we’ll get into some nuance, believe me—but big picture kind of explain that.

Chris Porter:

Sure. As we were talking about this over the last couple years, how much has the US housing market undersupplied. It felt like every month somebody was coming out with a new number and those numbers kept getting bigger and bigger. So we started out with 4 million undersupplied, 5 million undersupplied, 6 million undersupplied, and I totally get how they get to their answers. I understand the math and the reasoning that they went into that, but at the end of the day, we’re really interested in what is the number that’s important to business people? How much do we need to make up in order to bring things back into better balance and what’s in a reasonable amount of construction that can meet that undersupply in the US to bring that to balance. And so that’s really where the genesis of this came from was really trying to understand what is the true number of undersupply and taking a real close look at the demographics behind that. And, again, getting into some metro-level detail.

Dean Wehrli:

Like you said, housing advocates have come up with 4 million, 5 million, 6 million level of housing shortfall. The estimates are different. Is the math the reason behind the estimates being different or is it just the approach? Is it just the method that makes these estimates so different?

Chris Porter:

No, I think it really is the approach. And so we actually address what we think are two different ways to look at this. And working in combination, I can get to some of those bigger numbers, those multimillion numbers. The approach that we took was: relative to the households that exist in the US today, how much are we undersupplied by housing? Because you need to have more housing units than you have households because you need to have some second homes. You need to have homes that are available for sale or for rent, for people to have choices as they’re considering moving. And the challenge has been that those numbers of homes that are available for sale or for rent have been in such short supply here in the last few years as we’ve gone through this surge in housing demand and more household formation in the last couple years, that’s really helped to create some voids.There’s not as many homes available for people to choose from. And that’s driven up prices. That’s what has driven up rents.

And then the other approach too is thinking about, all right, let’s think about the households that haven’t formed. And this is because where the affordability question comes into concern. There are young adults today who simply cannot move out of either their parents’ home or a roommate situation because they can’t afford to do so. It’s just too expensive to go out and form their own household. And we’ve also seen some societal shifts over time that have changed the rate at which people form households at a certain age. And so I think that a lot of the other research that’s out there is also taking into consideration that shortfall households. If we could build more affordable housing or more attainable housing, I should say, in the places that people want to live, I think we could induce more household formation all day long. It’s just we’re up against that challenge of some of the constraints on the affordability side.

Dean Wehrli:

So is it fair to characterize the numbers that you come to as sort of, I don’t know, market-solvable housing demand? Does that seem unfair, the characterization or is that kind of what you’re going for here?

Chris Porter:

Look, the housing shortfall method—where we’re looking at what are the households that maybe have formed for societal reasons or for affordability concerns—that’s one that’s a little bit more challenging because land is limited, especially in a lot of the places where people really want to live. And so that’s going to create some challenges just to build those from a profitability standpoint. But I do think the undersupply situation, I think it totally can come back into balance. We’ve gone from being an oversupplied market for much of the last decade, and that’s a result of overbuilding during the 2000s, whereas now we think we’re undersupplied, but I think over time that will resolve itself.

Dean Wehrli:

And I want to be crystal-clear for our listeners that there is, in all likelihood, the need to accommodate more housing and more housing, quote unquote, “demand” at much, much, much lower price levels that simply can’t be satisfied by market forces today for the reasons you said: the expense of building the house, the huge expense for land, et cetera. Is that fair?

Chris Porter:

That’s fair. And I would just point out, and we note this in the white paper, but we’re talking about single-family, we’re talking about multifamily, we’re talking about manufactured housing. So it’s all types of housing that are needed in order to bring this into a better balance.

Dean Wehrli:

Okay. You talk about four, I don’t know, pillars of demand that is creating the total demand, things like household formation, so second home, et cetera. Can you just briefly touch on those four key bulwarks of demand formation?

Chris Porter:

Of course. So the biggest one is household formation. So as the population ages, as they form households, we are going to have a net increase in households over time. And our estimate for that is about 12 and a half million households in net over the next 10 years, I guess from 2020 to 2030. And that includes new households that are going to form by young adults. And then it also accounts for the fact that we’re going to have some households that go away, either people move out of the country or they pass away. And so that is a net number. But we think it’s 12 and a half million. That’s a bigger number than we’ve seen in the last decade. But that’s really as a result of we’ve got this massive wave of young adults who are in that age group where they’re forming households in bigger numbers. And so that is the primary driver of our long-term demand call is the household formation. It’s about 12 and a half million of what we think is a 17 million need for housing over the next decade.

So next up is the second home demand, and that’s just people buy second homes. And so part of construction—new construction—is going to that, but they also may buy existing homes as a second home as well. So we’re just saying there is an element of second home demand that is going to fuel the need for additional housing. And whether that comes from the new construction side or it comes from existing construction, we think there is demand for second homes and then also you’ve got a replacement housing. So, every year, you are tearing down a certain number of homes in the US and they’re replaced within with new construction. And so we think you’ve got to add some supply into the market in order to replace those homes. You’re not actually adding an additional housing unit. The net increase in housing units is zero. This is kind of a replacement of what is already there.

And then also the other part of this is just that need to come back in into better balance. So we think we’re 1.7 million undersupplied today in terms of what a normal level of housing supply would be for the population of households that are out there today. We think prices are still high, rents are still high. In order to bring things back into better balance, we need to make up that 1.7 million. And so that would be what would be required to do that.

Dean Wehrli:

And so in this case, that’s almost a little bit like that pent-up demand. When you have periods like we did of limited supply in the 2010s, you have pent-up demand and maybe it’s the reverse in the 2000s in the first decade because we had a ton of supply, a lot of which we probably shouldn’t have had.

Chris Porter:

No, you’re exactly right. And if you look at our overall number 17.1 million over 10 years, that’s 1.7 million a year and that includes that 1.7 million we need to make up over 10 years in the undersupply. You subtract that out, we’re talking about 1.55 million housing units needed. I mean that’s pretty consistent with the long-term trends in the US. If you go back, I mean it’s been a little while since we’ve gotten there. We’re there today. It’s been a while since we were last there, but that’s pretty consistent with the long-term average for housing in the US.

Dean Wehrli:

So that little bit above that long-term average that you’re projecting for the 2020s is really because of we’re catching up from the 2010s.

Chris Porter:

Exactly.

Dean Wehrli:

Okay. Second-home demand. I do want to get your take on this. It’s highly discretionary. I don’t know, should that be considered part of a housing “shortfall”? Because it is so much up, it’s by definition discretionary and it’s not kind of the same as primary housing. Is that…

Chris Porter:

Just if we look back at historical trends, I mean we’ve seen second-home purchases over time. That’s a unit that’s being taken off the market. And so I think we’re accounting for that as a form of demand because it is a unit that is now not available to somebody else.

Dean Wehrli:

And which, by the way, does sometimes bring up some controversy, doesn’t it? There’s lots of localities where that has become very controversial from potential primary home buyers and renters.

Chris Porter:

You’re exactly right.

Dean Wehrli:

Yeah. How about Airbnb too, along the same lines?

Chris Porter:

That’s a factor in this as well and I haven’t really done the math on that to figure out where that all comes into play, but it certainly, I think, does have some impact on the housing demand dynamics.

Dean Wehrli:

Just real quick then, let’s end this basic kind of our big picture overview before we go on to some nuances in demand. Let’s talk about your method a bit. You use one of my favorite words, headship, great word, method and y’all also use kind of a vacancy method. Tell us about those two methods that you use to get to these big-picture numbers we’re talking about.

Chris Porter:

Sure. So the undersupply number, the 1.7 million: really that was based on vacancy. We’re looking at, as I mentioned earlier, you always want to have some homes that are available for sale, homes that are available for rent. There’s this whole other category of vacant homes that just kind of sit out there and then really are not necessarily for sale or for rent, but there’s a certain amount of vacancy you want in a market in order to have an efficient market. Quite frankly, this data really didn’t exist in a regular consistent manner. So we had to build a history by market of what has vacancy looked like over time and looked at what was the long-term trend in vacancy and what is it today. And I think you’d be hard-pressed to find markets today where there doesn’t feel like—at least at the time we started this research—where there wasn’t an undersupply of housing. There was just so many markets that… You saw prices rising, you saw rents rising. And it was because there was a short supply relative to the amount of demand. And so we just tried to figure out, from a vacancy standpoint, how many fewer homes are available to people than maybe there would be based on historical trends? And that’s ultimately how we arrived at that 1.7 million number for the households that exist today.

The other part of this is what I call that shortfall in households. So if you go back and look at historical trends—and we picked 2000 as the year to measure against—if you looked at the rate at which people had formed households by age back in 2000 and what that amounted to in terms of total households in the metro or the country and then you compared that with where we are today and how many households we actually have and compare that against the population by age today, it’s clear that societal trends have meant we just have fewer households that have formed. And there’s a variety of reasons for that.

And so we just said, let’s do the math on that and figure out if we had used the same rates of household formation as we had 22 years ago and apply that to today’s population, how many more households would we have in the US? And it is a form of undersupply because that’s a household that hasn’t formed for one reason or another that might benefit from a house that would meet their needs and their price point.

Dean Wehrli:

And that is a bit of a moving target because, as I read in this book—it’s called Big Shifts Ahead; you might be familiar with it a while back—is that those kind of demographic are those choices and the timing of when folks are making decisions to things like form a house or get married, that’s been shifting for quite a while, hasn’t it?

Chris Porter:

It has been shifting. And quite frankly, I mean we picked the year 2000 for each of these markets. We might have used a different year as the standard for different markets because of local dynamics that are going on there too. So you’re right, it is very much a moving target.

Dean Wehrli:

It’s weird because the timing, the last other two censuses, and census is one of the key source of your data, right?

Chris Porter:

That’s right.

Dean Wehrli:

So the last two have some quirkiness, don’t they? In 2010, it was during the greatest recession since the depression and 2020 it was during COVID and we may never fully understand the impact of those things on those two censuses.

Chris Porter:

You’re exactly right. I mean we were collecting the data literally in April of… It was being measured as of April 2020. There was a lot going on in the world during that time. And so one of the reasons we’ve seen a delay in some of the data coming out from the Census Bureau is they’re just trying to figure out how do we make sense of some of this data that was collected during such a unique time.

Dean Wehrli:

We really need a nice clean 2030 census. I’m hoping our AI overlords, who will rule humankind at that period, are up to the task.

Chris Porter:

I mean that’s my biggest challenge as a demographer is the best data we get, comes out once every 10 years.

Dean Wehrli:

And the last two times have been… a little bit-

Chris Porter:

Very unique situations.

Dean Wehrli:

Yeah. Okay. So let’s go into some demand nuances. So I think that’s going to be… Like I said, the shortfall is the headline, but the demand is pretty critical. So, beyond the top line numbers as you touched on, there are other demographic realities that are important and one of those is growth, not just overall population, but specific to given age groups. Because what they do—what different age cohorts do— might come at different times and might result in different choices. So is it fair to say that growth in the right age sectors has a big impact on your outcome here with this white paper?

Chris Porter:

It matters a lot. In fact, I even just got a question from a client about this today. We do have slower rates of growth in population in the US. Actually, it ticked up just a little bit in 2022, but from a very, very low number in 2021. And there’s reasons for that in 2021. But over time, the rate of growth of the population in the US has gotten smaller and smaller. We’re not negative, but it’s a lower number than it has been and yet we’re forming a lot of households over these last couple of years. So how do those two things jive with each other? And it really does come down to, well, what age groups are the ones that are growing the most? And as we think about the population structure of our country, we have a lot of young people who were born in the 2000s, in the late 1990s who are of age where they’re forming households in bigger numbers.

So you have this massive wave of young adults who are entering those years where they’re forming households. Maybe it’s a little bit later than their parents  were forming households, but yes, that can drive solid household formation even in the period where the rate of population growth overall is slower and it’s just due to that aging in the population.

Dean Wehrli:

And this most recent period—’21, ’22 and I guess late 2020 as well—we had this COVID impact that maybe pushed a lot more folks to form those households earlier than they otherwise would’ve because suddenly they can afford a bigger home, cheaper, many, many miles away from their HQ, their headquarters because of the impacts of work from home. So it’s also kind of a weird time for that too. Did that form more households than it would’ve these last couple of years?

Chris Porter:

The 2020 and 2021, despite a pandemic, were the perfect mix of conditions for household formation. So think about it: you had pent up demand amongst a large young adult population. You had higher savings as a result of government stimulus, you had wage growth as a result of labor shortages, more emphasis being placed on the home. You had a desire for more space as roommates were splitting up, more freedom to relocate due to work-from-anywhere policies, record-low mortgage rates. And by the way, we had moratoriums on foreclosures and evictions, which might have otherwise made some households go away. So no big surprise that we had a surge in household formation during those two years, when you consider all those factors kind of occurring all at one time, despite the fact we had this global health crisis.

Dean Wehrli:

Yeah. And which explains, by the way, the surge in home prices at the same time.

Chris Porter:

You’re exactly right. And because we weren’t building enough to accommodate that level of demand.

Dean Wehrli:

And you call household growth a tailwind for housing’s future. Explain that a little bit. Does that mean we’re going to see some more demand coming, which I think you’ve implied in your 10-year projection?

Chris Porter:

We do. And so if you look at the… actually it’s funny: I was talking about this with another client the other day. He had this perception that the millennials were just this anomaly, that they were a big group that got a lot of attention because they were so much bigger than the generation before then born in the ‘70s, this group born in the ‘80s was so much bigger. But when you look at US births over the next several decades, it stayed pretty flat around that 4 million, 3.9, 3.8 million number. We didn’t have the dips that we had in the ‘70s. And so we’ve got a pretty solid base of people that are going to age into those household-forming years over the next several decades.

As we look at the groups born in the most recent years, those are lower numbers, but that’s not really going to impact housing demand in the same way for another 20 some years. And then there’s the foreign element of this as well: as we have more immigration into the US, that’s also adding to these populations. And so it’s a pretty solid base that we’re building from a population standpoint, and even if they are forming households later in life then than prior generations, they’re still going to form households at some point. And so I think we’re working from a solid base and that’s why we called it a tailwind for housing demand.

Dean Wehrli:

That’s the key that most of these folks—these younger folks—are attaining those milestones like marriage and having kids and things like that. They’re just doing it later. So in a sense, them delaying that is going to increase demand now. And in the near term here.

Chris Porter:

And as John always reminds me, just because somebody’s buying a house at 32 instead of at 26, I mean they’re still buying a home and, quite frankly, it might even be a nicer home because they’ve got a little more life experience, maybe a higher income, maybe they added a dual income to their household by that point.

Dean Wehrli:

Yep, definitely. And in the last couple years it was in Boise instead of Northern California. They’ll be back. They’ll come back. Well, maybe not. So you mentioned immigration. Let’s touch on immigration because I think it’s something that’s really heavily underappreciated in terms of how it impacts the US overall population and population growth. And again, that’s something that’s very specific to some metros more than others. But it’s nationwide. It’s everywhere. Does that come back anytime soon from the vastly lower numbers that were experienced in ’20 and ’21?

Chris Porter:

So if you’d look back historically—I mean over the last decade or two decades—fully a third of our net population growth in the US was a result of immigration. So we had two-thirds of our growth fueled by the natural increase that’s births minus deaths. But another third was coming from immigration, and we saw immigration peak around the mid 2010s. So about 2015, 2016, we had a million net immigrants coming into the US each year. That started to decline in the subsequent few years, but then really took a nose dive in 2020. I mean, we’d closed off our borders and just people were not coming into the US. Pretty low still in 2021.

And so we’d just made some projections. How soon did we get back to normal? And we said, oh, maybe over a five-year period we get back to a more normal level of immigration because, look, the US is a very desirable place for people to want to be. And so I think there’s always going to be demand to move to the US. We just got the 2022 numbers. So this is measuring through July 2022 from July 2021. It’s back up to a million and pretty quickly. So a pretty quick reversal. Now these are estimates that get revised every year, but that’s a pretty sharp rebound in immigration and it’s-

Dean Wehrli:

A little surprising too, at least-

Chris Porter:

A little surprising. I think you’re right. That immigration number did come back sooner than I thought it would, and something I’m definitely keeping my eyes on for the future because it adds to housing demand.

Dean Wehrli:

It does. It adds tremendously to housing demand. And I know there are some markets that, absent immigration, the natural population growth is actually shockingly limited if not flat, even negative in some urban metro areas.

Chris Porter:

It can definitely vary much by metro area. You’re right.

Dean Wehrli:

Yeah. So a big part of equation that you look at in your white paper is the overbuilding of homes in the 2000s. We’ve touched on it a couple of times here briefly. Can you go into that with a little more depth? Are we still kind of regaining our balance from the overbuilding in the 2000s and then maybe the underbuilding in the 2010s?

Chris Porter:

So you’re exactly right and we think we just relative to the amount of demand that was out there, we just simply overbuilt and our estimate was about 3.2 million units in the 2000s relative to probably what we should have built based on the amount of demand that was there. So, yes, I think part of the reason we had such lower construction in the subsequent decade—in the 2010s—was because we had overbuilt in that prior decade and so we didn’t need as much construction to meet the demand for housing. So I do think we’re back. We’ve recovered that. We underbuilt a bit in the 2010s, but part of that was due to the fact that we stayed overbuilt by so much.

Dean Wehrli:

Last thing on demand before we talk about supply a little bit is COVID and how in the white paper you mentioned that COVID kind of pulled forward some demand. Explain that to me because I think of it as, at least in many situations, it was untapping latent demand that had long been here had always been there. In other words, you could now move away from the city center where the housing was small and overpriced to much larger, bigger, less-expensive houses in the suburbs or even a different metro area entirely. And I don’t know, that doesn’t seem like… I guess that could be considered pulled forward demand, but do you think of that as a little bit of a drag on future demand?

Chris Porter:

I think it’s almost two sides of the same coin in the fact that you can say we’re pulling demand from the future, that that would have occurred naturally or you could say it’s a catch-up to where maybe we should have been at this point. So I think, yes, this was demand that would’ve unleashed at some point anyway. But I also wonder if we now have a new standard: maybe it’s a little bit higher for the attainment of forming a household at a certain age. Does that carry on forward to the next group, the next generation behind them or the next cohort behind them? That is the new standard. It remains to be seen, but I think it’s either a little bit of a catch-up or it’s a bit of a pull forward. So I think you can look at it either way.

Dean Wehrli:

And won’t the work-from-home phenomenon impact that? In other words, these folks who were able to form households when they did it in ’21 and ’22 or late ’20, they did so because they were able to work from home. To the degree folks in the future are not able to do so—we’re seeing the back-to-office right now—the people coming after won’t be able to do that because they can’t afford it.

Chris Porter:

You’re right. I mean that could be a possibility as well. And people who were able to relocate to a new city where they could afford to form their own household, if they’re now being required to be closer to an office, that also might post some challenges as well.

Dean Wehrli:

Yeah, I do want to do a back-to-office and the impacts of that on a later episode. So let’s talk about supply now. If you can, go through the supply part of your equation, because you are really trying to tap into all sources of supply—including something that people forget about, which is manufactured home shipments.

Chris Porter:

No, you’re right. And the manufactured housing, I mean it adds a little bit right now. It added a lot more. If you go back historically. I went and pulled this information by decade. So we look at what are single-family starts, what are multifamily starts, and then what is that manufactured housing component. Dean, if you go back to the 1970s, we were adding 370,000 manufactured units a year in the US. Today, we’re at about 100,000 per year. But that was a huge surge in manufacturing. That was new housing that was available to people. I mean back in the 1970s, that was when the Boomers were really coming of age, they were forming their own households. There were such a big wave of them that we just saw construction really surge there. In the 1970s, we had over 2.1 million units per year when you think about starts both for single-family, multifamily and manufactured-

Dean Wehrli:

So they were forming homes but they weren’t having babies because it wasn’t the 1970s, the dip in births that you mentioned.

Chris Porter:

The 1970s was the dip in births. Yeah, so a lot of household formation going on at that time because-

Dean Wehrli:

But not a different kind of household formation was not going on apparently in the ‘70s. I’m not sure what was happening there.

Chris Porter:

As we talked about in the book, this group—the early Boomers—that was a generation that couldn’t wait to get out of the house, right? They were the ones that just for them moving back home after college was kind of a stigma. And they were just really independent in forming their own households and that’s why you had that big surge and more construction in the ‘70s as a result. And then every subsequent decade we saw a little bit less construction. So in the ‘80s we had about 1.7 million, ‘90s was a little bit less than 1.7 million. The 2000s was about 1.7 million. And then the 2010s, and we did about 1.1 million per year over that 10-year period.

The last couple of years, as I look back, 2020, 2021, and we don’t have the final numbers yet for ’22. But if I look at those three years, we’re doing about 1.6 million per year when you add up starts and the manufacturing shipments. So, we’ve definitely seen a bit of an increase here in the last several years as we’ve recovered from those very low numbers in the early part of the 2010s.

Dean Wehrli:

Just to be clear though, Chris, you’re talking about the three sources of supply—in addition to the manufactured shipments are single-family and multifamily—and that makes up the universe of supply.

Chris Porter:

That’s right. That’s how we’re adding housing units to the US housing stock.

Dean Wehrli:

Okay. Now, if you can, can we go through your projections of supply needed going forward and from the sources that they come from.

Chris Porter:

So I mean really if we want supply and demand to be in balance, look at our demand numbers that we talked about at the beginning of this conversation, that’s 17.1 million and that’s going to come from, again, household formation, the need to replace existing units, the need to add second homes to the market and then maybe bring us back into a better balance of supply and demand in the US. That suggests if you want demand and supply to be in balance over time, there could be the potential for 17 million units of construction needed over a 10-year period.

Dean Wehrli:

But as you also teased at the front, regionally, there’ll be some pretty big differences. So let’s talk about that to tease out some of those key differences. So you show your projections at the metro level. For those of you who are going to read the white paper: toward the end, you’ll see of the paper, you’ll see some negative numbers and positive numbers associated with different metro areas. Tell me if I’m wrong, but the negative numbers mean that there is undersupply in those metro areas and so they’re going to need some increase in housing.

Chris Porter:

You’re right. Yes. So the undersupply is the negative number and we show this for the top 50 MSAs in the US.

Dean Wehrli:

Yes, yes. And it’s surprising, by the way, to see a couple places on the top 50 MSAs like Columbus. Yeah, I can guess I can see Columbus. So it’s interesting though that the undersupplied metros are the vast bulk of the top 50. There are not that many oversupplied metros and the metros that are oversupplied are generally oversupplied by pretty small numbers. Is that just explained because, overall,l we’re looking at an undersupplied nation?

Chris Porter:

Exactly. We have an undersupplied nation. You look at those areas that were the most undersupplied, the areas we’ve had the most in-migration over the last several years. I mean, you look at inland California, you look at some of these Florida markets, Phoenix, some of the Texas markets—that’s where a lot of the migration was going over the last few years. As a result, their vacancy rates are lower than they have been historically, and that’s why we’re undersupplied in those markets. There’s a few markets that we do say are probably oversupplied by a bit, and that is really just because it tends to be some of the markets where people are leaving—some of this Midwest markets. We’ve seen people migrating out of the Midwest, out of the Northeast and going further south. And you’ve also got some big cities that we’re also impacted by COVID. And, again, part of the challenge with this research was we were measuring this point in time where the dynamics were such that people had left some of the big cities, so you had more vacancies. And that did pose some challenges. But I think you do start to see some of those regional groupings and some of those trends at both ends of the list.

Dean Wehrli:

Because New York and San Francisco, I believe are both on the oversupplied part of that spectrum, aren’t they?

Chris Porter:

That’s right. Yeah. And those were both cities where people were leaving and going out to the suburbs or going to other metro areas.

Dean Wehrli:

Yeah. Do you think the work-from-home thing starts to supplant that a little bit? If people are pulled back to those core urban areas, will that maybe reverse that trend?

Chris Porter:

It could definitely reverse that trend for sure.

Dean Wehrli:

Okay. I will say specific to California: it’s funny—and this kind of teases the differences in the outcomes, given your two core methods, which is the headship versus the vacancy estimates—in the headship estimates, I noticed that a lot of the California markets were very, very undersupplied. And there’s more kind of dispersed along the top 50 metros in the vacancy method.

Chris Porter:

Well, just think about affordability. I mean, if you are in these expensive California markets where the prices are just so high, it’s no wonder that on the household shortfall methodology, people just can’t afford to form their own household. And if they stay, they’re staying with roommates, or they’re staying with their parents or some other living situation where they haven’t gone off and formed their own household at the same rate. So I think a lot of it ties to affordability in those cases.

Dean Wehrli:

Yeah. So that same dynamic should happen really in any very expensive metro area. It could happen in New York, Boston, DC in addition to California.

Chris Porter:

It’s just harder for people to form households, especially if you’ve got a lot of young adults.

Dean Wehrli:

Whereas in Texas, Florida, they’re going to be able to form those households. So the vacancy is going to be a little bit more accurate. So it seems like the vacancy is probably a little more accurate if you really want to account for affordability or lack of affordability.

Chris Porter:

I think you’re right.

Dean Wehrli:

Okay. And then undersupply: I did notice it’s mostly those high-end migration places like Phoenix and Florida and Texas and inland California that had the undersupply. So do you expect just more of the same with respect to specific metro areas? We’re going to see the Sunbelt, we’re going to see the more affordable places experience the growth?

Chris Porter:

I mean, I think we’re still seeing some of those migration trends persist. The whole return-to-work thing could change some of these dynamics a bit. But I think there’s parts of the country that people are moving to. We’re certainly seeing continued in-migration to Florida, to the Southeast. This has been going on for decades. I think we saw some of it accelerated here in the last couple of years. Even if it returns to a more normalized pace, I do think those are trends that are going to continue.

Dean Wehrli:

I think so too. I think also if back-to-the-office really catches on, and most of those folks are pulled back, I think, still—because it’s so unaffordable in a lot of those core urban areas—the demand isn’t created in the core urban areas; it’s created in their outlying areas, nearer in like it has been going on for decades. The drive to qualify.

Chris Porter:

Correct.

Dean Wehrli:

Yeah. So yeah, if you’re not affordable, you’re not affordable and you can’t form households because no one can afford to form households there.

Chris, this has been quite the education in all things demographic and housing shortfall. So just to recap, about 17 million over 2020 through 2030, the decade of the ‘20s effectively, which a little more than the recent kind of long-term norm on an annual basis, but not dramatically more. And we think that growth is going to logically center in those places a little more affordable, little more accepting of growth.

Chris Porter:

And I think that reason that our call for the little bit higher growth than the long-term trend is because we’ve been out of balance and we’ve just had an undersupply situation for a couple of years now. And if we want to bring that back into balance, that is going to be additional demand.

Dean Wehrli:

2020s the decade of balance. What do you think? No, that’s lame. So let’s not do that.

Chris, I appreciate you coming on. Like I said, demographics is something everyone knows. It’s so super-critical, but not enough discussion and really kind of diving into it deeply is done. And you do that very, very well.

Chris Porter:

And thanks for the opportunity to share that with you and with the audience as well.

Dean Wehrli:

Awesome. Thank you for listening folks. This is been Dean Wehrli for the New Home Insights Podcast. We’ll see you in a couple of weeks.

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