It is estimated that there are about five million homes short in the United States to meet current housing needs. A decade of insufficient homebuilding in the wake of the Great Recession – when housing supply grew only 6.7% from 2010 to 2020, about half the rate of the previous decade – has put our market housing in a difficult situation.
But the lack of new housing is only one piece of the housing shortage puzzle. Several other contributing factors affecting the number of homes available today are overlooked and could be largely responsible for our current housing crisis.
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Wall Street Residential Takeover
The Great Recession ushered in a new era of opportunity for buyers on Wall Street, which include real estate investment firms, iBuyers, real estate investment trusts (REIT), hedge funds and other large private equity firms that had the capital available to grab single-family homes at ultra-low prices. As rental prices and demand rebounded in the ensuing years, yields rose and institutional purchases increased dramatically.
In 2021, institutional buyers accounted for just under 17% of all homes purchased during the year, or about one million in total. That’s a lot of homes that could have gone to end buyers, but are instead in the hands of private equity firms and likely to be held for long-term rental. It is also a great contribution to increased competition in the market, as institutional investors have the power of cash offers.
To be fair, not all properties purchased by institutional buyers were listed on the traditional market or suitable for end buyers. Often properties are bought in bulk from banks or other funds, in the foreclosure stages, or are vacant and need repairs or updates, which institutional buyers do before putting them up for sale or for rent. Nevertheless, this continues to reduce the number of existing homes, which in turn leads to higher prices as buyers have to bid higher or more aggressively to compete.
The Airbnb effect
Vacation rentals are becoming an increasingly popular investment avenue in the residential market. The high returns or the possibility of having a holiday home paid for by others make it an attractive investment. Plus, getting started in the vacation rental business has never been easier, thanks to popular vacation rental companies like Airbnb and VRBO.
Growing demand for vacation rentals as investment, coupled with a pandemic, has spurred a boom in vacation shopping. The last two years have seen a huge increase in the number of vacation homes purchased. In 2020, vacation home purchases outpaced existing home sales growth by 44% year over year. In the first months of 2021, it was estimated that just over 400,000, or 6.7%, of the homes purchased in the existing housing stock were purchased as second homes.
This makes it difficult for buyers of ideal vacation destinations to compete. I can personally attest to what I’ve dubbed “the Airbnb effect”. The last three homes I’ve bid on in my local market of St. Pete, Florida have all sold to buyers planning to use the property for an Airbnb. This drove the housing stock away from end buyers like me and pushed up house prices as they overpaid, knowing the income potential of properties when used for vacation purposes.
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Vacant homes held off-market
Data from a recent census revealed that there are currently over 16 million vacant homes in the United States. This includes holiday homes with low owner occupancy, vacant properties offered for sale, and properties vacant because the owner has died or the home is uninhabitable or at any stage of legal proceedings, such as a vacant foreclosure or a real estate owned (REO) property.
The percentage share of homes held off-market — which are vacant properties not offered for sale or rent or used as seasonal homes — is at its highest level since 1995, with about two million homes across the country simply vacant. States like Vermont, Alaska and Maine have up to 20% of their housing stock vacant. Other states, like Florida – home to the hot real estate markets of Miami, Tampa and Orlando – have about 17.1% of their housing stock vacant.
Vacant housing is not alarming. Every market will naturally have a period during which one or more homes will remain vacant as the property goes through probate or is renovated, seized or prepared for listing or rental. The biggest problem is that there is no clear solution to turn these two million off-market homes into available housing. Lengthy legal processes, the need to track down owners to buy or list a property, the time it takes to complete renovations, and the lack of value of homes based on their condition can all contribute to a home sitting unused. .
There is no single cause for today’s lack of housing. It is a combination of factors which, in turn, require a combination of solutions to resolve them. Fortunately, slowing demand should help alleviate some of that need as homebuilders try to fill the housing gap. However, too great a dynamic of home deliveries could lead to another housing crisis. Finding the balance between a stable market and an oversupplied or undersupplied market has proven to be tricky.
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