Today too many homes for sale… Tomorrow an undersupply of homes?

A report by MIT economics professor William Wheaton, looks ahead and cautions against taking only a ‘short view’ about home inventories. Wheaton raises the question that despite the current glut of existing homes for sale, there might be “excess demand” for new homes in the future. The basis for his theory: current depressed levels of new construction. Since many homebuilders have gone out of business during the current downturn, “capacity constraints” could arise in the long term as the U.S. population continues to grow.

Consider that nearly 2.1 million new housing units were built at the 2005 peak of the housing bubble. Today the U.S. is adding only about 600,000 housing units a year… which is fine, except that long-term growth in new households is 1.3 million to 1.4 million per year. When you overshoot on the upside in a market, which U.S. real estate did through 2007 , there is often a tendency to undershoot on the downside. And that downside might be a housing shortage.

According to Ross DeVol, the executive director of economic research at the Milken Institute, an independent think tank in Santa Monica, Calif, it’s unlikely that undersupply will be seen in overbuilt places such as Las Vegas, Phoenix, Miami or Riverside, Calif.  However, he does warn that if the pace of home construction doesn’t pick up, “We are going to begin to see some tightness in some areas of the country that didn’t have the boom and bust occur.”

“Oh. And where might that be?” you politely ask. Well, where supply and demand are currently in relative balance.

According to Celia Chen, a senior director of housing economics at Moody’s, the regions most likely to be undersupplied by mid-2012 are Washington state, Oregon, New Mexico and Utah. Makes buying now, with the double benefits of low prices and low rates, look better and better.

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