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By Suzanne Blake
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A new study suggests more homes could be built than buyers need in the coming years, causing home prices to drop lower.
For years, would-be homebuyers have faced a daunting combination of limited inventory, rising prices and elevated mortgage rates. But a new housing market analysis led by Mortgage Bankers Association chief economist Mike Fratantoni found the balance between supply and demand may begin shifting in buyers' favor over the coming decade.
"The post-financial crisis narrative of a persistent housing shortage may no longer accurately describe market conditions over the decades ahead," the researchers wrote, warning that supply growth could eventually outpace demand growth.
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Why It Matters
The U.S. housing market has been defined for years by a shortage of homes and rapidly rising prices. However, that dynamic could begin to shift as demographic changes slow housing demand while construction continues to add supply.
If builders ultimately produce more homes than buyers need, home-price growth could moderate or even decline in some markets, giving first-time buyers more options and greater negotiating power.
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What To Know
Researchers led by Fratantoni found that demographic changes could significantly reduce future housing demand, even as home construction remains relatively strong.
According to the study, annual demand for new housing units is projected to average about 1.13 million from 2025 through 2035, while housing stock could expand by roughly 12.6 million units during the same period.
That challenges the widely held belief that the United States faces a long-term housing shortage that will continue driving prices higher indefinitely.
"Several in-demand markets during the pandemic era are already seeing aggressive marketing on new builds and existing homes, as fewer potential buyers are relocating," Alex Beene, a financial literacy instructor for the University of Tennessee at Martin, told Newsweek.
"What could add to that glut of inventory is a homeownership base made up primarily of aging Americans who over the next two decades will begin leaving those properties to their heirs who could potentially look to sell them."
Why Housing Demand Could Slow
The report looked at several demographic trends that could reshape the housing market.
Baby boomers, one of the largest generations of homebuyers, are aging, while younger generations are smaller in number. Birth rates remain low, and changes in immigration policy have reduced population growth compared with previous decades. Together, those trends could lead to fewer new households being formed and less demand for housing overall.
The report predicted demand will weaken further in the decade after 2035, falling to roughly 802,000 housing units per year. Across two decades, the report projects nearly 23 million units could be added to the nation's housing stock, compared with demand for about 19.4 million units.
If builders continue constructing homes at a pace that exceeds demand, housing prices could experience downward pressure nationally.
Still, Drew Powers, the founder of Illinois-based Powers Financial Group, said it could be "dangerous" for a potential homebuyer to sit on the sidelines for another 10 years in hopes prices may finally come down.
"Affordability is an issue today and every day, while this downward pressure on home prices is expected to be a decade-to-decades long process of price correction in the overheated housing market," Powers told Newsweek. "Many homebuyers need solutions now; they cannot wait 10 to 20 years for prices to come back in line."
What It Means for Homebuyers
For prospective buyers who have struggled with affordability, the report offers a potentially encouraging outlook.
A larger inventory of available homes could give buyers more negotiating power and reduce the intense competition that has characterized many markets in recent years. Researchers said an oversupply scenario could lead to lower home prices for both single-family and multifamily housing.
Industry experts, however, caution that affordability challenges are unlikely to disappear completely.
"Just because more inventory could trigger prices to fall doesn't equate to ownership suddenly being a reality for many Americans," Beene said.
"While you will see price declines from motivated sellers, most homeowners are still going to want to get as much as they can out of their property. The unfortunate reality is while we could see a decline from the all-time highs home values are currently experiencing, it may not lead to a sizable uptick in new owners."
Not Everyone Agrees the Housing Shortage Is Over
Despite the report's new findings, there remains considerable debate over how large the nation's housing shortage actually is.
Estimates vary widely, with economists and housing groups placing the deficit anywhere from just over 1 million homes to as many as 10 million. The National Association of Realtors estimates the housing gap at 4.7 million units, but calculations depend heavily on assumptions about how households would behave if more housing were available.
"I do think they will build more homes, but that may not impact pricing. They will just build smaller more conventional style models while maintaining the current cost structures which allows for prices to remain elevated," Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, told Newsweek.
"Instead of having a 500k home going for $150 per square foot, you may see a much smaller home going for $200 per square foot or more, without all the bells and whistles."
What Happens Next
Even if demand growth slows, metropolitan areas with strong local economies and existing housing shortages could continue seeing stronger price growth than other regions.
Meanwhile, homebuilders may respond to softer demand by reducing construction activity to avoid oversupply and protect their profit margins.
"What is likely going to happen is smaller more cottage-style homes being built, which is what you are seeing currently," Thompson said. "So square footage will come down but price will remain higher which allows for price-conscious consumers to enter the market."
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