The Big Long? A Deep Dive on U.S. Housing (Part 1) — Part 1 - Where Is The Inventory?

Theme and Background

This chapter focuses on the supply side of the U.S. housing market, analyzing how the current record-low inventory of homes for sale came to be. The report argues that the market did not suddenly fall into shortage but instead experienced a decade-long period of underbuilding, compounded by multiple structural factors, resulting in extreme tightness on the supply side.

Core Thesis

The author’s central argument is that the current housing supply shortage in the U.S. is the result of long-term accumulation, not a short-term bubble. A counterintuitive conclusion is that even if construction continues at the current pace of over 1 million starts per year for another two years, and all new homes remain vacant, inventory would only return to historical averages—the market is far from overheating. The author believes the market is in the early stages of “returning to normal,” not on the brink of a bubble bursting.

Key Arguments and Data

The report systematically demonstrates the origins and current state of the supply shortage through historical comparisons and multiple data points.

1. Chronic Underbuilding: Since 1960, the U.S. has built an average of 1.01 million single-family homes per year. However, after the 2007 bubble peak, the U.S. experienced a 13-year period of below-historical-average construction, during which the number of households increased by 14 million. This created a massive supply gap.

2. Inventory Absorption and Pent-Up Demand: Excess inventory after 2008 (e.g., the rental vacancy rate fell from 11% to 5.6% by 2009, absorbing approximately 2.05 million units) and the rising share of young adults living with parents (among 25-34 year olds, men rose from 14% in 2005 to 19.7% in 2021, women from 8% to 12.3%, suppressing demand for roughly 1.34 million new households by men and 973,000 by women) were key factors that allowed the market to maintain balance over the past decade. This pent-up demand represents future purchasing power.

3. Current Inventory Levels: As of February 2022, active listings across the U.S. totaled only 338,738 units, down 25% year-over-year and 71% below pre-pandemic levels (the 2016-2019 average). The shortage is particularly acute in states experiencing population inflows.

Region	Current Inventory	YoY Change	Change vs. Pre-Pandemic	Listings per 1,000 People (Pre-Pandemic vs. Current)
Nationwide	338,738 units	-25%	-71%	3.1 -> 1.0
Florida (Top Metro Areas)	27,139 units	-49%	-75%	Data not explicitly given
Carolinas (Top Metro Areas)	<11,000 units	-40%	-80%	Data not explicitly given
Top 25 Metro Areas	Data not explicitly given	-22%	-67%	3.1 -> 1.0

Metro Areas 26-50	Data not explicitly given	-22%	-70%	2.9 -> 0.8
Metro Areas 51-75	Data not explicitly given	-29%	-75%	4.1 -> 0.9

4. Other Supply Tightening Factors:

• Low-Rate Lock-In Effect: Homeowners, having locked in low mortgage rates, choose to rent out their old homes rather than sell them when purchasing a new one, leading to a net reduction in listings.
• Investor Demand: Investors (including short-term and long-term rentals) accounted for 33% of home purchases.
• Second-Home Demand: 13% of buyers planned to purchase a vacation home, and 33% of respondents indicated the pandemic made them more likely to buy a second home.

• "Upgrade in Place" Renovations: People chose to renovate their existing homes rather than enter the competitive market to buy.
• Natural Attrition: Approximately 0.25% (about 350,000 units) of existing housing stock is removed each year due to demolition or abandonment, requiring new construction to offset.

5. Alternative Housing Options: The vacancy rate for multifamily housing (apartments) stood at just 2.4%, a record low, pushing the national median apartment rent up 19.8% year-over-year. The report notes that even if construction continues at the current pace of 500,000 multifamily starts per year for another 3.6 years, with no one moving in, the vacancy rate would only return to the 30-year historical average.

Companies/Assets Referenced

This chapter does not mention specific listed companies; it primarily analyzes macro market trends. Data sources cited include: U.S. Census Bureau, Realtor.com, Knight Frank, John Burns Real Estate Consulting, Bloomberg.

Investment Implications

For investors, the implications of this chapter are clear: the supply shortage in the U.S. housing market is structural and deep-seated, unlikely to be resolved in the short term. This means:

• Bullish on homebuilders and building-material-related companies: The long-term construction demand provides sustained growth momentum for these industries.
• Bullish on the rental market: Supply shortages and low vacancy rates will support continued rent increases, benefiting apartment REITs and single-family rental operators.

• Be wary of the "bubble theory": The current market is fundamentally different from 2008. The core issue is not excess demand, but insufficient supply. Therefore, short-selling strategies based on a "bubble burst" scenario carry high risk.

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Theme & Background

This chapter focuses on the demand-side drivers of the U.S. housing market. By analyzing the correlation between employment growth and changes in housing inventory, the report argues that job expansion is a key force driving housing demand and consequently reducing inventory. The author pays particular attention to the differences in post-pandemic employment recovery rates across regions (red states vs. blue states) and their impact on housing markets.

Core Argument

The author's core argument is: employment growth is the most important single factor explaining the reduction in housing inventory. Specifically, an MSA's level of employment growth can explain nearly half (R² = 0.47) of its decline in available housing. This judgement is counterintuitive: the market generally focuses on interest rates, demographics, or investor behavior, but the author believes that changes in employment are the most direct demand-side driver at present.

Key Evidence & Data

1. Strong correlation between employment growth and inventory reduction:

• Analysis of the top 40 MSAs nationwide shows an R² of 0.47 between employment changes since 2019 and concurrent changes in available housing.
• The author explains: employment growth brings more people with home-buying capacity, directly translating into housing demand.

2. Regional divergence: Red states vs. Blue states:

• Among the top 5 MSAs in employment growth since 2019, 4 are located in Texas or Florida (red states).
• The bottom 5 MSAs in employment growth are all large cities in blue states (e.g., New York, Los Angeles).
• The author believes this divergence is directly related to the stringency and duration of pandemic lockdown policies: red states had lighter, shorter lockdowns and faster economic recovery.

Region Type	Employment Growth Performance	Representative Cities/States	Policy Characteristics
Red states (Texas/Florida)	4 out of top 5 spots	Houston, Dallas, Miami, etc.	Lighter, shorter lockdowns
Blue states (large cities)	Bottom 5	New York, Los Angeles, San Francisco, etc.	Strictest, longest lockdowns

Companies/Assets Involved

This chapter does not mention specific companies or stocks, but provides a demand-side analysis framework for subsequent chapters (e.g., repair and remodeling spending, stock selection). The author implies that housing-related assets in regions with strong employment growth (e.g., Texas, Florida) may be more attractive.

Investment Implications

1. Focus on regions with strong employment growth: Investors should prioritize housing markets in red-state MSAs such as Texas and Florida, where employment recovery is faster, housing demand is stronger, and inventory pressure is greater.

2. Beware of housing demand risks in large blue-state cities: Large blue-state cities like New York and Los Angeles are experiencing slow employment recovery and may face weak housing demand or inventory build-up.

3. Employment data is a leading indicator: When analyzing housing markets, changes in employment at the MSA level should be treated as a core leading indicator, rather than focusing solely on interest rates or demographics. Employment growth explains nearly half of inventory changes, and its predictive value exceeds that of other factors.