Of all the shortages afflicting the US economy, the housing shortage might last the longest. Earlier this year, we argued that constrained supply and sustainably robust demand would keep the US housing market very tight, pushing up home prices and rents sharply. The boom since then has surpassed even our lofty expectations, with home prices now up 20% over the last year. This week, we take stock of where home prices will go from here, how high rent inflation will rise, and whether new deregulatory efforts can alleviate the housing shortage.
The supply-demand picture that has been the basis for our call for a multi-year boom in home prices remains intact. Housing inventories remain historically tight, while homes remain relatively affordable despite the recent price increases, and surveys of home buying intentions remain at healthy levels. Our model now projects that home prices will grow a further 16% by the end of 2022.
Does the sharp rise in home prices suggest an even faster acceleration in shelter inflation than our aggressive standing forecast of 4.5% at end-2022? The risks do now look more two-sided, especially with our shelter inflation tracker—a leading indicator based on several alternative rent measures—having jumped from 2.1% to 4.6% in just 6 months. But we caution that the most extreme increases reported in some alternative rent measures provide a misleading signal about the official data because they focus on units that turn over, where base effects from depressed rents in 2020 are stronger and government rent restrictions are weaker.
Is there a solution to the national housing shortage? Economic research shows that relaxing the zoning rules and other regulatory constraints that have impeded homebuilding for decades would boost supply and lower prices and rents. But in practice, this has been difficult politically.
Some state and local governments are pushing to substantially reduce regulatory constraints. Most notably, California recently abolished single-family zoning statewide. The White House hopes to use housing funding to incentivize others to follow suit, but much of the proposed $400bn in housing-related grants and tax subsidies is likely to be cut from the reconciliation bill. As a result, nationwide changes seem unlikely for now, and limited state and local changes are only a partial step toward relieving the housing shortage.
Of all the shortages afflicting the US economy, the housing shortage might last the longest. Earlier this year, we argued that constrained supply and sustainably robust demand would keep the US housing market very tight, pushing up home prices and rents sharply. The boom since then has surpassed even our lofty expectations, with home prices now up 20% over the last year (Exhibit 1). This week, we take stock of where home prices will go from here, how high rent inflation will rise, and whether new deregulatory efforts can alleviate the housing shortage.
The supply-demand imbalance that has been the basis for our call for a multi-year boom in home prices remains intact.
While the supply of homes for sale has increased modestly since the spring, it remains well below pre-pandemic levels (Exhibit 2) and the outlook offers no quick fixes for the shortage. Homebuilders continue to face headwinds that were present before the pandemic — especially a lack of construction workers and a lack of available plots to build on — and the pandemic has exacerbated those problems with further delays from supply chain disruptions, lumber shortages, and now economy-wide labor shortages. These headwinds are likely to limit the pace of annual homebuilding to around 1.65mn in coming years. Subtracting roughly 250k demolitions per year implies a trend net increase in supply of 1.4mn housing units per year.
How does that compare to demand? Demographic tailwinds are likely enough to prevent the supply of homes from normalizing quickly in the near-term. We estimate that demographic changes –most importantly, millennials moving into the age range where household formation and home buying tend to peak – have boosted the trend rate of household formation to roughly 1.3mn per year.
There has been some concern around the sustainability of homebuyer demand, as potential homebuyers seem to have taken note of the sharp rise in home prices: 66% of respondents to the University of Michigan consumer survey now think today is a bad time to buy a home, the highest share in nearly four decades (Exhibit 3, left). However, we are not that concerned about weakening sentiment because homebuyers remain, as our credit strategists noted, “reluctant bulls” who still intend to buy despite thinking it’s a bad time (Exhibit 3, right). Additionally, while the huge increase in home prices over the last year has reduced housing affordability, housing in the US remains affordable relative to historical standards because rates are still low and household incomes have remained largely intact.
To see what this means for home prices, we update our housing model that jointly considers supply, demand, affordability, and home prices. In the model, we assume that mortgage rates, income, and homebuilding evolve in line with our baseline economic forecast, and allow home prices and demand to evolve simultaneously. The exercise suggests that today’s robust demand for a limited supply of homes will only gradually reduce affordability (Exhibit 4, left). That in turn reduces demand, which slowly boosts the supply of available housing as the rate of housing completions remains steady and new listings of existing homes recover to the pre-pandemic trend (Exhibit 4, middle). That dynamic eventually mitigates the supply-demand imbalance and reduces price pressures, but not before—the model projects—home prices grow a further 16% by the end of 2022 (Exhibit 4, right).
Does the sharp rise in home prices suggest an even faster acceleration in shelter inflation than our aggressive standing forecast for PCE shelter inflation to rise from 2.4% year-over-year today to a 20-year high of 4.5% by the end of next year? The risks do now look more two-sided, especially with our shelter inflation tracker—a leading indicator based on several alternative rent measures—having jumped from 2.1% to 4.6% in just 6 months (Exhibit 5).
Some investors expect a much faster pace of acceleration, pointing to double-digit increases in some alternative rent measures over the last year. However, we caution that some of these measures, such as Zillow’s observed rent index, could provide a misleading signal about the official rent and owners’ equivalent rent data because they are less smoothed and focus on units on the market that are turning over, whereas the official measure includes continuing leases. With less than 5% of rentals typically turning over in a given month, even sharp changes in asking rents only fractionally show up in the official measure. Measures based on asking rents weakened substantially during the start of the pandemic, especially in large cities, and now those measures are being compared to the depressed rents of 2020, resulting in an extreme base effect that overstates the sequential pace of rent increases. Additionally, several states and cities enacted rent freezes during the pandemic, and many areas regulate the rate of annual rent increase of at least some units. Those restrictions typically apply to only renewals, which are included in the official measure but not in measures of asking rents.
A large body of economic research shows that one way to boost housing supply is to reduce the regulatory burden on homebuilders. In particular, academic studies show that the rise in land-use restrictions over the last 60 years (Exhibit 6) has constrained the supply of housing and increased both home prices and rents.
While researchers measure the restrictiveness and impact of land-use regulations in many different ways due to the lack of a comprehensive nationwide database of regulations, even the lower end of the range of estimates implies that rolling back regulations like minimum lot sizes and building height limits can substantially increase the supply of housing (Exhibit 7).
Outside of the housing market, several studies show that land-use restrictions impact broader economic outcomes too. Ganong and Shoag (2015) show that high home prices — including those that are the result of land-use regulations — act as a barrier to labor market entry for lower-paid workers who would otherwise migrate to high-income places. That drag on labor mobility reduces productivity growth because it restrains the supply of workers for high-productivity cities. Hsieh and Moretti (2019) show that the accumulation of those productivity losses have substantially weighed on output, estimating that if land-use restrictions in New York, San Jose, and San Francisco had remained at the level of the median US city, national GDP would have been almost 4% higher in 2009.
While economic research shows clear benefits from reducing the most restrictive land-use regulations, reducing them has been politically difficult in practice. But recently, some state and local governments have pushed to substantially reduce regulatory constraints (Exhibit 8). Most notably, California passed legislation last month that will effectively eliminate single-family zoning for most of the state, becoming only the second state to do so after Oregon. In addition to allowing some lots that were previously only zoned for a single-family home to split into two, the new legislation allows duplexes to be built on most single-family parcels. While take-up of the new policy is uncertain, it has the potential to grow the roughly 60 thousand new single-family homes that are permitted each year into thousands of additional units. And even if a small fraction of California’s existing 7½ million single family homes were to make use of the policy — for 5.4% of which the Terner Center for Housing Innovation at UC Berkeley estimates it makes financial sense — the boost to housing supply could be substantial over the medium-term.
As part of a broader effort to increase the supply and affordability of housing, the White House hopes to use funding for local governments to incentivize others to follow suit (Exhibit 9). The latest proposal would create an incentive program that awards flexible funding to local governments that take steps to reduce barriers to affordable housing production, such as by removing exclusionary zoning laws like minimum lot size requirements or restrictions on multi-family homes. However, much of the latest proposal’s $400bn in housing-related grants and tax subsidies — which also include the expansion of the Low Income Housing Tax Credit and the creation of a new tax credit for homebuilders that develop and renovate 1-4 unit housing — appear likely to be dropped from the reconciliation bill as Democratic leaders try to scale back the overall size of the bill. As a result, nationwide changes seem unlikely for now, and limited state and local changes are only a partial step toward relieving the housing shortage.
Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.
We, Jan Hatzius, Alec Phillips, David Mericle, Spencer Hill, CFA, Joseph Briggs and Ronnie Walker, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy generally prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director or advisor of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman Sachs & Co. LLC and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts.
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the companies and other entities which are the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. To the extent that the contents of this document contains any financial product advice, it is general advice only and has been prepared by Goldman Sachs without taking into account a client's objectives, financial situation or needs. A client should, before acting on any such advice, consider the appropriateness of the advice having regard to the client's own objectives, financial situation and needs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests and a copy of Goldman Sachs’ Australian Sell-Side Research Independence Policy Statement are available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Brazil: Disclosure information in relation to CVM Resolution n. 20 is available at https://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 20 of CVM Resolution n. 20, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: This research, and any access to it, is intended only for "professional investors" within the meaning of the Financial Services and Capital Markets Act, unless otherwise agreed by Goldman Sachs. Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. A copy of certain Goldman Sachs Australia and New Zealand disclosure of interests is available at: https://www.goldmansachs.com/disclosures/australia-new-zealand/index.html. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Research reports do not constitute a personalized investment recommendation as defined in Russian laws and regulations, are not addressed to a specific client, and are prepared without analyzing the financial circumstances, investment profiles or risk profiles of clients. Goldman Sachs assumes no responsibility for any investment decisions that may be taken by a client or any other person based on this research report. Singapore: Goldman Sachs (Singapore) Pte. (Company Number: 198602165W), which is regulated by the Monetary Authority of Singapore, accepts legal responsibility for this research, and should be contacted with respect to any matters arising from, or in connection with, this research. Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.
European Union and United Kingdom: Disclosure information in relation to Article 6 (2) of the European Commission Delegated Regulation (EU) (2016/958) supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council (including as that Delegated Regulation is implemented into United Kingdom domestic law and regulation following the United Kingdom’s departure from the European Union and the European Economic Area) with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest is available at https://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company.
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; Public Communication Channel Goldman Sachs Brazil: 0800 727 5764 and / or email@example.com. Available Weekdays (except holidays), from 9am to 6pm. Canal de Comunicação com o Público Goldman Sachs Brasil: 0800 727 5764 e/ou firstname.lastname@example.org. Horário de funcionamento: segunda-feira à sexta-feira (exceto feriados), das 9h às 18h; in Canada by either Goldman Sachs Canada Inc. or Goldman Sachs & Co. LLC; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman Sachs & Co. LLC. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom.
Effective from the date of the United Kingdom’s departure from the European Union and the European Economic Area (“Brexit Day”) the following information with respect to distributing entities will apply:
Goldman Sachs International (“GSI”), authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”) and the PRA, has approved this research in connection with its distribution in the United Kingdom.
European Economic Area: GSI, authorised by the PRA and regulated by the FCA and the PRA, disseminates research in the following jurisdictions within the European Economic Area: the Grand Duchy of Luxembourg, Italy, the Kingdom of Belgium, the Kingdom of Denmark, the Kingdom of Norway, the Republic of Finland, Portugal, the Republic of Cyprus and the Republic of Ireland; GS -Succursale de Paris (Paris branch) which, from Brexit Day, will be authorised by the French Autorité de contrôle prudentiel et de resolution (“ACPR”) and regulated by the Autorité de contrôle prudentiel et de resolution and the Autorité des marches financiers (“AMF”) disseminates research in France; GSI - Sucursal en España (Madrid branch) authorized in Spain by the Comisión Nacional del Mercado de Valores disseminates research in the Kingdom of Spain; GSI - Sweden Bankfilial (Stockholm branch) is authorized by the SFSA as a “third country branch” in accordance with Chapter 4, Section 4 of the Swedish Securities and Market Act (Sw. lag (2007:528) om värdepappersmarknaden) disseminates research in the Kingdom of Sweden; Goldman Sachs Bank Europe SE (“GSBE”) is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) and Deutsche Bundesbank and disseminates research in the Federal Republic of Germany and those jurisdictions within the European Economic Area where GSI is not authorised to disseminate research and additionally, GSBE, Copenhagen Branch filial af GSBE, Tyskland, supervised by the Danish Financial Authority disseminates research in the Kingdom of Denmark; GSBE - Sucursal en España (Madrid branch) subject (to a limited extent) to local supervision by the Bank of Spain disseminates research in the Kingdom of Spain; GSBE - Succursale Italia (Milan branch) to the relevant applicable extent, subject to local supervision by the Bank of Italy (Banca d’Italia) and the Italian Companies and Exchange Commission (Commissione Nazionale per le Società e la Borsa “Consob”) disseminates research in Italy; GSBE - Succursale de Paris (Paris branch), supervised by the AMF and by the ACPR disseminates research in France; and GSBE - Sweden Bankfilial (Stockholm branch), to a limited extent, subject to local supervision by the Swedish Financial Supervisory Authority (Finansinpektionen) disseminates research in the Kingdom of Sweden.
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman Sachs & Co. LLC, the United States broker dealer, is a member of SIPC (https://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
We and our affiliates, officers, directors, and employees, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research, unless otherwise prohibited by regulation or Goldman Sachs policy.
The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs.
Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report.
This research is focused on investment themes across markets, industries and sectors. It does not attempt to distinguish between the prospects or performance of, or provide analysis of, individual companies within any industry or sector we describe.
Any trading recommendation in this research relating to an equity or credit security or securities within an industry or sector is reflective of the investment theme being discussed and is not a recommendation of any such security in isolation.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options and futures disclosure documents which are available from Goldman Sachs sales representatives or at https://www.theocc.com/about/publications/character-risks.jsp and https://www.fiadocumentation.org/fia/regulatory-disclosures_1/fia-uniform-futures-and-options-on-futures-risk-disclosures-booklet-pdf-version-2018. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request.
Differing Levels of Service provided by Global Investment Research: The level and types of services provided to you by the Global Investment Research division of GS may vary as compared to that provided to internal and other external clients of GS, depending on various factors including your individual preferences as to the frequency and manner of receiving communication, your risk profile and investment focus and perspective (e.g., marketwide, sector specific, long term, short term), the size and scope of your overall client relationship with GS, and legal and regulatory constraints. As an example, certain clients may request to receive notifications when research on specific securities is published, and certain clients may request that specific data underlying analysts’ fundamental analysis available on our internal client websites be delivered to them electronically through data feeds or otherwise. No change to an analyst’s fundamental research views (e.g., ratings, price targets, or material changes to earnings estimates for equity securities), will be communicated to any client prior to inclusion of such information in a research report broadly disseminated through electronic publication to our internal client websites or through other means, as necessary, to all clients who are entitled to receive such reports.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data related to one or more securities, markets or asset classes (including related services) that may be available to you, please contact your GS representative or go to https://research.gs.com.
Disclosure information is also available at https://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282.
© 2021 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.