Why are there so many houses to fix and flip: Average age of US houses is ageing
By: Abhilash Khalkar
Tags: Housing, Covid 19, Real Estate, USA, Sales

Image Source: WSJ

Aging houses in the US narrate the story of a construction industry, which constantly lags in the construction of new homes every year.

As per a recent survey, the average age of homes in the US is between 31 to 40 years. The age of houses is increasing significantly every year and is expected to do so over the foreseeable future.

Rise in Housing Prices and Increase in Number of Houses to Fix and Flip

Homebuilding has taken up the pace in recent years, and the year 2019 ended with a high note for the construction industry. However, this pace is not enough to satiate the rising demand for new houses. As per a research study, the US housing market is falling short of approximately 5 million houses.

When we analyze the US census data, it becomes evident that the 6 million new homes for single families built between 2011 and 2019, do not offset the 10 million new families formed in the same period. Even if construction companies increased their pace, it would still require a minimum of 5 years to return to a balanced market.

This shortfall has caused the housing prices to skyrocket. In such a scenario, citizens in the US prefer to spend money on renovation and repairing their existing homes, rather than buying new homes. This has hence caused the number of houses to be fixed and flipped, increase significantly.

Reason for Housing Shortfall Today

The epic housing crash, which occurred a decade ago is responsible for the shortfall in housing today. The crash was brought on by unscrupulous and irrational mortgage lending. Loans were being awarded to even the riskiest buyers, this caused the housing industry to become highly vulnerable.

Owing to a humungous number of loans become defaulted and enter the non-performing assets (NPAs) category, home construction in the US plummeted. This caused millions of houses to go into foreclosure. Moreover, a substantial number of investors had bought approximately 5 million homes and converted them into rental homes for the duration of the crises, and even after that. This further lowered the for-sale inventory in the housing market.

Today’s Situation

After the crises passed away, builders focused on high-end houses, which had attractive margins. However, low mortgage rates and the coming of age of the millennial populations, has fired up the demand for new housing over the past few years.

Housing construction companies have started to focus on basic floor plans, few amenities, smaller and affordable homes. This focus towards the entry-level market is, however, not sufficing the rising demand for houses, as millennials are not willing to move away from metro cities. This unwillingness to move away from metro cities has further fueled the increase in costs for new houses.

Conclusion

The US housing construction industry is not building a sufficient number of houses to match up with the demand. The current rate of housing construction is approximately 400,000 behind the actual demand for long-term housing. Following the decline in the growth rate for housing construction, a significant shortfall has been generated today.

Housing costs are anticipated to rise continuously until the construction companies ramp up their activities. This factor will constrict household formations and prevent millions of people from owning a home, over the next few years.