It is estimated that the United States is short roughly five million homes to meet current housing needs. A decade of insufficient homebuilding in the wake of the Great Recession -- when the housing supply grew only 6.7% from 2010 to 2020, roughly half the rate of the previous decade -- has put our housing market in a tight spot.
But lack of new homes is only one piece of the housing-shortage puzzle. Several other contributing factors impacting the amount of available housing today are being overlooked and could be largely to blame for our current housing crisis.
Wall Street's residential takeover
The Great Recession ushered in a new era of opportunity for Wall Street buyers, which include real estate investment firms, iBuyers, real estate investment trusts (REITs), hedge funds, and other large private equity firms that had the capital available to snag single-family homes at ultra-low prices. As prices and rental demand rebounded in the years that followed, returns compounded and institutional buying rose dramatically.
In 2021, institutional buyers accounted for just under 17% of all homes purchased in the year -- around one million in total. That's a lot of homes that could have gone to end buyers but instead are in the hands of private equity firms and likely to be held as long-term rentals. It's also a big contribution to the increased competition in the marketplace because institutional investors have the power of cash offers.
To be fair, not all properties purchased by institutional buyers were listed on the traditional market or have been a good fit for end buyers. Many times, properties are purchased in bulk from banks or other funds, at foreclosure steps, or are vacant and in need of repair or updating, something the institutional buyers do before relisting them for sale or rent. Nonetheless, it's still reducing the amount of existing housing stock, in turn causing prices to rise because buyers have to bid higher or more aggressively to compete.
The Airbnb effect
Vacation rentals are becoming an increasingly popular investment avenue in the residential marketplace. High yields or the ability to have a vacation home paid for by others does make it an attractive investment. Plus, it's never been easier to jump into the vacation rental business, thanks to popular vacation rental companies like Airbnb and VRBO.
Growing demand for vacation rentals as investments, coupled with a pandemic, spurred a vacation buying boom. The last two years saw a huge increase in the number of vacation homes purchased. In 2020, vacation home purchases exceeded the growth of existing-home sales by 44% from the year prior. In the first few months of 2021, it was estimated that just over 400,000, or 6.7%, of homes purchased from existing housing stock were being bought as second homes.
This makes it tough for buyers in ideal vacation destinations to compete. I can personally attest to what I've dubbed "the Airbnb effect." The last three homes I've made offers on in my local market, St. Pete, Florida, were all sold to buyers who plan to use the property for an Airbnb. It took housing stock away from end buyers like myself and pushed home prices up as they overpaid, knowing the income potential of the properties when used for vacation purposes.
Vacant homes held off-market
Recent census data revealed there are currently more than 16 million vacant homes across the United States. This includes vacation homes minimally occupied by the owners, vacant properties listed for sale, and properties that are vacant because the owner passed away or the house is unhabitable or in some stage of legal proceedings, like a vacant foreclosure or real estate owned (REO) property.
The percentage share of homes held off-market -- which are vacant properties not listed for sale or rent or used as seasonal homes -- is at its highest levels since 1995, with around two million homes across the country simply sitting vacant. States like Vermont, Alaska, and Maine have as much as 20% of their housing stock sitting vacant. Other states, like Florida -- home to the red-hot housing markets of Miami, Tampa, and Orlando -- have around 17.1% of their housing stock sitting vacant.
Vacant housing isn't alarming. Every market will naturally have a period when one or more homes will sit vacant as the property goes through probate or is renovated, foreclosed on, or prepared for listing or rent. The greater issue is that there isn't a clear fix for turning that two million homes held off-market into available housing. Long legal processes, the need to track down property owners to purchase or list a property, the time needed to complete renovations, and a lack of value in the homes based on their condition can all contribute to a house just sitting unused.
There isn't a singular cause for today's lack of housing. It's a combination of factors that, in turn, need a combination of solutions to fix them. Thankfully, slowing demand should help alleviate some of this need as homebuilders try to bridge the housing gap. However, too much momentum in home deliveries could lead to another housing crash. Finding the balance between a stable market and an oversupplied or undersupplied one has proven tricky.