As the nation’s residential real estate market begins to ascend out of its valley of economic despair, some are suggesting we may be fast approaching a new national crisis: a housing shortage.

With fewer than 400,000 new households formed in 2009 — as opposed to the historical annual average of 1.3 million — development of new homes will need to keep up with the demand that could potentially arise as the job market rebounds and members of Generation Y begin entering their property-buying years — now through 2020. [For more information on housing construction trends, see the June 2010 first tuesday Market Chart, CA single- and multi-family housing starts; for more information on first-time homebuyers and the population, see the February 2010 first tuesday Market Chart, First-time homebuyers and new housing.]

The nation’s population has continued to grow during this economic crisis — California’s present annual population growth exceeds 400,000 — but many developers have gone out of business, as is always the case in housing recessions. Population growth and a lack of builders paired together could potentially bolster demand for new housing while preventing the means to supply enough housing to meet that demand.

first tuesday take: The reason why construction starts have been so low is that demand is simply not there. What’s more, the housing market in California was drastically overbuilt due to those who bought new homes in the 2000s and have since lost them in foreclosure — with another 400,000 expected foreclosures to occur by the end of 2013.

With the collapse of the housing bubble in 2007, people were rendered unable (read: unemployed) or unwilling (read: informed of risks) to enter into purchases and mortgages.  Further diminishing future demand for new homes is the continuous decline of homeownership in California. From the artificially induced homeownership statistic of 59% in 2006, to the current 56% — which is expected to fall below the 55% seen in the ‘80s and ‘90s — and to a bottom rate of 50%.

However, as the California economy picks back up, so will home construction. Until Californians take a different view of cities and the opportunities they offer professionally, culturally and socially, they will head for suburbia, despite the suburb’s cost in time, energy consumption, and stress due to living where they do not work. [For more information on the benefits cities can provide, see the June 2010 first tuesday article, The plight of California to be solved by… cities?]

Let California also not forget about the shadow inventory underlying the massive delinqencies, increasing strategic defaults and unmarketed real estate owned (REO) properties. As buyers become more financially able (read: acquire a buildup of savings) to qualify to borrow and demand rises for homes, banks will complete foreclosures and release the shadow inventory.

The massive mortgage delinquencies in California will eventually be processed as foreclosures which will result in an abundance of single-family residences (SFRs) — not a shortage. This shadow inventory will probably take us into 2015 when we will have regained most (but not all) of the jobs we had at the peak of employment in November 2007. [For more information on the shadow inventory, see the March 2010 first tuesday article, Where have all the REOs gone?]

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