Housing analysts think the housing shortage could last years—this real estate CEO isn't so sure

Freddie Mac economists recently published an analysis finding that the U.S. housing market would need 760,000 more for-sale housing units and another 760,000 for-rent housing units to bring the vacancy rate, both rental and homeowner, back in line with historical averages.

That line of thinking is shared by most housing analysts. Earlier this year, ResiClub PRO members got our round-up of 11 estimates regarding whether the nation is overbuilt or underbuilt—all of the estimates collected found the U.S. housing market to be underbuilt.

That said, a few in the industry have wondered if the trajectory could be shifting, including Brian Dally, CEO of Groundfloor Finance, an Atlanta-based alternative investment platform with over $1 billion in investment and repayment volume. To gain insights from a housing industry executive with a contrarian view like Dally, ResiClub reached out to him for a Q&A.

Below is ResiClub’s Q&A with Dally.

Q: The general consensus among housing analysts is that the U.S. housing market is underbuilt. Fannie Mae puts the housing deficit around 4.4 million homes, and Moody's estimates around 1.7 million home deficit. What are some factors that could begin to change that dynamic?

“The demand side of the housing shortage is often taken for granted, but evidence suggests that the factors driving demand are changing, potentially challenging the perception of a supply shortfall. The population [growth outlook] is declining, with decreasing fertility rates, as well as an increasing death rate—all contributing to future decreases in demand. While single-family residences (SFR) may be relatively balanced, multifamily housing appears to be oversupplied by as much as 30%. This is evidenced by declining rent growth and absorption rates in the multifamily (MF) sector, along with a significant drop in new MF starts. As of August 2023, median multifamily occupancy rates are below the long-term trend across the largest metropolitan statistical areas (MSAs) in the country. Additionally, household formation is likely overestimated, as homes purchased for short-term or seasonal rental are being counted as new households. We appreciate the work done by Zelman and Associates on the housing supply issue [which suggest the U.S. might not be undersupplied] and, given their track record, take their findings seriously.”

Q: In 2008, the U.S. Census Bureau forecasted that U.S. population would reach 439 million in 2050. In 2012, the Census Bureau forecasted the U.S. population to reach 400 million in 2050. In 2017, the Census Bureau forecasted the U.S. population to reach 389 million in 2050. In 2023, the Census Bureau forecasted the U.S. population to reach 361 million in 2050. How do you expect decelerated long-term population growth, if it happens, to impact the U.S. housing market?

“First of all, it’s important to note that our population is still growing, although it’s projected to grow more slowly and the waterfall of projections do indeed continue to reflect an increased slowdown in growth. Population growth is obviously important for housing, but it hasn’t been as much a driver over the past three decades as the widespread availability of financing. With higher interest rates and conditions ripe for continued asset price inflation generally, over time it’s possible that decelerated population growth could take the edge off and partially offset dynamics that would otherwise tend to worsen affordability.”

Q: If the experts are wrong and the housing market is less undersupplied than believed, how could that impact the market?

“When supply and demand rebalance, housing price appreciation is going to revert to its mean. It would be an error to assume the housing demand curve can’t shift down due to demographics and affordability taking buyers out of the market, while the supply curve shifts out due to late-acting government policy to ease conditions for bringing more supply online. You don’t have to be an expert in microeconomics to understand the pricing pressure these dynamics could impose. The result could be equity returns in housing that substantially underperform other asset classes, precisely as the trade to own single-family rental property becomes as crowded as ever.”

Q: Looking ahead five years, where do you think the best areas for investment in the real estate space will be?

“On a five-year time horizon, with tolerance for some volatility, investing in the equity of distressed corners such as hotels and offices are contrarian plays that could overperform. When it comes to single-family residential real estate, we think short-term (and thus variable rate) investment debt is set up to outperform the equity in those assets rather resoundingly. One could make an argument that’s probably true in small-scale multifamily as well.”

Q: Can you tell us a little more about Groundfloor and your vision for the company?

“We started the company eleven years ago to open new opportunities for self-directed individual investors to preserve and build wealth as private capital markets evolved in the wake of the Great Financial Crisis and 2012 JOBS Act. Along the way, we’ve observed how people are penalized by the way popular legacy investment vehicles such as Blackstone’s REIT, and more recently Starwood’s REIT, tolerate or fail to tolerate market stress. The current state of technology and regulation as applied to the problem of delivering exposure to private markets -- especially in residential real estate -- shows there’s a better alternative to the inefficiencies and unintended consequences of active fund management. Changing the status quo takes time, however. We think it’s the bottom of the third inning, the retail investor is just now coming up to bat, and we’re prepared to pitch a complete game to make sure they win. Along the way, we also continue to explore how institutional capital and retail investor capital can not only co-exist in private markets, but benefit one another here as they do in public markets.”

On Thursday, we got the May print for housing starts.

Single-family housing starts are down -1.7% on a year-over-year basis.

Multifamily family starts are down -51.7% on a year-over-year basis.