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Believe it or not, a housing shortage

With all the talk of excess inventory and a flood of foreclosures, the idea of a looming housing shortage sounds unrealistic, if not downright fanciful.

After all, data from the National Association of Realtors showed a 5.1% decline in existing-home sales in June. Meanwhile, total housing inventory increased 2.5%, to 4 million homes available for sale -- an 8.9-month supply, up from an 8.3-month supply in May.

The tax benefits of homeownership

Foreclosures, too, are an issue, with a vast backlog of distressed properties and "underwater" loans sitting just below the surface, according to RealtyTrac, an online foreclosure marketplace. The company forecasts that more than 3 million properties will get hit with foreclosure filings by the end of the year.

But if you step back from the doom and gloom of foreclosures and declining sales and focus on the low construction levels of the past few years, some economists say a housing shortage might be in the offing. A 2009 report by Massachusetts Institute of Technology economics professor William Wheaton says that despite the glut of existing homes, with current depressed levels of construction, there might be "excess demand" for new homes.

How could there be too few?

In the past seven years, housing starts first exceeded -- but then fell short of -- the historical norm of 1.6 million, according to the National Association of Realtors, with a deficit expected to grow into 2011. The chief economist of the Realtors group said last month that the big drop in home construction suggests a shortage could become an issue later.

Longer-term demographics support this theory, says Ross DeVol, the executive director of economic research at the Milken Institute, an independent think tank in Santa Monica, Calif. The U.S. is adding only about 600,000 housing units a year now, and the long-term growth in new households is 1.3 million to 1.4 million per year, DeVol says.

That household formation rate has fallen off somewhat because of the recession. But that decline is misleading because many college graduates have chosen to live with their parents while they find their financial footing, and some couples have deferred getting married.

But long term, that household growth says that "if we build substantially less than that amount, which we're doing now, in four, five or six years, if we don't ramp up housing starts, we could see a shortage," DeVol says.

We're still growing

There's a tendency in any market that when you overshoot on the upside -- which the U.S. did through 2007 in real estate -- you undershoot on the downside, DeVol says. But underlying growth in population demographics -- namely, how many people will enter the work force -- is somewhere in that range of 1.3 million to 1.4 million, he says.

One risk is that so many homebuilders will leave the field during the current downturn that there could be "capacity constraints" in the long term as the U.S. population continues to grow, says John Vogel, a professor of real estate at the Tuck School of Business at Dartmouth.

Consider that at the peak of the housing bubble, in 2005, nearly 2.1 million new housing units were built. In 2006, that number dropped to 1.81 million; in 2007, as the bubble deflated, new units fell to 1.34 million. By 2009, only 550,000 new units were built, DeVol says.

There won't likely be constraints in overbuilt places such as Las Vegas, Phoenix, Miami or Riverside, Calif. But if the pace of home construction doesn't pick up, "we are going to begin to see some tightness in some areas of the country that didn't have the boom and bust occur," DeVol says.

The regions most likely to be undersupplied by mid-2012 are those where supply and demand are now in balance, says Celia Chen, a senior director of housing economics at Moody's. Chen includes Washington state, Oregon, New Mexico and Utah in this group. This is where strengthening demand, combined with construction that will remain below trend, is likely to result in undersupply, she says.

Note :

This article was reported by Lisa Scherzer for SmartMoney

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