Why New York May be Headed for a Real Estate Shortage

By G. Brian Davis

There are plenty of discouraged homeowners and real estate professionals in America these days, after a painful few years for real estate markets everywhere. But despite high foreclosure rates, large numbers of vacant homes nationwide, and the only slowly warming economy, there are plenty of reasons for hope, and some economists are even forecasting a real estate shortage to arise within the next few years.

Taken as a raw number, the 14.2 million vacant homes in America seems a daunting figure to overcome. How could we possibly experience a housing shortage, with 14.2 million vacant homes?

The answer is beguilingly simple: the vacant homes aren’t necessarily where the demand will be.

Consider that a large percentage of the vacant homes in America sit in rural or fringe suburban areas, or in parts of Ohio and Michigan with permanently decaying economies. Residents are leaving these areas in droves, primarily in search of one thing: employment.

Cities like New York, with diverse economies and fundamentally strong foundations, will experience job recovery and growth first, and with jobs, renewed demand for real estate. In the last few years, as the economy has contracted, the demand for housing has artificially shrunk, while the supply of available housing has artificially expanded, depressing real estate values, but both of these pressures are strongly correlated to employment.

As jobs disappear and salaries are slashed, the total number of independent households decreases, as households consolidate. The scenarios are visible everywhere: recent college graduates deciding to move back in with Mom and Dad for a year or two, young professionals leaving their studios in favor of sharing an apartment with a friend, couples moving in together before they would normally, people with extra space deciding to lease it out in order to generate more monthly income; the bottom line is that more people are living together to save money, and this reduces the total number of households.

The effects caused by foreclosures are now understood by even the most casual observer: local real estate markets become flooded with under-priced inventory, simultaneously driving up supply and driving down market prices.

Further, consider the effect caused by new job creation in one relatively small area, while elsewhere jobs remain scarce. In addition to existing residents re-entering the real estate market, new residents will flood the region, in search of work.

And it doesn’t stop with jobs. A quick look at demographics in this country reveals several telling trends: baby boomers, coupled with Generation Y in their 20’s and early 30’s, make up the overwhelming majority of household heads at the moment, and these groups tend to shift away from outlying areas and gather in cities and suburban centers. The traditional occupants of outlying suburban and rural areas range from their early 30’s up to roughly 50 (Generation X and late boomers), and this is an uncharacteristically small population at the moment, and will remain so for some time. Finally, it’s worth pointing out that immigration remains the fastest vector for population growth, and cities like New York are hotbeds of immigration activity.

In short, New York City real estate has nowhere to go but up. Sure, it may not happen tomorrow, as job creation will likely be slow and steady, and demographic shifts don’t take place overnight, but cities like New York simply can’t sustain housing depressions for long. With little room for increased housing supply, and plenty of causes for increased demand, there’s a good chance that New York, New York may in fact be headed towards a housing shortage in a few short years.

Brian Davis is a real estate investor, landlord, and former private lender, with a particular love for renovating historic and older residences. Currently he manages EZ Landlord Forms, an online resource for landlords and investors that provides a customizable New York lease, New York eviction notices, a summary of New York's landlord-tenant laws, and other tools for real estate investors. E-mail: gbdavis@ezlandlordforms.com.