Anybody who is house hunting knows that the options are limited, there is intense competition, and prices can be high. However, one analyst says that too many homes are being built.

According to National Association of Realtors (NAR), the August supply of houses for sale was 1.29 million, which is 1.5% less than July and 13.4% lower than August 2020. This is a supply of 2.6 months at current sales rates, which is the lowest ever recorded. A market with a 6-month supply between seller and buyer is considered balanced.

One analyst, Dennis McGill, director of research at Zelman & Associates, however, argues that the current supply of homes for sale is not indicative of the overall need to build more houses. Because of the unexpected emotional surge caused by the pandemic, demand right now is very strong, he claims. Historical data, such as demographics, are better indicators of demand for housing, but they don’t support any more.

McGill stated that there is a declining trend in population growth and household formation, which will really impact the demand for what needs to be built. The other side is that the developers are optimistic that there will be a shortage of housing and that they can build the necessary amount. However, they seem to be pressing down harder on the accelerator than they think they should.

McGill asserts that there is a decline in demand. According to McGill, data from the U.S. Census Decennial Census shows that household formation is 24% lower than it was during the previous four decades.

McGill’s partner Ivy Zelman is probably best known as McGill’s first warning about the subprime crisis in mortgage lending over a decade.

The market is hot. Zelman said that there is a huge amount capital coming into the area. This is despite all of the investor interest in housing. We believe that the single-family market has already exceeded demand, with a 20% increase in single-family construction and a 10% rise for multifamily. So we can’t possibly be more opposite of the current situation and the future of the housing industry.

However, homebuilders would disagree. Although housing starts are not as high today than they were a decade ago they are gradually recovering and homebuilder sentiment remains high. The stock of national public builders has also seen a surge, though this may be due to rising demand.

Rob Dietz (chief economist at the National Association of Home Builders) stated that he has seen Ivy’s thesis and agree with population growth.