The ‘haunted’ housing market’s real problem may be too few people, not too few homes, says J.P. Morgan’s David Kelly

David Kelly, chief global strategist at J.P. Morgan Asset Management, argues that the real issue with the U.S. housing market isn't a lack of homes, but a shortage of people. According to Kelly's analysis in his Oct. 26 research note, the U.S. population growth is expected to be only 800,000 per year over the next few years. This would require only 320,000 new housing units annually, compared to roughly 1 million per year in the first two decades of the century.

This contradicts the popular narrative that the country simply hasn't built enough homes. Zillow estimated in July that the U.S. was about 4.7 million homes short as of 2024. Kelly, however, sees the situation as one of "net excess supply." The housing market has been haunted by a variety of factors, including over a decade of easy money, tariffs, and immigration policies that make building homes more expensive while limiting the number of people who need them.

The aging population and falling birth rates are expected to further dampen demand. Kelly expects homebuilding to continue declining, marking the eighth decline in residential construction in the last 10 quarters. He predicts housing starts of 1.32 million this year, the weakest since 2019, and a further decline to 1.24 million in 2027.

Despite lower mortgage rates, which are currently below their 50-year average, Kelly expects the Federal Reserve to raise rates in December, potentially making this the last rate hike of the cycle. The issue is particularly acute for younger generations, who are finding it harder to buy homes. Homeownership rates have fallen since 2022, with a sharper decline among those under age 35.

Kelly attributes the drop to tougher lending standards and a lack of accumulated wealth among younger households. He concludes that the housing market remains "haunted for now" with many personal housing nightmares to be endured.