Housing data for December is expected to point to an alarming shortage of homes in the United States that will continue to affect the cost of living for middle- and lower-income households.
The U.S. does not have a demand problem—it remains robust—nor does it have a financing problem.
Rather, it has a supply problem that begs a smart and comprehensive federal and local policy solution directed at both the overall level of supply and its composition.
Overall housing costs (including rents) are rising at 3.4% per year; those costs account for 44.5% of the consumer price index and are one reason for the elevated inflation rate. While there are substitutes for many of the smaller items in the CPI that households consume, housing is not one of them.
We can safely say that:
- There is a housing supply problem.
- Investment in housing has been insufficient since the 2008 housing-induced financial crisis.
- Not much is being done about it, at least at the macro level.
The shortage has been a long time in the making, and goes beyond the more recent dynamic of homeowners with low mortgages who don’t want to move.
Consider the investment being made in housing. In the late 1970s, the 4.7% contribution of residential investment to gross domestic product was reasonably in line with the 6.3% share of nonresidential investment.
By the third quarter of last year, residential investment had shrunk to 3.2% of GDP while nonresidential investment had climbed to 15.4%.
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Because housing in most of the country is built and managed privately, that implies that the lack of supply is a market failure.
There are multiple reasons for this market failure, ranging from normal levels of population growth, a lack of space in the cities and suburbs for that population, a lack of cheap and reliable transportation into the cities, and a preference among younger buyers for larger homes.
For example, the average size of a new home today is roughly 2,400 square feet, or approximately 6% to 8% larger than a quarter century ago and 30% larger than the average size of a new housing start of 1,700 square feet in 1976.
So why haven’t builders responded with enough housing to meet the demand?
The first reasons are institutional: Zoning restrictions that prohibit multifamily housing in cities and suburbs, the lack of transportation from the outer rings of cities and the increased cost of housing construction.
The second tranche of reasons can be traced to buyer preferences for larger single-family homes. The demand for this kind of housing adds to the affordability crisis by bidding up rents and house prices.
The result is a supply problem, with public and private intransigence over where and what to build only adding to the shortage.
The takeaway
Addressing the housing shortage will take a mix of public and private policy changes. These changes should encourage the construction of more multifamily housing. There are plenty of city neighborhoods where the old housing stock no longer meets the demand for updated and efficient use of space. But builders are often stymied by zoning restrictions limiting the number of units in those areas.
Second, efficient transportation projects would allow for dispersion of housing beyond the immediate suburban rings.
Finally, government assistance for public-private rebuilding of old neighborhoods would add to the housing stock and revitalize the tax bases of cities.
