The U.S. housing market has been growing at an unprecedented pace. In our 2021 in Review, we discovered that the median home price in the U.S. went up 14% in 2021. A recent report from CoreLogic found that the average U.S. home appreciated 20% between February 2021 and February 2022. The unusual annual rise in home appreciation was a result of several factors. Previously low interest rates spared a homebuying frenzy after the start of the pandemic. High inflation and a labor shortage were also major driving forces, as creating and transporting goods necessary for homebuilding grew more expensive.
However, the leading cause for skyrocketing home appreciation is a lack of adequate supply. All the evidence shows that the housing affordability crisis won’t correct itself until enough homes are built to meet the demand. According to a June 2021 report from the National Association of Realtors(NAR), there has been an “underbuilding gap” of 5.5 to 6.8 million housing units since 2001, which led to today’s housing shortage.
In the same month, NAR released a more detailed report that detailed the underlying reasons behind the national housing shortage and the urgent problems that result from a lack of adequate supply.
The Housing Shortage is a Crisis Two Decades in the Making
The report summarized the dire nature of the current housing shortage, a crisis that is two decades in the making. Between 1968 and 2000, the number of housing units in the U.S. grew at a 1.7% annual rate. But it only grew 1% annually since 2000. Since 2010, the growth rate was 0.7% and declined even further after the start of the pandemic.
U.S. Census data estimates 12.3 million American households formations from January 2012 to June 2021. But at the same time, just 7 million new single-family homes were built. A severe labor shortage hampered housing construction over the last couple of decades. It grew even worse after the onset of the pandemic.
To make up for the current shortage, NAR estimates that the United States would have to build at least 2 million homes a year for a decade. It is a record level of production that represents an increase of more than 700,000 units compared to current levels. However, when including demolished homes due to old age, neglect, or redevelopment, the actual housing shortage is around 6.8 million units.
This means that the United States could build 2 million housing units annually for a decade and still face a housing deficit. The severe housing shortage is illustrated by the number of active listings on the market right now. There were 870,000 units on the market in February, a 15.5% annual decrease from last February.
As a result of the shortage, affordability worsened as supply was unable to meet demand. The report notes that the crisis hit millennials the hardest and is a major reason why younger generations decided to delay marriage and having kids. More Americans are pushed into the rental market due to rising owning costs. But at the same time, 40% of renters are cost-burdened. 25% are severely cost-burdened, meaning they spend more than half of their income on rent.
Housing Production is Up, But is it Enough?
The latest census data reports that, as of February 2022, annual home completions were 1,309,000, and housing starts were 1,447,000, far lower than the 2 million units that the NAR report called for. However, there are signs that housing production is heating up in a big way. Despite falling short of what’s needed, housing starts were 22.3% higher than the previous year.
Privately‐owned housing units authorized by building permits were at a seasonally adjusted annual rate of 1,859,000, a 7.7% yearly increase. Those units are in the pipeline and nearly meet NAR’s minimum goal of 2 million units annually. Despite the increase in housing production, rapid inflation, supply chain disruptions, and labor shortages remain and keep construction costs high.
At the moment, there doesn’t seem to be a federal bill that will actually solve the housing crisis. Build Back Better proposed building or preserving 1 million affordable homes. The legislation is unlikely to pass. Even if it does, it would do little to address the chronic housing shortage. Unless federal, state, and local government officials can work with developers to ramp up construction and reduce construction costs, the U.S. may not be able to improve its current affordable housing crisis.
