Overcoming the Nation’s Daunting Housing Supply Shortage MARCH 2021 Prepared By Jim Parrott Mark Zandi Overcoming the Nation’s Daunting Housing Supply Shortage Overcoming the Nation’s Daunting Housing Supply Shortage BY JIM PARROTT AND MARK ZANDI here is not enough housing for sale or rent in communities across the country. This means families must pay more for their housing, renters have less to get by on at the end of the month, homeownership is out T of reach for too many, and those of modest means are forced to live farther from decent jobs. The effects of the housing shortage are significant, both economically and socially. To address the problem, policymakers must tackle a host of chal- Yet even these figures understate the severity of the problem. The lenges outside the traditional reach of housing policy—in trade, im- lion’s share of the undersupply is concentrated in the lower end of migration, education, taxes and even municipal decision-making. Yet, the market, particularly in areas that offer significant economic op- if they succeed in taking the steps needed to close the gap between portunity, driving up house prices and rents for low- and moderate- the housing we have and the housing we need, the benefits will be income families precisely where they want to live (see Chart 2).2 considerable. Housing would become more affordable, leading to Prices for homes sold in the bottom quartile are up nearly 8% per more household savings, greater access to homeownership, and in- annum over the past decade, almost double that for homes in the top creased upward mobility. Difficult as the housing supply challenge is, quartile. And rents for those families who rent because they cannot it is worth taking on. afford to own, rather than by choice, have increased nearly 4% per annum over the past decade—a trend that has continued even during The toll of the shortfall in housing supply the pandemic. The scale of the supply shortfall is considerable. There is less hous- The rising rents leave more and more renters with little to live on. ing available for rent and sale than at any time in 30 years, and things Today, one in four renters pays over half of their monthly income to- are only getting worse. The annual supply of new housing units is ward rent, leaving barely enough to cover food, clothing and health- running an estimated 100,000 below new housing demand, creating care, much less save for emergencies or build wealth. The typical the largest shortfall in nearly a half century, equal to almost a year of renter saves less than $500 a year, not enough to cover run-of-the- new construction at its current pace (see Chart 1).1 mill financial emergencies let alone save for a down payment on a Chart 1: Plunging Vacancy Rate Chart 2: Shortages Plague Much of U.S. Vacancy rate for homes for sale and rent, 4-qtr MA, % 5.0 Current housing supply 1,700,000 4.5 Single-family 1,200,000 Multifamily 400,000 4.0 Manufactured 100,000 3.5 3.0 Adequately supplied Trend housing demand 1,800,000 Undersupplied 2.5 Household 1,200,000 Obsolescence 400,000 Severely 2.0 undersupplied 65 70 75 80 85 90 95 00 05 10 15 20 Sources: Census Bureau, Moody’s Analytics Sources: Census Bureau, Moody’s Analytics March 2021 1 March 2021 2 OVERCOMING THE NATION’S DAUNTING HOUSING SUPPLY SHORTAGE 1 Overcoming the Nation’s Daunting Housing Supply Shortage Chart 3: Increased Congestion Chart 4: Lumber Prices Surge in Pandemic Hrs of traffic delay per person, 2005=100 Lumber and wood producer prices,1982=100 140 400 135 DC Dallas 350 130 Atlanta 125 Chicago 300 120 San Francisco 250 115 Seattle Phoenix 110 200 105 150 100 95 100 05 06 07 08 09 10 11 12 13 14 15 16 17 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 Sources: Texas A&M, Moody’s Analytics Sources: BLS, Moody’s Analytics March 2021 3 March 2021 4 home. And the rise in house prices is putting the economic opportu- What’s undermining the economics of building affordable nity of homeownership out of reach for more and more families, par- housing ticularly those of color. Today the homeownership rate for Hispanics The primary causes of this shortfall, from least to most impor- is 48% and for Blacks it is 42%, a level not seen in decades.3 tant, are materials and labor, lending, and land (see Box 1). These The housing shortfall is not just depressing savings and increasing are significant inputs into building a home, and they have all been in the wealth gap. It is also forcing those at the bottom of the economic short supply since the financial crisis, driving up their cost and reduc- ladder to live farther away from those at the top and, more important- ing builders’ profit margins and thus their incentive to put up more ly, farther from economic opportunity. The most desirable cities are homes, particularly lower-priced housing with lower margins.5 becoming affordable only to the wealthy, while many of those of more While prices of many building materials have risen in recent years, modest means are forced into longer commutes, creating more traffic, the rise in softwood lumber prices has been especially dramatic, up more environmental strain, and greater social division (see Chart 3). close to 10% per annum since the housing bust and nearly double over the past year alone6 (see Chart 4). The higher material costs reflect A tale of two markets a range of factors, most recent being the disruption of global supply Homebuilding collapsed during the housing crash a decade ago, chains during the pandemic and the Trump administration’s imposition with builders constructing only 550,000 homes in 2009, the lowest of higher tariffs and greater trade restrictions on most major U.S. trad- pace on record. Construction of high-end homes and apartments ing partners. Trade disputes with China and Canada have had the most recovered first, with builders responding to the quicker rebound in adverse impact since China is an important source of aluminum, steel, demand by well-to-do households and the stronger profit margins in concrete, fiberglass, plumbing fixtures and appliances, and Canada is a that segment of the market. By the middle of the last decade, supply critical source of lumber and other wood products. at the top end of the market began to meet demand again nation- Homebuilders have also struggled in recent years to develop and wide and has since eclipsed it in many urban areas. maintain a consistent labor force, reflecting the difficulty that many However, construction of affordable housing—homes that low- of the trades face in attracting high school graduates into careers and moderate-income households can afford to rent or buy—has requiring specialized skills. Prior to the financial crisis, this labor gap been much slower to bounce back. Here, too, the story is one of was largely being filled by immigrants. But, just as housing demand demand and profit margins. Low- and moderate-income households began to warrant ramping up housing supply again, the Trump ad- were much slower to recover from the recession, only hitting their ministration all but shut down this source of labor through restrictive economic stride again in the year or two before the pandemic. And immigration policies. The same problem is driving up labor costs in the margins that builders could get from building affordable housing the transportation, distribution and supply industries that home- have been too low to incent the investment, with pricing too low to builders rely on, making homebuilding still more costly and difficult. adequately clear the high fixed costs of building. Labor cost pressures have eased a bit during the pandemic, but this The economics of building affordable housing have improved appears temporary and will almost surely worsen again if there is a recently, with skyrocketing house prices and rents finally creating a large federally financed infrastructure effort.7 wide enough margin to justify more investment. But the fact that As the cost of materials and labor has gone up, builders’ access to the economics of building affordable housing are still precarious and financing has gone down. Bank acquisition development and construc- appear to require pricing that is not affordable for many homebuyers tion lending is an especially important source of financing for smaller and renters, especially as mortgage rates normalize on the other side builders, which often do not have ready access to other forms of financ- of the pandemic, indicates the problem remains acute.4 ing.8 Yet banks have been pulling back on these loans since the financial OVERCOMING THE NATION’S DAUNTING HOUSING SUPPLY SHORTAGE 2 Overcoming the Nation’s Daunting Housing Supply Shortage Box 1: What Explains the Housing Shortage? Our assessment of the importance of the factors explaining the housing shortage is based in part on conversations with homebuilders, land developers, housing researchers and consulting firms. While there was strong uniformity of views regarding the factors behind the sup- ply shortage, there were meaningful disparities in the ordering of the importance of these factors. So, we did a statistical analysis to assess the relative impact of the factors. Our statistical analysis confirmed that the factors identified in these conversations were indeed important, and that land availability (proxied by the land share of house prices) is the most critical factor explaining the shortage followed closely by the availability of financing (proxied by the Federal Reserve’s senior loan officer survey results for acquisition development and construction loan underwriting stan- dards).