US housing shortage: Are 2 million homes missing, or 20 million?
Mortgage Rates and Housing Prices Reach Record Highs: The Supply Side Problem
Mortgage rates are skyrocketing, making it nearly impossible for hardworking Americans to enter the housing market. Meanwhile, retirees are struggling to downsize due to the exorbitant prices. Unfortunately, the Biden administration has done little to address this crisis. In this captivating installment of the Home Economics series by the Washington Examiner, we delve into the root causes of the housing market dilemma, the toll it’s taking on people across the country, and the innovative solutions individuals are adopting to survive in this challenging market. Part three of this four-part series focuses on the supply side issues plaguing the housing market.
The Housing Crisis: Decades of Undersupply
While various theories have been proposed to explain the unaffordability of housing, economists agree that chronic undersupply is the underlying problem. Other factors, such as private equity firms and immigration, may cause temporary slowdowns, but the scarcity of housing is like an engaged parking brake, hindering progress at every turn.
The Problem at Hand
The situation reached a breaking point when mortgage rates soared while housing prices remained at record highs. Consequently, the cost of purchasing a new home skyrocketed, leading to a significant decline in home sales. Many families are now unable to afford homeownership.
Why Prices Are Soaring
Housing prices have reached unprecedented levels, surpassing even the heights of the housing bubble before the 2008 financial crisis. The fundamental issue is a severe lack of supply. Altos Research President Mike Simonsen emphasizes that the country needs approximately 1.5 million new homes annually to keep up with population growth and replace old stock. However, over the past decade, the construction rate has fallen short, with less than a million new homes built each year.
Rents have also been rising faster than overall inflation for decades, indicating that the demand for housing is outpacing supply. This trend highlights the urgent need for more affordable housing options.
The Supply Side Perspective
The notion that supply-side problems are the primary cause of the housing market crisis has gained traction at the highest levels of government. The Obama, Trump, and Biden administrations have all acknowledged that local barriers to homebuilding, such as zoning laws and land-use regulations, have severely limited housing construction. Homeowners’ use of these rules to impede new development is commonly referred to as “NIMBYism” (not in my backyard).
Efforts have been made to address this issue, including the Obama Council of Economic Advisers’ publication of a “toolkit” in 2016 to reduce barriers caused by local land-use rules. Housing and Urban Development Secretary Ben Carson declared himself a “YIMBY” (yes in my backyard) during the Trump administration, and President Donald Trump signed an executive order in 2019 aimed at reducing regulatory barriers to new housing. The Biden White House has also recognized the lack of supply as a key factor in poor affordability and has sought to incentivize localities to ease building restrictions.
The Case of San Francisco
Major U.S. cities, particularly those along the coasts like San Francisco, Los Angeles, Boston, and New York, have implemented severe building restrictions, resulting in exorbitant housing prices. For instance, the median home sale price in San Francisco is a staggering $1,334,000. This astronomical figure puts homeownership out of reach for most households, as mortgage payments would consume around 85% of the median income in the area.
San Francisco’s restrictive zoning laws and neighborhood building restrictions, coupled with a lengthy public process that allows for local residents’ input, have hindered new housing supply. The city’s inability to build up or out has exacerbated the problem. Surrounding areas, such as Mountain View, have even stricter land-use policies, further limiting housing options.
The Magnitude of the Shortage
Estimates of the nationwide housing shortage vary widely. Moody’s Analytics suggests a shortfall of 1.8 million housing units, while Freddie Mac puts the figure at 3.8 million units. However, a report by the Joint Economic Committee’s Republican staff suggests that the shortage could be as high as 20 million units.
The discrepancy in estimates stems from different definitions of the shortage. Moody’s figure focuses on bringing vacancies back to 1990s levels and satisfying pent-up household formation. In contrast, the 20 million-unit estimate considers the elimination of supply-side constraints imposed by government policies, aiming to align housing prices with construction costs.
Ultimately, the scale of the problem necessitates significant regulatory changes, such as local zoning reform, to address the shortage effectively. However, implementing such changes would require a cultural shift and a reevaluation of housing as an investment.
Understanding the true extent of the housing crisis is crucial for devising comprehensive solutions. Whether the goal is to alleviate immediate affordability issues or create a housing market that is abundant and affordable for all, bold actions are needed to overcome the supply side problems that have plagued the housing market for decades.
How do accessory dwelling units (ADUs) and modular construction offer innovative solutions to the housing crisis in San Francisco and other cities
Price in San Francisco is over $1.4 million, making it unaffordable for the majority of residents. The city’s strict zoning laws and limited land availability have contributed to the supply shortage and subsequent increase in prices.
Despite the recognition of the supply side problem, progress in addressing it has been slow. Local governments and communities often resist new developments due to concerns about increased congestion, strain on infrastructure, and changes to the character of neighborhoods. This NIMBYism perpetuates the housing crisis by further limiting the housing supply.
Innovative Solutions
While the government plays a crucial role in addressing the housing crisis, individuals and organizations have also taken it upon themselves to find innovative solutions. One such solution is the rise of accessory dwelling units (ADUs), also known as granny flats or backyard cottages. These small standalone units can be built in the backyards of existing homes, providing additional housing options without drastically changing the neighborhood’s character. ADUs have gained popularity in cities like Seattle and Los Angeles, where homeowners are turning their unused spaces into rental units to meet the growing demand for affordable housing.
Another promising solution is the use of modular construction. This method involves building homes in a factory setting and then transporting them to the desired location. Modular construction offers several benefits, including shorter construction times, reduced labor costs, and increased energy efficiency. By embracing this method, builders can increase the pace of construction and help meet the demand for affordable housing.
The Road Ahead
The housing market crisis, characterized by high mortgage rates and soaring housing prices, presents a dire situation for many Americans. The chronic undersupply of housing, exacerbated by local building restrictions and NIMBYism, lies at the core of the issue. While efforts have been made by successive administrations to address the problem, progress remains slow, and the crisis persists.
However, there are signs of hope. The recognition of the supply-side problem and the adoption of innovative solutions like ADUs and modular construction are steps in the right direction. It is crucial for government, communities, and individuals to work together to overcome the barriers that hinder housing construction and strive for a more affordable and accessible housing market for all Americans. Only then can the dream of homeownership and housing security become a reality for hardworking individuals and families across the country.
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