How to fix the housing affordability crisis: Build more homes
- The housing market is cooling off, but home prices are still soaring.
- That's because buyer demand continues to outpace inventory levels.
The US housing boom is fizzling out as inflation and interest-rate hikes make housing far less affordable for many potential buyers.
However, despite fading demand and slowing appreciation growth, home prices remain high in housing markets across the country.
Over the past few years, historically low mortgage rates have enticed millions of Americans to purchase homes. Although buyer interest has fallen due to rising costs, housing remains unaffordable. That's because there still are not enough homes to meet demand. While existing home inventory has spiked, data from Realtor.com shows that US homebuilders still need to build millions of homes to match the current level of demand.
Karan Kaul, a principal research associate with Urban Institute's Housing Finance Policy Center, told Insider that it all boils down to housing construction.
"We just have not built enough new housing in the last decade or so, especially after the 2008 housing market crash," Kaul said. "The building industry was heavily impacted and it took a long time for them to get back to where they used to be. So, we went through a number of years where we just did not produce enough new homes."
According to building network ConstructConnect, between 2007 and 2013, the number of US construction firms declined by about 150,000 and more than 2.3 million construction jobs were lost due to a combination of layoffs, retirement and workers leaving for different industries.
Although the sector regained its footing in the following years, homebuilders were still behind on housing construction, which escalated as buyer demand heightened in 2020.
Kaul says as the deficit accumulates, shortages have intensified. "We're at a point where the crisis has gone from bad to worse."
"Even though we're building more new homes, we just can't build them fast enough to raise the deficit that we have accumulated over the last 10 years," Kaul said.
High costs are preventing the construction of more affordable homes
In June, residential homebuilding slowed for the second consecutive month as both housing starts and the number of building permits issued decreased. The slowdown is attributed to rising construction costs.
Data from National Association of Homebuilders shows that building material prices have increased by 20.4% since 2021 and 31.3% since January 2020. This has added as much as $14,000 to the construction costs of the average newly built single-family home.
"There's no question that supply chain issues are playing a big impact on the market right now," Kaul said. "As prices of commodities have gone up — due to inflation which is running around 9% right now — it certainly has had an impact on home builders. It makes it difficult for them to build homes that are affordably priced."
Robert Dietz, the chief economist at NAHB says that the US government will need to work with the construction industry to boost the affordable housing supply.
"Policymakers need to focus on mending broken building material supply chains and reducing ineffective zoning and other regulatory policies to help bend the cost curve and enable builders to boost attainable housing production," he said in a statement.
Kaul says fixing the housing affordability crisis won't be easy but agrees with Dietz that addressing zoning regulations will be a "good first step."
"Some of the things that can help us build more affordable homes is to address zoning regulations," he said. "We still have a zoning regime that favors detached single-family construction. To ease the supply crisis we need to make it easier to build homes, and the way to do that is to build higher density construction."