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Economic uncertainty, inflation, and rising mortgage rates are clouding the picture for the U.S. housing market, which is also facing a structural deficit of both for-sale and rental homes. During the “Getting Serious About Housing Supply: The State of the U.S. Housing Market” webinar hosted by the Bipartisan Policy Center, Jeff Tucker, senior economist of economic research at Zillow, and Caitlin Sugrue Walter, vice president of research at the National Multifamily Housing Council (NMHC), shared the current conditions and challenges facing the home buying and rental sectors, respectively.
In the single-family for-sale market, Tucker said the past two years of home price growth has pushed unaffordability to a “crisis stage.” The rise in affordability concerns has resulted in potential buyers becoming discouraged, causing sales volume to fall, and increasing inventory on the market.
“When we try to put all this competing information together, demand is stepping back in the face of affordability challenges [and] inventory is rising but not skyrocketing; what our model says is prices may dip seasonally for the remainder of the year, then have a seasonal bounce back in the spring [of 2023]. It’ll look like a bit of a seasonal plateau—flat, but with some seasonal growth,” Tucker said.
Tucker said inventory, “the barometer of the housing industry,” has recovered slightly from its record low levels in spring 2022 as a result of demand softening in the summer. However, inventory levels are still at nearly half the volume of 2019 levels.
“We’re looking for a new equilibrium [of inventory], but it’s not a runaway train heading for more affordable homes,” Tucker said. “Some people are hoping for a dramatic price plunge based on the media headlines, and our model suggests that’s not on the cards because fundamentally there’s not enough homes to go around for all the people who want to buy one.”
Walter said the lack of supply is also a current issue facing the rental side of the housing market. Research suggests 600,000 units are currently needed at a variety of price points to deal with supply shortages and an additional 3.7 million units will be needed by 2035, according to Walter. While data suggest nearly 900,000 units are under construction, the lengthened construction timelines and delays are inflating the numbers, suggesting the market is not at a risk of overbuilding, she explained. Regulatory costs are among the chief contributors to higher building costs and delayed construction schedules in the multifamily market.
“Local jurisdictions should really take a look at what they’re requiring of developers at the local level, what the developer is going to have to comply with at the state level and national level. If there are ways they can help alleviate those issues, that will help to fray the cost,” Walter said.
In addition to supply concerns, the sector has seen double-digit rent growth since the second quarter of 2021, which, coupled with migration trends, has caused some markets that have traditionally been more affordable to become less so for renters.
“I like to think of the affordability crisis as a bunch of puzzle pieces, where we need to put the puzzle pieces back together in order to solve the problem,” Walter said. “Right now we have a bunch of puzzle pieces that just aren’t working correctly. It’s expensive and lengthy to build, we aren’t building where we need to, and that’s showing up through the rent growth.”
Walter and Tucker both said a low-hanging fruit solution to help combat the housing supply shortages is to reduce some regulatory burdens facing builders and developers.
“Single-family zoning and, even within that, minimum lot size [requirements where] you can’t have a home unless it also comes with a quarter of an acre of land. That is going to guarantee that you have less home on the land that is buildable,” Tucker said. “I think step one is getting out of the way of builders.”
Walter said another policy solution that would help many rent-burdened households would be fully funding the Housing Choice Voucher program and “make the changes to it that are necessary to make it useful for more property owners.”
A result of the structurally underbuilt housing market is there are less household formations among individuals in the 30- to 50-year-old cohort. Tucker said there should be between 4 and 6 million more households than currently exist based on current population data. The lack of household formation transmits through individuals “doubling up” in multifamily properties or moving back home with parents.
“Americans are still squeezed in and not able to fulfill their American Dream of having a place of their own, whether it’s owned or rented. Everyone is squeezed into less space, and I think that the deficit relative to where people want to be got worse during the pandemic,” Tucker said. “A lot of people need a place of their own with a bedroom, that’s expanding the appetite [for space], which means we’re actually further away from a balanced level where everyone has the amount of space that they need and can afford. I think that’s the story of why prices skyrocketed so much in the past couple years.”