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Zillow: US Needs 4.3MM Homes to Meet Housing Demand

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By The Registry Staff

  • Between 2015 and 2021, the housing stock in the United States expanded by approximately 6.3 million units. In the same period, the number of families in the country increased by 7.9 million, and 7.1 million new households were formed. When household formation surpasses the growth of available housing units, the supply of available units diminishes, creating intense competition and driving up housing costs.
  • In 2021, there were 15.6 million vacant homes nationwide; however, only 3.7 million of them were available for rent or sale. Concurrently, around 8 million families across the country were “doubling up” by living with non-relatives in homes they didn’t own or lease. The most severe deficits in housing units were observed in expensive coastal markets such as Los Angeles, San Francisco, San Jose, San Diego, Boston, and even in places like Boise.
  • Of the families doubling up with non-relatives, 68 percent had an annual income of $35,000 or less, highlighting the fact that the scarcity of smaller, more affordable, entry-level homes is the primary obstacle to household formation. This stands in contrast to only 29 percent of families living in their own housing units.

The housing affordability challenges in recent times have brought attention to the insufficient construction in the United States to meet the demand and provide families with the housing options they desire. The number of households without suitable living arrangements exceeds the available housing units, and this gap has been growing over time. The extent of the housing deficit and how quickly it can be addressed by builders will play a crucial role in determining the future of housing affordability in the U.S.

Before the pandemic, there was already a housing deficit, primarily caused by a decline in construction activity during the Great Recession. The surge in housing demand during the pandemic exacerbated this shortage and led to the highest inflation period in nearly four decades. Despite the recent slowdown in the housing market, the persistent shortage has kept housing inflation elevated. Lower-income families have faced intense competition for relatively affordable, entry-level homes, as mortgage rates increased and various segments of the housing market cooled down, according to a study by Zillow analyst Orphe Divounguy.

In 2021, approximately 8 million families across the country were “doubling up” by living with non-relatives in homes they didn’t own or rent. Most of these families had an annual income of less than $35,000. While some families may choose this living arrangement, it is more likely that these families couldn’t find affordable homes of their own. Increasing the supply of affordable housing would likely enable many of these families to establish their own households.

Quantifying the housing deficit in the United States is a challenging task for policymakers and the private sector. Determining how people live today is not solely based on their preferences but also on their limited options.

Comparing the number of new building permits to the number of new jobs created can help assess whether the building deficit is improving or worsening. This research provides an initial estimation of the gap resulting from historical under-building and serves as a preliminary step in quantifying the number of new homes required to address the affordability challenges in the U.S.

Although not all members of a household would choose to live together if given the option, we assume that a “missing household” refers to individuals or families living with non-relatives due to a lack of alternative options.

Between 2015 and 2021, the total number of households in the U.S. increased by 6.1 percent. The majority of this growth occurred between 2019 and 2021, driven by the pandemic, remote work, and historically low mortgage rates, which encouraged many individuals to form their own households.

However, within each household, there can be multiple families or combinations of related and unrelated individuals living together. Due to limited options and growing affordability challenges, the number of families grew by 6.4 percent during that six-year period, surpassing the 6.1 percent growth in households. In contrast, the housing stock only increased by 4.7 percent. This disproportionate growth in households and families compared to new homes available caused the stock of vacant housing to decline even further.

In 2021, there was an approximate deficit of 4.3 million housing units, with around 8 million missing households compared to only 3.7 million available units for rent or sale nationwide.

This simple approach to quantifying the housing needs gap aligns with estimates from other housing experts, suggesting that there were 3.8 million missing homes across the United States in 2019.

While the extent of the housing deficit varies across metropolitan areas, it is most significant in expensive coastal housing markets like Los Angeles, San Francisco, San Jose, San Diego, Boston, and also in places like Boise.

In 2021, 8 million families lived in homes they neither owned nor rented. These families were not living in their own homes by choice or due to constraints such as insufficient savings for a down payment or inadequate credit history to secure a loan. It is also possible that they were unable to find affordable homes to buy or rent.

The majority of these families consisted of a single lower-income adult living with another family. Additionally, the typical family size in the U.S. consists of only two individuals, indicating that building smaller, more affordable homes could be a solution to the challenges of affordability and lagging household formation.

Nationwide, the majority of doubling-up families had fewer than three members. However, there were only approximately 1 million available one or two-bedroom units for rent or sale compared to 2.6 million units with three or more bedrooms.

In 2021, the number of units with fewer than two bedrooms available for rent or sale was around 268,000, while there were approximately 772,000 two-bedroom homes and roughly 2.6 million vacant homes with three or more bedrooms. This highlights the mismatch between housing needs and the available housing stock.

These figures, combined with the expectation of smaller family sizes due to lower fertility rates and older Americans retiring and downsizing, suggest that prioritizing the construction of smaller, more affordable homes would be beneficial.

The productivity of the construction sector in the U.S. has been declining relative to the overall economy since the late 1960s. Despite increased capital investments, construction sector profit margins have remained relatively consistent compared to other industries. This decline in efficiency indicates that productivity growth in the construction sector is hindered by various “frictions.”

Land use restrictions and delays in building approvals are likely significant factors contributing to the decline in construction sector productivity. Metropolitan areas with extensive regulations experience a significant reduction in housing starts, and housing markets with more regulations also witness faster increases in rents and home values.

Out of the nearly 12 million housing units that were not available for rent or sale, only 6.3 million vacant units had recently been purchased, rented, or used occasionally by the owner. This leaves 5.6 million vacant homes that are not available for various reasons. Metropolitan areas with lower home values tend to have a higher share of these unavailable vacant units. Jackson, Mississippi, ranked highest among the 100 largest metropolitan areas in this regard.

To move in the right direction, zoning reforms should allow for the construction of more housing units instead of focusing solely on single-family detached homes. This change alone could create millions of critically needed housing units, and surveys indicate that most residents would support such reforms in their own neighborhoods to increase housing supply. Other steps, such as reducing or eliminating parking requirements, minimizing building permit approval delays, and establishing or expanding affordable housing trust funds, should also be explored. Ultimately, developers must take the lead in constructing new homes to meet the existing demand in all segments of the housing market.

Source: Zillow – original story appears here.