Shiller price index

The housing shortage and policies to address it



By Jeffrey Zabel·July 5, 2022

The problem:

One of the consequences of the COVID-19 pandemic has been a significant increase in real estate prices. Prices increased by 13.5% from March 2020 to March 2021 and an additional 20.6% from March 2021 to March 2022, as measured by the U.S. National Case-Shiller House Price Index. This has intensified attention to the lack of affordable housing in the United States. While there are many factors driving the rise in house prices, the growing scarcity of housing has peaked. This problem has been building (or not, depending on the case perhaps) for decades. But the pandemic has taken it to a whole new level.

The United States has built fewer homes relative to the number of households over the past three decades than historical trends.


  • The United States faces a housing shortage. While deficit estimates vary, analysts agree that the available housing supply in the United States has not been large enough to adequately meet existing demand. A analysis of Freddie Mac, for example, estimated the housing stock gap at 3.8 million units in 2020, up from 2.5 million units in 2018.
  • We have built fewer units relative to the number of households over the past three decades than historical trends. The annualized number of housing starts per 1,000 households was 22.2 between 1960 and 1990, but fell to 12.2 housing starts per 1,000 households between 1990 and April 2022 (see chart). It is important to note that this decline predates the significant decline in housing starts during the Great Recession.
  • A key to understanding this shortage of housing supply is the role of local zoning and land use restrictions. Having ceded zoning control to local jurisdictions means that landlords have been able to persuade their local authorities to restrict the supply of housing. This is particularly the case for the construction of low-cost starter homes and multi-family housing in American suburbs. The prevalence of this so-called “NIMBY (Not in my garden) syndrome” has led to a sharp increase in restrictive zoning which has limited the construction of new housing and increased prices. For example, the share of jurisdictions that limited the maximum number of permitted dwelling units in the highest residential area to less than 8 per acre fell from 15.5% in 1994 to 16.0% in 2003 and to 22.4% in 2019 according to data from the National Longitudinal Land Use Survey (1994, 2003, 2019), for the jurisdictions that responded to the 3 surveys.
  • Two land use regulations have had a particularly strong effect on reducing housing supply: restrictions on minimum lot size and single-family-only zoning. If the minimum lot size restriction (MLR) is one acre, then all new construction must be on a lot size of at least one acre. In to research with Maurice Dalton, we find that increasing the required minimum lot size led to a large and significant increase in house prices using data for the Greater Boston area. The fact that single-family zoning has also limited housing supply has only recently become apparent and this has led cities like Minneapolis and states such as Oregon and California to prohibit single-family zoning.
  • There are other constraints on the supply of new housing that have been exacerbated by the COVID-19 pandemic and will take some time to resolve. New construction has been hampered by a shortage of construction workers. The tight supply of construction workers is illustrated by a significant increase in job openings in the construction sector: monthly job openings in the construction sector rose from a low of 24,000 in 2009 to 449,000 in April 2022 (see here). And a 2020 investigation by the Associated General Contractors of America found that 81% of construction companies said they were having trouble filling positions, and 72% predicted labor shortages would be the biggest hurdle next year. In addition to labor shortages, there has been a dramatic increase in the cost of building materials since the onset of the COVID-19 pandemic (see chart below). It is very likely that the labor shortage will take longer to resolve than the high material costs. But the scarcity of workers and the high cost of inputs could already be holding back construction: private housing starts in May were 14.4% below the number in April.

Cost of building materials.  Monthly Producer Price Index (PPI) from January 2000 to April 2022. There is a general upward trend in the cost of building materials, with prices surging around 2021.

  • Are large purchases by investors also behind the rise in real estate prices? The share of home purchases accounted for by large investors has increased and peaked at 28% of all single-family homes purchased in February 2022. There is a see that these investors have crowded out first-time buyers through their purchases and by increasing house prices. The increase in purchases by large investors comes from investors who rent the units rather than return them which is at the center of these concerns. However, the percentage of first-time homebuyers among all homebuyers was 34% in 2021 and it has been at or near that level since 2014 (it was around 40% before the Great Recession). There is no evidence (yet) that this recent increase in purchases by large investors has caused house prices to rise (it could be that the increase in large investors is a reaction to the sharp price increases rather than the ‘reverse). And on a positive note, there is evidence that the increase in the number of large investors helped support the recovery from the Great Recession through the purchase of real estate (REO) properties in struggling local real estate markets (see here and here).
  • The impact of the recent sharp rise in mortgage interest rates on housing supply is unclear. As the Federal Reserve Bank began a series of bank rate increases in its effort to contain inflation, mortgage interest rates experienced one of the fastest increases in decades: the average fixed-rate mortgage over 30 years fell from 3.2% at the start of 2022 to 5.8% in mid-June. This is mostly a demand side issue as it increases the cost of borrowing. Lower demand due to rising mortgage rates should reduce future increases in the rate of house price growth. But rental rates have also increased, so the rental alternative to owning (for first-time home buyers) isn’t great. How this will affect the supply side of the housing market is unclear.

In May, the Biden-Harris administration announcement the Housing Supply Action Plan to deal with this housing shortage. The Biden-Harris plan includes policies to address restrictive zoning and provide additional funding for building affordable housing. He proposes to partner with the private sector to address building material supply chain disruptions, promote prefabricated homes and construction R&D, and recruit more workers into well-paying construction jobs. The plan also involves addressing the rise of big investors by taking steps to steer home buying towards owner-occupiers and nonprofits rather than big investors, but it’s unclear. how this would be achieved. The administration’s plan says the housing supply shortfall is 1.5 million units, well below Freddie Mac’s estimate of 3.8 million units and that his plan will close the shortfall. housing supply in 5 years. While the plan is comprehensive, it will likely take much longer to fully resolve our housing shortage, especially since many programs pushed by the administration must go through Congress and nearly all of them will take years to begin. to show significant results.