Housing costs are high due to a shortage of homes.

In nearly every region across the United States, a common concern resonates: housing prices are exorbitant—if homes are even obtainable. While real estate values are inherently local, influenced by specific community factors, several overarching issues contribute to what many perceive as a national housing crisis. The most critical point to understand is that, nationwide, demand has surged, leading to a deficit estimated in the millions of homes.

Is there a National Housing Shortage?

Yes, although the extent of the problem is debated. Mortgage guarantor Freddie Mac, whose economists have been tracking the shortfall for several years, updated their estimate in late 2024. The U.S. is short 3.7 million units, they reckon. Other assessments align closely with Freddie Mac's figures, suggesting a shortfall of "a few million" homes as a reasonable consensus.

Insufficient Home Construction

A significant factor behind the shortage is that, following the 2008 financial crisis, homebuilding activity plummeted. This decline is understandable, as construction companies had overbuilt during the housing bubble and were left with an excess of homes when credit tightened and unemployment soared. However, construction has never fully rebounded.

In 2019, the Joint Center for Housing Studies at Harvard noted that in the decade following 2008, for every 100 new households formed, approximately 100 housing units were added. While this seems logical, a healthy housing market requires additional properties to replace aging or uninhabitable homes and to allow for vacancies that facilitate mobility. This rate is also significantly lower than the average since the mid-1970s, which saw nearly 130 new units for every 100 households formed.

A report commissioned by the National Association of Realtors in 2021 examined this issue further. Between 1968 and 2000, an average of 1.5 million homes were built annually. Even accounting for the overbuilding of the early 2000s, that average fell to 1.225 million homes per year from 2001 to 2020, resulting in a shortfall of 5.5 million units over two decades.

Labor Shortages in Construction

Given this glaring deficit, one might wonder why builders haven't seized the opportunity to construct more homes. A primary reason is the labor shortage in the construction industry. As of 2024, there were roughly 1 million fewer workers in construction trades than in 2007, according to the Joint Center for Housing.

Even with the backlog of homes that could be built, builders may not want to employ quite as many people as they did during the last bubble. There are roughly double the number of job openings in the construction industry in recent years compared to before the bubble.

As the National Association of Homebuilders explains, native-born workers "remain reluctant" to go into construction trades, so much so that the share of immigrants in the industry reached its highest on record in 2023: 25.5%. "Only during the housing boom of 2005-2006 was the industry absorbing a similar number of new foreign-born workers," NAHB economists wrote.

The Impact of Local Regulations

Quantifying how local regulations impede housing development is challenging, but experts believe the impact is substantial. When municipalities restrict construction to detached single-family homes, mandate specific parking requirements for new developments, or impose other regulations, they effectively limit the housing supply.

A recent study compares the number of homes built to the number that could have been constructed without zoning or other regulations. The researchers found a shockingly high number—20 million homes—that were unbuilt, thanks to what many critics call "NIMBYism"—short for "Not In My Backyard."

Another recent study reckons that NIMBYism could decrease the number of housing units allowed to be built by as much as 20%.

As you might expect, the researchers determined that areas with fewer restrictions have a much better balance of supply and demand.

Investors in the Housing Market

It can be very tempting to blame "investors" for meddling in the market, buying homes to rent out that could be purchased by ordinary Americans instead. In 2024, it was one of the few points of agreement between the two presidential campaigns.

It's also notoriously hard to track which buyers and sellers are investors and which are not, and it's also important to remember that while there are plenty of mega-corporations in the housing market, the overwhelming majority of real estate "investors" are "mom and pop" operations. Indeed, buying a bit more house than you need—say a duplex—and renting out the excess—is a tried-and-true way to get access to property.

However, it is also true that investors have been buying an increasing share of the homes on the market in recent years. Data from CoreLogic shows that investors purchased between 15% and 20% of homes on the market in the years before the pandemic. But that share rose steadily until January 2024, when it peaked at an all-time high of 29.8%.

The Role of Rising Demand

Many housing experts believe that the lack of supply, as explained above, is the biggest reason for the housing shortage, which in turn drives prices higher. But demand is also a factor, and one of the most important reasons demand is higher is the millennial generation.

There were 72.1 million millennials—people aged 23 to 38, the prime years for buying a home—in 2020, according to a Pew Research analysis. In 2023, millennials bought 38% of all homes, according to a NAR report—comprising the biggest category of buyers by age.

And a recent NAHB analysis shows that young adults formed new households at the fastest rate in a decade during the pandemic.

Conclusion

The housing affordability crisis in the U.S. stems from a perfect storm of factors: an enduring supply-demand imbalance, a sharp decline in construction following the 2008 financial crisis, an ongoing labor shortage, restrictive zoning regulations, increased investor activity, and a surge in millennial homeownership. Solving this crisis will require a combination of policy changes, increased labor force participation in construction, and smarter urban planning to ensure housing is both available and affordable for future generations.

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