June 22, 2023
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Gap between families and available homes widens and likely continues to grow
The nation’s housing stock grew by roughly 6.3 million housing units from 2015 to 2021. The number of families living in the United States increased by 7.9 million and 7.1 million new households were formed during that period. When household formation outpaces growth in the housing stock, the number of available units falls, competitive pressure builds, pushing housing costs up.
There were 15.6 million vacant homes in 2021, but only 3.7 million of them were available for rent or for sale. Meanwhile, there were roughly 8 million families nationwide “doubling up” with non-relatives in a home that they did not themselves own or lease. The worst housing unit deficits were in expensive coastal markets like Los Angeles, San Francisco, San Jose, San Diego and Boston but also in places like Boise.
Sixty-eight percent of families that were doubling up with non-relatives had a family income of $35,000 or less (compared to just 29% of families living in their own unit), indicating that a lack of smaller, more-affordable, entry-level homes is the main roadblock to household formation.
Recent housing affordability challenges have shed more light on the fact that the U.S. has not been able to build enough to keep up with demand, and allow families to live in the type of units and arrangements that they would choose for themselves. Not only does the number of “missing households” without a place of their own to live exceed the number of available housing units, this gap has increased over time. The magnitude of the housing deficit and how quickly builders can fill this gap will go a long way toward determining the path for U.S. housing affordability.
A pre-pandemic housing deficit — due in large part to construction activity plummeting during the Great Recession — meant that the pandemic surge in housing demand contributed to the highest inflation period in almost 40 years. This persistent shortage has kept housing inflation afloat despite the recent slowdown in housing market activity. As mortgage rates increased and most segments of the housing market cooled, competition for relatively more affordable, entry-level homes has remained intense, putting pressure on lower-income families especially.
In 2021, there were 8 million families nationwide “doubling up” with non-relatives in a home that they did not themselves own or rent. Most of these families had an annual family income of less than $35,000. While some families may prefer this type of living arrangement, it’s more likely that these were families that could not find a home that they could afford. An increase in the stock of affordable housing would likely lead many of these families to form their own households.
Measuring this deficit is both important and challenging
Quantifying the deficit in America’s housing units informs policy and private sector solutions, but is incredibly challenging. Not least of all because how someone lives today is determined as much by their limited options as their preferences.
Comparing the recent number of new building permits to the number of new jobs created can help explain whether the building deficit is resolving or expanding. This research provides one way to estimate the gap resulting from historical under-building, and is an early step to quantify the number of new homes needed to fully resolve U.S. affordability challenges.
While not all family members in a home would choose to continue living together or unrelated friends apart if it were feasible to do otherwise, here we assume a “missing household” – one currently absorbed into other households due to a lack of other options – is a family or individual doubling up with non-relatives.
From 2015-2021, the total number of households (groups of people living together) in the U.S. grew by 6.1%. Most of that occurred between 2019 and 2021 when the pandemic, remote work and historically low mortgage rates encouraged many to move and form their own households.
But within every household there can be multiple families [1] – for instance, sets of related individuals, unrelated singles, unmarried partners, or other such combinations living in the same home. Potentially facing limited options and increasing affordability challenges, the number of families grew by more in that six year period (6.4%) than the number of households did (6.1%). And the housing stock grew by even less (4.7%). This outsized increase in households and families compared to the number of new homes caused the stock of available vacant housing to fall even more dramatically than it already had.
In 2021, the number of families that were likely in need of their own homes exceeded available homes by roughly 4.3 million units.
Across the country in 2021, there were roughly 8 million missing households – individuals or families living with non-relatives, potentially preferring to live on their own – compared to just 3.7 million housing units available for rent or for sale, a deficit of 4.3 million.
This relatively simple approach to quantify the housing needs gap indicates that there were 3.8 million missing homes across the United States in 2019, in line with estimates released by other housing experts. [2]
While the gap varies across metropolitan areas, it is most pronounced in the most expensive coastal housing markets in the country such as Los Angeles, San Francisco, San Jose, San Diego and Boston but also in places like Boise.
Sixty-eight percent of families “doubling up” had a family income of $35,000 or less. Smaller, more affordable, entry-level homes are needed.
In 2021, 8 million families lived in a home that they neither owned nor rented themselves. These families did not live in their own home by choice or perhaps because of other constraints — lack of savings for a down payment or an insufficient credit history to secure a loan, for example — but also potentially were not able to find a home to buy or rent at a price they could afford.
The bulk of these families were made up of a single, lower-income adult living with another family. In addition, the typical family size in the U.S. consists of just two individuals, suggesting that building smaller — as opposed to large, detached single-family homes — could be a solution to affordability challenges and lagging household formation.
Nationwide, the bulk of families that were doubling up consisted of fewer than three family members, but there were only roughly 1 million available one or two bedroom units available for rent or for sale compared to 2.6 million units with three or more bedrooms.
In 2021, there were only about 268,000 units with fewer than two bedrooms available for rent or for sale, about 772,000 two bedroom homes and another roughly 2.6 million available vacant homes with three or more bedrooms, highlighting the mismatch between housing needs and the available housing stock.
These numbers — combined with the fact that U.S. families are likely to keep getting smaller due to lower fertility rates and older Americans retiring and downsizing — hint that smaller, more affordable homes should be the focus for builders.
On top of the mismatch caused by demographic change, building lags because construction sector productivity growth has not kept up with the rest of the economy.
Construction sector productivity in the U.S. has been declining relative to the rest of the U.S. economy since the late 1960s. This is despite an increase in new capital investments that largely outpaced growth in the economy’s total capital stock.
Although house prices have risen, construction sector profit margins have remained relatively in line with increases in other industries. The evidence points to a substantial decline in the efficiency with which construction firms translate materials inputs into output, suggesting that “frictions” impede productivity growth in the sector.
Land use restrictions and delays in building approvals likely play a large role in explaining why construction sector productivity has fallen. Metropolitan areas with more extensive regulation can have up to 45% fewer housing starts. Rents and home values also rise faster in more regulated housing markets.
But it’s not just the shortfall in new construction, many homes sit vacant and are likely inhabitable.
Of the nearly 12 million housing units that were not available for rent or for sale, only 6.3 million vacant units had either recently been purchased, rented or were for the owner’s occasional use. That leaves 5.6 million vacant homes that aren’t available. The housing markets with the largest share of unavailable vacant units — likely inhabitable units — are in areas with relatively lower home values. Jackson, Miss. topped the list among the 100 largest metropolitan areas.
Moving forward
Some steps in the right direction include zoning reforms to allow for more housing units as opposed to just single family detached homes. This alone would create millions of critically needed new housing units and surveys show most residents would support such changes in their own neighborhoods to increase supply. More steps, such as eliminating or reducing parking requirements, minimizing building permit approval delays, establishing and expanding affordable housing trust funds should also be explored. Ultimately, developers need to be at the forefront of new home construction in order to meet the demand that exists in every part of the housing market.
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View source version on zillow.com HERE
https://www.zillow.com/research/affordability-crisis-missing-homes-32791/