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Is there a housing shortage in America?

Is there a housing shortage in America?

Last updated on: August 25, 2024 at 5:12 pm by Jane the Actuary

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Is there a housing shortage in America? 2024-08-25T17:12:36-06:00 Jane the Actuary

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“Housing shortage” is a term that conventionally pops up with reference to historical events such as a war or natural disaster destroying housing, or in the past, communist countries putting people on decade-long waitlists because housing was centrally planned, or in rare instances, a particular town or region suddenly becoming jobs-rich, such as parts of North Dakota recently due to the oil boom there.

How can America have a housing shortage, in general, when none of these conditions apply? How can it be an appealing campaign promise for the Kamala Harris team to promise the building of 3 million new housing units through tax incentives and subsidies and vague promises of cutting red tape?

First, my perspective without looking into the data:

Here in Chicago, prior to the financial crisis of 2008, construction was booming. When we bought our first house in 1997 and our move-up house in 2003, we liked to tour model homes in order to get design ideas. Early on, there was a subdivision we seriously considered moving to — sure, it was further out in the suburbs than the comparatively close-in suburb we live in, but our employer was far enough out in the ‘burbs that the commute wouldn’t have been that bad. But there were a couple main roads at which the signs would be placed promoting new subdivisions and every time we spent a Saturday model-home touring, those signs were more and more distant, to the point that they reached as far as the state line. It seemed unsustainable that people would move that far distant, though a neighbor who moved to one such development to the far west of Chicago said they were motivated by the ability to raise their family in a brand-new home backing to a nature preserve that was larger and cheaper than their present one, and expected that jobs and shopping would catch up and the longer commute they had now would not be for long.

Then the financial crisis hit and those signs pretty much disappeared.

A quick check now at a website called New Home Source lists a number of developments, some in-fill, some with significant price tags. There do not seem to be particularly many starter homes, and I can’t say with certainty that this is due to the builders’ choice — it may be that even in these furthest out towns their planning boards are only approving “move-up” homes — but my impression is that young “starter-home” couples and families are no longer as enthusiastic about moving so far out of town that driving long distances is the order of the day. My hunch is that builders aren’t building the same types of subdivisions they were, even two decades ago, because they don’t think the market is there. But if the demand for housing can’t be remedied by more construction further out, then expectations necessarily have to shift to higher density construction.

And I spent a few minutes looking at a CPI calculator and put the 2024 inflation-adjusted equivalent to our 1997 purchase price, and, well, there was one single-family match for a similar price, somewhat smaller than ours but with a larger lot and with remodeling that ours was missing. Otherwise, there are two condo choices with three bedrooms since virtually all the condos here are one or two bedrooms, from a time when they were intended for childless residents.

I should also add that that the “housing shortage” rhetoric is also paired with “housing affordability.” But that label gets tossed around these days with an arbitrary definition: can every prospective renter or homebuyer find an apartment or home appropriate for their family size without paying more than 30% of their income? There’s no magic to this threshold, and the definition of an “appropriate” home/housing unit has also been shifting upwards over time, in terms of codes and national norms for the amount of square footage per occupant, demands such as air conditioning and sprinkler systems, the end of a “boarding house” or SRO with bathrooms or kitchen facilities down the hall, etc. Frequently when politicians or policy experts or nonprofit advocates talk about “affordable housing,” they are really referring to subsidized housing for those whose incomes are so low that there are no circumstances in which they could afford a home, regardless of whether market forces were allowed to work their magic of constructing supply sufficient for demand and regardless of whether land costs are a major or only trivial part of the construction, because, after all, there are hard constraints around the actual cost of constructing or rehabbing a home and keeping it maintained, with utilities turned on. In the same way as we give out food subsidies in the form of SNAP benefits without yammering on about “affordable food,” it’s simply a euphemism to call government-funded or subsidized buildings which offer units for rent at below-market rates to low-income tenants, “affordable” rather than “subsidized” housing, and there’s no particular reason why providing housing to the poor needs to be done through designated “affordable”/subsidized buildings rather than through Section 8 vouchers, and why the proposals to help the poor don’t increase the Section 8 budget instead.

So how would I imagine a real “housing shortage” should be measured? It should be straightforward: the longer it takes a landlord to find a tenant for his apartment, the greater the likelihood is that he will cut rent. The longer a house is on the market, the more price cuts that house will have. Similarly, if a landlord believes he will rent the apartment easily at a higher rate, he won’t hesitate to increase the rent, and the same is true for homes for sale, where in tight markets sellers will price under what they hope to ultimately get, in order to trigger a bidding war. Hence, “housing shortage” should be measured by having an insufficient ratio of vacant/on the market housing units. We don’t need more than that.

That being said, what is the media and the experts saying?

My search produced reporting in 2021 from CBNC that

The U.S. is short 5.24 million homes, an increase of 1.4 million from the 2019 gap of 3.84 million, according to new research from Realtor.com.

But this is garbage reporting. All they do is calculate that

The U.S. Census found that 12.3 million American households were formed from January 2012 to June 2021, but just 7 million new single-family homes were built during that time.

“Household formation” is defined as “when an individual moves out of a shared living situation.” But that entire calculation is nonsensical, assuming as it does that every “household” should be living in a single-family home, and that 10 years prior, we had the “right amount” of homes. It’s also a metric which is logically nonsensical — how can “new households” be formed without homes of one kind or another for them to move into?

CNN provided an update of this claim in 2023, reporting that “The US housing market is short 6.5 million homes” again using this same premise.

Earlier in 2024, NPR reported that the shortage of homes was “somewhere between 4 and 7 million” with a link to Pew, but that link doesn’t actually explain how it calculated that number, either, as the Pew report is about a survey about opinions on housing policy, with that shortage given in a paragraph about the reasons for concern.

It also turns out that must of the reporting is actually about “affordable housing,” for example, “Addressing America’s Affordable Housing Crisis,” which discusses the availability of housing for households with extremely low incomes, defined as either 30% of the area median income or the federal poverty level, and, again, with “affordable” defined as apartments with rents at 30% or less of income. Additionally, they only count “rental units with complete kitchen and plumbing,” and they appear to consider adults with roommates to be “doubled-up” and thus suffering from “doubled-up homelessness” because they look at raw numbers. The report also introduces an additional definition, that a household is housing “cost-burdened” if, after paying for rent, they can’t pay for their other basic needs — which, again, points to the fact that policy folks are promoting subsidized housing with the euphemism of “affordable housing” rather than simply recognizing that these folks are simply poor.

That being said, the actual Harris proposal, as reported at CNN (because there doesn’t appear to be an official document) primarily involved government subsidies, some directly to homebuyers in the form of $25,000 cash for first time home buyers as well as a $10,000 tax credit (so apparently $35,000 in total?), as well as a declaration that she would cause the building of $3 million new housing units, through tax incentives for builders, and a heavy emphasis on “affordable housing.” Do I think the $25,000 cash will just push up prices by $25,000? It’s not that simple a calculus, but that alone isn’t going to actually remedy a supply/demand imbalance, and certainly won’t fix issues for the very poor who just don’t earn enough to pay their rent under any circumstances.

a row of homes. CC-BY-SA-3.0/Matt H. Wade at Wikipedia

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