What can the next administration do about the US housing shortage?

Transcript

Does the U.S. have a housing crisis?

The cost of housing in the U.S. has risen steeply in the last four years, both rents and the cost of purchasing a home. As with all markets, prices are determined by the relationship between supply and demand. Right now in the U.S., demand is out-pacing supply, especially in metropolitan areas, and thus driving up prices. That means a larger and larger share of income is going to pay for housing: For low-income renting households, about a third of their expenditures go toward rent. For those reasons, many are describing the current situation as a “housing crisis.” 

What’s driving the housing price increase?

On the supply side, in some areas there just aren’t enough units. Estimates vary, but experts broadly agree that the U.S. has millions fewer units of housing than American families need. A big part of this is long-term issues related to zoning: A tapestry of city and state single-family zoning laws across the country prevent construction of more affordable, denser housing units in many neighborhoods – 75% of residential land in the U.S. is zoned for private, single-family homes.

There are more recent issues driving the demand side of the equation. For one, the COVID-19 pandemic increased demand for larger homes, so new construction homes have been larger and more expensive.  The pandemic also changed where people want to live. That means less demand in some places and more in others, including suburban areas with large plots, and so new construction will take some time to catch up.

What can we do about it?

Much of the problem is at the state and local level. When it comes to federal policy, economists generally agree that a key part of the solution will be a mix of measures to boost the supply of affordable housing. The presidential candidates and other policymakers have floated a number of ideas that aim toward this end. Vice President Harris’s argues her proposals would mean the construction of 3 million new housing units over four years. Those proposals include an expansion of the Low-Income Housing Tax Credit to subsidize building of affordable homes and a $40 billion fund for the use of providing incentives for state and local governments to come up with innovative solutions, which could include changes in zoning practices and housing regulations.  Former President Trump’s campaign has also proposed eliminating regulations to increase supply but has offered no details on how.   

On the other hand, several proposals floated by the campaigns would solve some problems but create others. Harris’ plan to offer $25,000 to some first-time home buyers would help those households afford downpayments but would stoke demand in the home purchase market—which is already unsustainably tight. The suggestion by the Trump campaign that mass deportations would decrease demand for housing doesn’t contend with the significant disruptions that would entail. Just for starters, home builders would face a reduction in labor supply. And Trump’s idea to ban mortgages for undocumented immigrants is targeting a trivial number of mortgage borrowers but would create more of a paperwork headache for all mortgage borrowers, which would just make renting more attractive.

Researchers have also come up with a number of innovative ideas to increase the supply of housing. For example, the Hamilton Project recently published a proposal to convert offices, many of which are underutilized post-COVID, to apartments. This approach would have the additional benefit of producing 50-75% fewer carbon emissions than demolition and new construction.

While home sale prices have leveled off recently, homeownership is still out of reach for many, and rent prices have continued to climb. The November election will be consequential for determining which policies the government enacts to make housing more affordable.