Why Does the U.S. Have a Housing Shortage, and What Can Be Done to Fix It?

If you’ve turned on the news or tried to buy a house since 2020, you’ve probably already heard about the housing shortage and its contributions to the soaring cost of real estate. And while it’s easy to blame this shortage on the pandemic, the so-called “urban exodus,” and lack of inventory — the truth is that the roots of the problem run much deeper.

While it would be nice to pin down the causes of the housing shortage to just one or two variables, the reality is there are many factors that first caused and then further exacerbated a lack of homes for sale in America. Additionally, much of the housing shortage affects first-time homebuyers and affordable housing, creating a market that is simultaneously on fire and unattainable.

According to Homelight’s Top Agent Insights 2022 Housing Market Preview, 75% of agents believe the inventory shortage will persist in 2022, and 52% believe that just a little more inventory would give buyers more options.

In 2022, 83% of agents expect a seller’s market compared with 13% who predict a balanced market and just 2% who expect the market to shift to a buyer’s market.

To untangle the causes of the housing shortage and offer recommendations for how to fix it, we did a ton of research and talked with Mike Galbally, a top agent in O’Fallon, Missouri. He gave us some much-needed perspective on the causes of the current housing shortage as well as possible solutions to help boost inventory and make housing more affordable over time.

Why is there a housing shortage?

Unfortunately, this is a very complex problem, and there aren’t just one or two reasons for today’s housing shortage. Let’s take a look at some of the major causes.

The Great Recession

After the housing bubble burst in 2008, 10 million people had their homes foreclosed on, and home prices plummeted by 33%. After the Great Recession, the market slowly recovered, reaching a point of relative normalcy a full 10 years later with prices up 50% since hitting the bottom.

Galbally still sees the impact of the Great Recession in today’s market, saying: “After the recession, they built far fewer houses than in any other time period. And the houses that they would build at the time in our area were not what people would describe as desirable.” In Galbally’s area, building projects at this time were focused on cheap townhomes rather than single-family homes.

As the market started to recover, there was a shift towards building big, expensive homes. This created the “missing middle” — a shortage of entry-level and mid-level housing, including townhomes, duplexes, cottage housing, garden apartments, and smaller single-family homes.

These missing “middle” homes are integrated into residential neighborhoods, allowing for more occupancy without the need for a large, high-rise apartment building.

Today, in Galbally’s market, he says they have plenty of big houses and lots of townhouses, but not enough single-family homes. And now, people who bought the big houses are looking to downsize and are entering the market with equity and a large down payment — two things that first-time homebuyers often don’t have.

Entry-level homes aren’t being built

In the 1980s, just a little more than 40% of new home builds were below 1,400 square feet — deemed an entry-level home. Construction of homes of this size has steadily decreased since then but experienced a sharper decline after the 2008 recession. In 2020, the percentage of homes built that were under 1,400 square feet was closer to 10% — a 50-year low.

Between January 2012 and June 2021, 12.3 million American households were formed, according to the U.S. Census. During that time, only 7 million new single-family homes were built, creating a shortage of around 5 million homes. This number is higher than the 2019 gap of 3.84 million homes.

The cost of materials and labor is rising

When the COVID-19 pandemic hit in 2020, much of the world effectively shut down, halting production and deliveries, and creating supply chain issues that persist today. These shutdowns led to shortages of building materials and caused prices to rise.

As of August 2021, building material prices had risen 19.4% during the past 12 months compared to a 1.1% increase in the same period in the previous year.

Wages for construction workers are also rising, and those costs are typically passed onto the consumer. So as it becomes more expensive to hire people to build houses, house prices rise. There is also a labor shortage in the construction industry, with the Bureau of Labor Statistics reporting 389,000 job openings in January 2022 (contrast that with 293,000 job openings in January 2019). The labor shortage can extend the time it takes to build a home, therefore decreasing the number of houses that can be built and increasing the price of those that are completed.

Zoning laws don’t keep up with new options

According to a March 2022 NPR article, the chief economist for the National Association of Home Builders cites overly restrictive zoning laws as a significant contributor to the housing shortage. Some zoning laws require one single-family home on lots that could feasibly hold two or three, creating a more expensive home on a larger lot than what the market can support. Other zoning laws may restrict townhomes, accessory dwelling units, or apartments.

Changing zoning laws can be difficult territory to navigate. Many existing homeowners, typically those 58 and older, oppose the construction of housing that would increase traffic in the neighborhood or make the area more crowded, and those residents won’t support changing the zoning laws. This may change as time goes on, as 86% of both Gen Z and Millenials, and 78% of Gen X, approve of either accessory dwelling units or duplexes and triplexes as a way to address housing shortages.

While the federal government can take steps to push local governments to change zoning laws through financial incentives and other means, local governments ultimately approve the laws. The Biden administration, for instance, has proposed financial incentives for local governments to change zoning laws that restrict certain neighborhoods to single-family homes.

More people are “aging in place”

As of 2021, baby boomers held 44% of real estate wealth, with Gen Xers coming in second with 31%. As previous generations have aged, they’ve sold their houses, preferring to live in assisted living or nursing homes or with family.

Baby boomers, on the other hand, are deciding to “age in place,” staying in their homes as they age rather than selling and downsizing or moving into a senior facility. This trend was only exacerbated by the COVID-19 pandemic, which created concern and caution around living in nursing homes.

Would-be sellers are reluctant to get into the market

Selling a house typically means buying a house to replace it. With prices soaring, some would-be sellers are waiting to sell because they’re not sure if they’d be able to find an affordable home to replace their current home.

Online platforms have increased short-term and vacation rentals

Airbnb and VRBO have made it possible for nearly anyone to turn their home into a vacation rental. As a result, the typical Airbnb host in the U.S. made over $13,800 in income in 2021.

Before short-term and vacation rental platforms became popular, it was often difficult to hold onto more than one home and potentially pay more than one mortgage. With the ease of listing a home as a vacation rental, many are deciding to hold onto their previous home instead of selling it, and are then using the income generated to pay the mortgage or as a side hustle.

iBuyers are offering convenience and cash offers

Cash offers from iBuyers (instant buyers) have resulted in sellers selling their homes to companies rather than private buyers. According to Zillow, in Q2 of 2021, iBuyers accounted for 1% of the market, but this affects markets very differently.

In Galbally’s area, he says, “Opendoor is buying up a good amount of properties in our area. It remains to be seen if they make a profit, but they are disrupting the market for sure.” He sees this as providing a service to the seller but not necessarily supporting the market as a whole.

Often iBuyers will buy homes and then sell them to investors who will either fix-and-flip (raising the price of the home) or use them as a rental property, increasing the number of rentals available, but not homes to purchase.

HomeLight offers Simple Sale for those looking to sell their home on their timeline and without worrying about negotiations or repairs. (Which is important if you don’t want to wait to take your chances on a traditional sale and miss the chance to buy the home you want). And to make buying a new home even easier, HomeLight’s Trade-In™ program will buy your current home and allow you to make a strong offer on your next home with no lending or home sale contingencies.

Eviction moratorium/mortgage forbearance

Pandemic mortgage forbearance phased out in 2021, and HomeLight’s Top Agent Insights survey showed that 38% of agents surveyed think the end of mortgage forbearance plans will result in new listings. Redfin reported that the supply of affordable homes rose 13% from the previous year as homeowners of low cost homes whose mortgage was in forbearance decide to sell their homes.

According to Black Knight’s February 2022 Mortgage Monitor, the expected flush of houses into the market after many forbearance periods ended in 2021 didn’t fill the inventory gap despite 28% of the 8.1 million homeowners previously in forbearance selling their homes.

How to handle the housing shortage

While we don’t know what the future holds, there are a number of scenarios and steps that could ease the housing shortage in the upcoming months and years.

Wait for interest rate hikes

This may seem counterintuitive, as many want to take advantage of historically low interest rates. But as interest rates rise throughout 2022, the urgency of buyers to lock in low interest rates will lessen and may serve to cool the market, reducing the frenzy to scoop up any listing that hits the market, which will mean added inventory and a little breathing room for buyers.

Find the ‘missing middle’

A recent Zillow survey found broad support for “missing middle” homes in residential neighborhoods. They found that even modest densification measures, such as allowing two units on 10% of single-family lots in some of the largest U.S. metros, could boost the housing supply enough to slow housing price growth in a meaningful way.

Of the respondents, 73% supported at least one “modest densification” option that included duplexes, triplexes, accessory dwelling units (often referred to as a “mother-in-law suite”), and small apartment buildings known as garden or cottage apartments.

De-incentivize investments

A solution to the housing shortage that we could see as political and economic policies change is to take away incentives that encourage investments in single-family rentals.

Galbally observes, “if they take away the incentives that are in single-family rentals — the tax exemptions, the depreciation — you’ll see all these people dump this inventory. If they can make more money somewhere else, they’re going to move the asset.” If this type of policy change occurs, we could see an influx of homes hit the market, easing the shortage.

Use the ‘circle prospecting’ strategy

Jesse Allen, a top agent in Jeffersonville, Indiana says that, in the past, leads would come to him, and often, he could get a listing by simply being the person who answered the phone. Now, with the housing shortage, it requires a different strategy in order to find homes for sale.

Allen says that as an agent “you have to go out and find your own inventory.” Circle prospecting is a strategy that Allen and his team use: “If we know certain neighborhoods that our buyers want to live in, we’re calling those neighborhoods and seeing if there’s anybody that’s interested in selling.”

Contacting homeowners directly can sometimes yield additional homes for a buyer to choose from.

Increase adaptive reuse projects

Adaptive reuse architecture takes existing buildings and repurposes them, often into homes. Adaptive reuse projects include repurposing schools, banks, electricity plants, factories, and more.

The benefits of this strategy include slowing urban sprawl, maintaining culture and architectural styles, lowering construction costs, and speeding up construction.

Get creative and take action

Galbally says that a reluctance to get into the market and potentially having to buy a high-priced house is preventing some from selling their current home. He reveals, “the biggest problem is that people are just frozen. I tell people: If you want to make a move, if you want to make a change, just do it.”

He recommends getting out of your own way and trusting the process — and getting a little creative. Leveraging options, whether it’s moving back in with parents or renting an apartment, will allow you to sell your current home while waiting until a better time to buy a new one.

Working with a trusted agent can help you navigate today’s market

The real estate market, especially in 2022, can be difficult to navigate on your own, but working with a trusted agent can ease some of the stress associated with buying and selling a home. HomeLight can help you find a top real estate agent in your area. We analyze millions of home sales to find real estate agents that will help you find the perfect home at the right price — and submit a winning offer.

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