Inflation may be in check, but the lack of inventory around the country is fueling a sharp rise in housing costs.

There is no inflation, says the federal government. The consumer price index rose by only 0.4 percent in 2015 so there will be no cost-of-living adjustment to Social Security checks this year. However, as most real estate professionals know, housing costs are still climbing. Rents rose at their highest pace in seven years and home prices nationally increased by 6 percent. That would be three times the pace of average wage growth. Housing costs are expected to keep rising in 2016 simply because not enough homes are being built.

From 2009 to today, new construction of single-family homes, condominiums, and apartment units totaled 5.6 million. Over the same period, approximately 1.7 million housing units were deemed uninhabitable or obsolete and were demolished and removed from the housing stock. These two figures result in a net addition of 3.9 million housing units to the country’s stock. Is that adequate in light of 17.3 million additional people living in the country over the same period?

Clearly, the answer is no. Given the average household size of 2.5 persons, a total of 6.9 million new housing units would be needed to accommodate the country’s rising population. The 3.9 million units that were actually created fall far short of the demand—by some 3 million homes.

That explains why rental vacancies are falling and housing inventories are shrinking. Of course, local market conditions vary. States with declining populations, including Connecticut, Illinois, and West Virginia, may have a less pressing need for additional home construction. But those places are exceptions. Housing shortages are the rule in most states and there’s no reason to expect anything to change this year.

There are essentially two major consequences of a persistent housing shortage: a continuing steep rise in housing costs and people needing to double or triple up to afford a home. Young adults may have to find multiple roommates or else live with their parents.

That latter scenario is probably not what most young people dream about, but it’s what the American dream of home ownership could turn into if we don’t spur more housing development in the country soon.

Advertisement