ShareWhen cash bidding wars take place across the nation — not for unique designer houses, but for everyday fixer uppers in humdrum neighborhoods — there’s a housing shortage. By any measure, for more than a decade, there has been an underproduction of housing — largely in single-family but also multifamily.
The housing shortage drives up prices. It impacts everyone from the millennials finally ready to settle down, start a family and invest their savings — to working poor and impoverished people unable to afford rent for even the most modest of housing units in dozens of major cities.
Experts also say there’s a shortage of rental housing — which serves a strong purpose of giving people a detached unit, backyard, work-from-home space and flexibility in a 21st century workforce that is more transient for job opportunities.
There is no one culprit. But most economists and expert researchers agree that material costs are high, labor pools are thin and land-use policy has made it increasingly difficult and expensive to bring housing to market.
While home builders, real estate professionals and public policy experts all wrestle with issues of housing shortage, high cost of entry and skyrocketing rent burdens (when people are spending, 40 percent, even 50 percent of their entire incomes on shelter alone) — there are other seismic changes.
The high cost of city living, along with the desire for bigger housing units on larger lots (fueled by both pandemic fears and the ability to work more from home) is shifting some demographics toward a segment that is willing to live farther out with fewer amenities in return for cheaper housing with more space.
The shortage of housing in America is critical, according to a NATIONAL ASSOCIATION OF REALTORS® (NAR) report — “Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing.” The report, authored by the Rosen Consulting Group, found that over the past 20 years, growth in America’s housing inventory slowed significantly across the nation. The NAR report states the “underbuilding gap” at 5.5 to 6.8 million housing units since 2001.
“There is a strong desire for homeownership across this country, but the lack of supply is preventing too many Americans from achieving that dream,” said Lawrence Yun, NAR’s chief economist. “We have a housing shortage in single-family housing, apartments, rental housing — it’s across the board. This is a problem, not only because homeownership is beneficial as far as long-term wealth building, but also because Americans are forking over a great share of their paycheck for housing costs.”
Boost the Supply
Yun said the only way to solve the issue is the boost supply. There are many challenges and solutions. The first issue Yun underscored is overly restrictive zoning regulations. He supports the right to determine the character of a neighborhood, but said far too many cities have overly restrictive zoning and that creates obstacles to building even slightly denser housing.
While the COVID pandemic has created many issues, Yun said it may present an affordable multifamily housing silver lining.
“The economy is recovering, but the office sector is sluggish and with the new trend of work-from-home flexibility, we are saying ‘what can we do with the empty office space?’” he said. “Maybe it can become rental apartments. For many developers, the numbers aren’t there — but government funding could fill the gap and create safe, clean, affordable housing in buildings that already exist.”
“Highways and broadband are good, but can’t some of the infrastructure dollars be used to create habitable homes?
Many cities have vacant properties, abandoned shopping malls, largely empty or emptying office buildings. Government funding could support the effort to provide housing.”
Yun supports funding for more rail transportation. He said more frequent, more dependable commuter rail could help people live without a car or with fewer cars per household. Easier commuting can give people more flexibility in choosing where to live.
“The next round of federal legislation should have a homebuyer tax credit to address equity issues,” he said, noting that many people struggle to save for a down payment and that disparity often hurts people of color. “A program of down-payment assistance could help close the gap. Naturally it will disproportionally help those who have been left out of wealth building via homeownership and the entire nation benefits from having more accessible, affordable units.”
Why the Shortage?
Yun said the labor shortage must be addressed. He said some communities are offering free or reduced community college courses that groom people for construction trade skills. “The labor shortage doesn’t just drive up the cost of building a home — it also makes appliances and everything that comes from a factory to the inside of a home more expensive,” he observed.
Yun said the federal government should intervene with support for training in a cost-effective way.
Robert Dietz, chief economist for the National Association of Home Builders (NAHB), said the housing shortage — which leads to an across-the-board affordability crisis — can be linked to five limiting factors, dubbed the five Ls:
1) Labor
There is a lack of skilled labor — the work force has aged and the industry is short at least 350,000 construction workers. The silver lining is that residential construction gained jobs while unemployment rose during the first year of COVID. Because one single-family home construction employs the equivalent of three full-time workers for a year, it boosts the economy to train more workers.
2) Lots
Whether it is a single-family subdivision, an apartment block or urban infill residential, land must be available for housing and difficult zoning rules make it prohibitive to build even when land is assembled. Dietz said land-use rules have been so restrictive, that the land development sector shrunk by 50 percent coming out of the Great Recession of more than a decade ago.
3) Lending
Dietz said there are issues with access to mortgages, but his lending issue is with policy and market conditions that impact home builders and land developers. Seventy percent of homes are dependent on loans from community banks. Since the Great Recession, lending is much more difficult to get for land acquisition and development.
4) Laws (and regulations)
Dietz points to exclusionary zoning practices that require more land than the market demands. He said when NIMBYs (Not in My Back Yard) block small and diverse units — it crowds out the entry level buyer, the new home buyer. He said the choice for the developer is to build on bigger lots with more expensive homes or to build nothing at all. He said regulatory costs and, well-intended but onerous impact fees, drive up costs and add delays. Dietz said research shows that regulatory costs account for a quarter of the final price of single-family housing and a third of the cost of multifamily housing.
5) Lumber
Ninety percent of single-family homes are wood construction. The Trump administration raised tariffs on lumber coming from Canada to 20 percent, later cutting it back to nine percent. But the steep tariffs and sharp demand for materials saw the cost of lumber shoot up more than 300 percent from spring 2020 to spring 2021 — climbing to a record of more than $1,500 per thousand board feet. Dietz said that stratospheric leap in cost can add $30,000 to $40,000 to the price of a single-family house.
Advocate for the Missing Middle
“Each community has to look at reforming zoning laws to address the housing deficit. We have an increase in NIMBY and now there is BANANA (build absolutely nothing in my back yard),” Dietz said, noting that opposition to any growth at all only widens the gap between haves and have nots and increases the number of people spending most of their paycheck on shelter. “We have to convince the NIMBYs to be YIMBYs (yes in my back yard) that support some density.”
Dietz predicts an increase of building the so-called missing middle a way of adding density that is not high rise or out of scale. The term describes duplexes, rowhouses and courtyard apartments that provide housing at different price points that is compatible in scale with single-family neighborhoods. It supports diverse and walkable communities. It is “missing” because such housing was common in pre-WWII United States, but often is outlawed by zoning.
“It is a complex story; I push back on the idea that there is a single solution. We need to add density, reform zoning, reduce regulations, recruit more diversity in the construction workforce and address impact fees,” he said, noting that roughly 30 percent of construction workers are women and that the industry needs to recruit a more diverse workforce to address both the labor shortage and equity.
Dietz said the profit margins for smaller scale builders and developers — the vast majority of the industry — are “not extremely high.” He said many of the same people advocating for more affordable and attainable housing are the same ones in favor of permit fees, taxes and impact fees that drive up the price of housing.
“Housing is a capital asset — the typical single-family home lasts 80 to 100 years. Rather than a high-up-front fee, finance infrastructure needed to support residential development with low-cost (municipal) bond debt,” he said. “This would make the entry point for homeownership lower.”
The Pandemic-Induced Growth Shift
Dietz said the high cost of living in or near major cities plus the concern over the pandemic and the need for more space in a home and a bigger lot — has moved growth to more outer suburban and small-town areas.
“It’s the COVID effect. The permit data from the second half of 2020 and the first half of 2021 shows strong growth rates for both single-family houses and apartments in lower density, lower cost areas,” he said. “Young families have to live somewhere and they are looking farther out, for better prices — COVID accelerated those trends.
“Rather than thinking about a long daily commute, it might be work mostly from home and a weekly commute. Some trends predict that 30 percent to 40 percent of the American workforce will work two days at the office and three from home — or some kind of hybrid — that reduces daily long commutes. The exurbs are growing.”
Ken Rosen, chairman of real estate market research firm Rosen Consulting, was the lead author of the NAR “Housing is Critical Infrastructure” report.
Rosen also is seeing people leave high-cost, high-tax markets for lower cost areas, though the cost of living in a particular area is more than just the house. It also involves the cost of transportation. Houses in rural locations may cost less but you need a car for each licensed driver. Yet, he sees a shift from large population coastal areas (east and west) to Sun Belt and Mountain States. He noted that San Francisco lost 10 percent of its population between March and November 2020.
“In a lot of metro areas, the supply of new housing is constrained by very tough local zoning requirements,” he said. “When it is harder to build things, it becomes more costly. The affordability gap widens.”
Rosen said low interest rates and stimulus checks in 2020 fueled a strong desire for homeownership, but noted that it is increasingly difficult to supply housing to meet the demand.
“Housing is very hard to put in place in a number of areas. The NIMBY phenomenon has really taken hold in California and many other metro areas. You think it’s protecting your area, your value — but it’s denying housing to the next generation. It makes it increasingly difficult for working people, even middle-income earners to buy any kind of housing.”
Rosen said real earnings are a lot higher in secondary cities. He said a family may spend 25 percent of its income on housing in a smaller market, but more than 40 percent of it on housing in a major city.
“The expensive areas — and that has increased from a few big cities a few decades ago to dozens of metros — must create more housing and different prices. We must convert underused commercial to residential. We must allow more dense housing. We need special programs to support affordable housing,” he said.
Infrastructure Investment
The NAR report that Rosen led bluntly states: “Large-scale investment in infrastructure for the 21st century provides a once-in-a-generation opportunity to avoid the mistakes of the past and instead build infrastructure and housing together in a way that plans for inclusive and sustainable growth that binds communities together instead of dividing them along racial lines.”
Rosen said cities and regions would be wise to use a good portion of their share of previous stimulus bill funding for government, plus the $1.2-trillion infrastructure funding, to improve diverse housing and transit opportunities where people live and work.
“Address congestion with efficient transit. Allow more density near transit. Relax costly parking requirements for residential next to transit,” he said. Density can work well. People want more open space and concentrating density can create a balance that allows open space.
The NAR/Rosen report explains that hurrying for solutions to the housing shortage will not only benefit families, but it also will create sustained fiscal success at all levels of government.
“This additional new residential construction would also be expected to generate more than $53 billion dollars in new annual tax revenue, including $18 billion in state and local taxes and $35 billion in federal taxes, reflecting a wide range of activity, including considerable new federal income taxes related to the new job creation,” the report states. (See article on page 34 about the fiscal impacts of where, how and the mix of what is built.)
Housing Policies
At the local level, the NAR/Rosen report urges incentivizing shifts in local zoning and regulatory environments to substantially increase the quantity and density of developable residential space.
“Housing policy is very complicated. We haven’t had much policy at the federal level. I’m confident that this administration will see this is a major issue, that housing policy should be a center focus,” Rosen said.
Lisa Sturtevant, chief economist for Virginia REALTORS®, agrees that swift action must be taken at all levels of government to supply more housing — especially the missing middle.
“Where housing is most needed is where the strongest community opposition is. And elected officials put their foot down on housing,” she said. “Arlington is joining Minneapolis in moving to allow duplexes and triplexes by right in single-family zoning. But sometimes the most progressive places are where road blocks come up in the way of housing for different populations.”
Sturtevant said NIMBYism must be resolved in the suburbs. She said people feel it will hurt their property values, but that isn’t an automatic.
“They are designing attractive housing for lower incomes. I lived in workforce townhomes and you couldn’t tell it from the outside. They have built public housing next to million-dollar townhomes and it hasn’t made them less desirable,” she said.
Sturtevant has hope for new building methods that can create more affordable housing that is accessible to all in terms of price and mobility accessibility. She points to a demonstration house created via 3D printer. She noted advances in modular housing produce a more durable, flexible and sustainable product — not the modular housing that people picture from 1970s trailer home styles.
Sturtevant endorses efforts by advocates such as the Alliance for Housing Solutions (AHS), a nonprofit working to increase the supply of affordable housing in Arlington County and Northern Virginia.
Alice Hogan, a consultant to AHS, said missing middle housing is an important tool for communities to have in their toolbox when seeking to increase housing supply and create greater housing diversity and opportunity.
“When it comes to the issue of affordability, we like to think of missing middle as attainable housing instead of affordable housing, which is restricted to people making a certain percentage of the area median income. Missing middle housing is ‘affordable-by-design,’ meaning it is priced at a financial level that many middle-income earners can achieve, including young professionals, essential workers, and seniors,” she said.
Though missing middle housing isn’t the solution to all affordability challenges, AHS sees it as a way to re-introduce more housing types into the local housing market.
“Zoning laws that were enacted many decades ago in Arlington — and in many other places across the United States — can make it a challenge to build missing middle housing today. But we’re starting to see a shift: cities like Berkeley, Calif., have committed to ending restrictive zoning laws by the end of 2022. And in August 2020, the city of Portland, Ore., approved a policy legalizing up to four homes on most lots and significantly reduced maximum building sizes,” Hogan said. “In Arlington, AHS is pleased that the county is exploring zoning changes to allow for more missing middle housing types through a multi-year study.”
AHS advocates for housing types that support transitcentered, walkable communities that are inclusive and equitable for people of all incomes, backgrounds, ages and stages of life. The group is well-aware that when people hear about zoning changes, they worry how it will impact their homes, neighborhoods and environment.
“Updating zoning laws allows for more types of housing and does not mean an end to single-family zoning or allowing large apartment buildings next to single-family homes,” she said. “AHS advocates for mindful growth so that added density — or gentle density can be easily incorporated into the fabric of a community. Missing middle housing is well-suited to fit into existing neighborhoods because it is efficiently sized and designed with a lower perceived density.”
Walkability Is Important
Multiple surveys show roughly half the nation would opt to move to a walkable community — where they could walk to most of their daily needs — even if it meant they would live in an attached dwelling such as a townhouse, condo or apartment.
However, the impact of the pandemic plus trends towards millennials starting families and settling down as they age, indicate a shift in the opposite direction for some. Results from NAR’s Coronavirus Update to the 2020 Community and Transportation Preferences Survey show younger respondents — especially those with children at home — reported a reduced need to be near highways and public transit or to have a home with a short commute to work. Results, released after surveying at the height of COVID in 2020, indicated an increased desire for more outdoor space and larger homes, most particularly among millennials and those with kids at home.
Demographic Trends
Arthur C. Nelson, professor of planning & real estate development at the University of Arizona, focuses on long-term demographic trends. He said the big rush to buy houses soon after the pandemic hit hard was a surprise to many.
“The younger generations were accumulating some money (because) the pandemic shut things down so there was nothing to spend money on and with two percent interest rates — the market came together nicely for millennials and they moved to the suburbs,” he said.
“Many suburbs were poised to meet that demand. I think a part of that sudden demand for homebuying by millennials was, in part, a failure for cities to expand housing supply for young families. They did a good job of attracting young singles, young couples — but cities missed the opportunity to build the missing middle,” Nelson continued. “Cities need to do more to make their current housing stock nimbler.”
Nelson said a trend linked to the pandemic is that new homebuyers want more out of their communities — such as walkability, convenient transit and places for social interaction. He said many suburbs have done a good job of putting in sidewalks and creating complete streets, so they are competitive with urban areas. This means people can stay in the same metro area, but trade a smaller expensive attached unit in the center for more room at a lower cost on the fringe of the core city.
Nelson said despite the desire to age-in-place, many baby boomers will want to unload large houses that they can no longer maintain — to become renters in smaller, more efficient units.
He said there are houses “with more rooms than people because over the years, the average number of people in a home has shrunk from 3.5 to 2.5.” These are the aging baby boomers’ houses on large lots that will not match the needs of young buyers. Nelson believes in many regions, including the Great Lakes, there will be more senior citizens trying to unload their homes than people who want that type of housing on large lots.
This will become very evident by 2030,” he said. “Seniors, whose biggest asset is the home they own, will sell their home for much less than they hoped — or not be able to sell at all. Public policy must address this mismatch of housing needs.”