Construction Is Booming, So Why Is Housing So Unaffordable?

The year 2023 was a heck of a run for the residential construction market. Recent real estate statistics show just under 1.5 million homes were completed over the course of the year—the most in a year since 2007’s pre-global financial crisis activity. Yet housing is still considered to be unaffordable, even with an additional 1.5 million homes hitting the market. How can that be the case?

The housing affordability crisis is a multi-headed issue that supply alone can’t realistically change. Let’s take a look at some of those factors to get a better understanding of housing affordability and why it’s not improving.

How Is Housing Demand Determined?

First, let’s take a look at housing demand. It’s a major driving factor in the affordability of the existing homes on the market, and it’s worth exploring, as housing demand itself is a world of gray area.

Housing demand is defined by comparing two factors: the number of homes available on the market compared to the number of families likely to be seeking a home of their own at a given time. The number of houses on the market can fluctuate, but defining “likely to be seeking a home” is like trying to hit a moving target. Over the past few years, job markets, interest rates, inflation, remote work, and other socioeconomic factors have redefined the ways we shop for everything—especially major purchases like homes.

But, regardless of how we define demand, it’s clear to see that it’s increasing. More people are looking for homes each year than there are homes available, and it’s continuing to worsen.

With Booming Production, Why Aren’t Homes Affordable?

Despite the boom in production in 2023, houses are still unaffordable in 2024. The rules of supply and demand would suggest that increasing inventory would lead to lower prices, so what’s the issue? How is it possible that 1.5 million homes were completed in 2023, but we still didn’t increase supply?

Supply Isn’t Outpacing Growth

According to a recent Zillow report, at any given time in 2022, there were about 3.55 million homes available for sale or for rent. There were over 8 million individuals or families “likely to be seeking a home” throughout the year. That’s a deficit of 4.5 million homes—up 200,000 from the previous year.

And it continues to worsen. That 8 million figure was an increase of 1.8 million from 2022. Those numbers represent a significant surge from the years prior to the pandemic, creating even more pressure on the already burdened housing market.

Considering the existing deficit and growth in family numbers, adding 1.5 million homes doesn’t scratch the surface. Sure, it changes the ratio of home shoppers to homes available slightly, but it doesn’t come close to offsetting the supply issue contributing to unaffordable prices. The lack of strong construction activity before the pandemic dug a hole that current construction activity can’t seem to climb out of.

With all of this information, we can see that supply and demand simply aren’t changing much despite completing record numbers of homes. When that’s the case, housing prices are unlikely to drop, sustaining affordability challenges.

Homeowners Are Reluctant to Sell

Another factor in the housing affordability issue is that most homeowners today are reluctant to sell—even if their homes are worth two or three times what they paid for them. How could that be? Interest rates.

At the time of writing this article, the current mortgage rate is between 7% and 8%. If a homeowner were to sell their home now, they still need a place to live. This often means getting another mortgage with an interest rate higher than their current mortgage. Plus, the type of home they’ll be able to afford is likely very similar to the one they’d be selling, even if they profit considerably and put down a large down payment.

What if they rent? As of May 2024, rents have increased an average of 30.4% nationwide between 2019 and 2023. While it may be an option, it’s not an attractive one.

So, with so many homeowners being reluctant to add their homes to the housing market, those that are on the market are likely to command a premium, compounding the housing affordability issue.

Some Areas Are Worse Than Others

Housing affordability is a nationwide challenge, but some areas are worse than others. Coastal markets are feeling it the most. The areas of and around Boston, Sacramento, Portland, San Diego, San Francisco, San Jose, Seattle, Minneapolis, Los Angeles, and Austin have the worst affordability mountains to climb.

These areas are generally desirable to younger professionals raising families. The areas’ exceptional school systems, healthcare, and job opportunities increase the demand for housing— and, subsequently, the prices. Surprisingly, two of those cities (Austin and Seattle) have also seen the largest increases in housing supply, proving that supply alone cannot solve affordability.

So, What Can Be Done?

There aren’t any switches to flip or buttons to press to bring the housing affordability problem to a halt. But, there are a few things that experts believe will help:

• Policy support and more money spent on affordable housing development
• Rezoning single-family home zones to allow for multi-family construction
• Streamlining the building permit approval process to allow for faster construction
• Establishing affordable housing trust funds or expanding existing funds

While none of these strategies are a solution on their own, they’re each a step in the right direction. As family volumes increase faster than housing completions, we’ll need as much help as possible to offset the challenge of housing affordability now and in the future.

Sources

• Business Insider, Why America’s Housing Shortage Is Getting Worse (2024)
• Zillow, Housing Shortage Worsened Despite Pandemic Construction Boom (2024)
• Fast Markets, US Housing Market Analysis: Are we in the midst of an affordability crisis? (2o24)