I see many pieces and reports to the effect that there is a housing shortage in the United States. But all these such reports are in service of a larger argument that seems to usually have two components - 1) we need to densify our cities and 2) we need to dismantle single family residential neighborhoods. The language is all about social justice, equity, DEI and ESG.
Densification and obliterating SFRN are clearly merely social justice central planning trying to sneak in under the guise of a housing shortage crisis.
Planning norms that have been in place for decades and widely supported are being proposed to be jettisoned with little actual analysis of what the impacts might be from the proposed changes. It certainly feels like ideological opportunism rather than a real crisis.
But what is the reality? I see a lot of articles about what we might do because of a housing crisis but none demonstrating that there is a crisis. What are the facts?
The housing market always has ebbs and flows, particularly in recent decades as the Federal government has become more involved from a social policy perspective. One factoid off the top of my head is that the US has long run had roughly a 65% home ownership rate (comparable to the UK but much higher than continental Europe). Another is that US housing is about 25-50% larger than that in most OECD countries. We run about 2,500 square feet per residence in the US whereas in Europe it is more like 1,500 square feet. A further observation is that the number of people in a residence has also been falling over the decades from 3.5 to 2.5 people. Finally, despite our currently low fertility rate, the US population is still growing owing to immigration. Larger populations create a demand for new housing.
So where are we now? From working recollection, when the GIs came home after World War II there was an infamous housing shortage due to nearly zero construction during the war, five years of family formation suddenly occurring at the close of the war, the post war baby boom, massive economic growth, etc. Housing demand exceeded supply for some years.
After that, demand ebbed and flowed based on general market fluctuations. In the early 2000s there was a massive Federal government effort to make home ownership easier to achieve which led to the crisis of 2008 with tracts of abandoned new home construction all across the nation but especially concentrated in some sunshine states like Nevada. That crisis was an economic/financial crisis wrapped up in a social policy misstep rather than a housing supply issue per se.
In the past two years of the crisis arising from public health policy responses to Covid-19, there have been massive movements of populations. In general, there has been a movement of people out of cities into suburbs, exurbs and smaller cities or towns. There has also been a movement from high Covid-19 restriction states to lower restriction states. To what degree either of these migrations are permanent is debated. Likely there will be some swing back but almost certainly not a complete reversion in the near term.
As a consequence, along with some financial considerations, there has been a recent escalation in housing prices over the past year but that frenzy appears to have burst.
There is a further consideration. People's perceptions of what a home environment is/should be have evolved over time, independent of whatever modifications might have been adopted under Covid. Virtually every house has heating and air-conditioning in a way not true fifty years ago. Kitchens and their fittings are larger and more elaborate. Many homes have entertainment centers. All of these are costs associated with new desires for the functions homes should support rather than changes in the actual cost of housing per se. There is no easy way to disaggregate rising housing costs (a possible indication of shortages) from rising feature demands.
So what would be a good measure, or good measures, of whether there is a housing supply crisis? Not price. That merely reflects short term economic and financial considerations as well as the impact of large population movements creating demand in some places and reducing it in others.
It seems like there are a couple of measures that might be indicative of whether there is truly a housing shortage justifying jettisoning longstanding zoning practices and explicitly using the regulatory hand of government to attempt to densify cities.
One would be the long run ratio of housing costs to income and the second would be housing and rental vacancy rates today versus the long run average. If housing supply is indeed in crisis, then housing costs should be increasing sharply and vacancy rates should be sharply below the long run average. These are crude measures but perhaps indicative.
Even without ideological calls to fundamentally transform cities by densifying them, the real estate market is substantially self-correcting when allowed to operate without intervention. If there is truly a sustained shortage of housing, allowing for 3-7 years of permitting and construction, the shortage will rectify itself, often with an over-correction.
So what are the numbers?
Click to enlarge or click on the above link for an interactive chart.
In 1946, home price/household income was a ratio of 6.5 for the reasons mentioned above. There was indeed a housing shortage. By 1960, the shortage was resolved and the ratio settled to a long term stable rate of about 4.7-5.0.
This normal range was broken in 2001 based on financial services industry changes and government policy home ownership social policies and rose to a peak of 7.03 just before the Great Recession. Indeed, the collapse of financial market in residential real estate was among the catalysts for the recession.
The post Great Recession led to a recovery in real estate but at a higher ratio of about 5.5-6.0 for a decade. And then came inflation and deficits of 2021. As of May 2022, the ratio of housing price to household income in a near eighty year record of a ratio of 7.78.
That would indicate a dramatic shortage of housing. Except that that number is at the peak of a financially induced hot real estate market when many people are relocating and adding real estate assets. There are good reasons to believe that that ratio has collapsed in the past three months.
None-the-less, the data does seem to support that there is a rise in the ratio of home costs to income from the long term norm of 5.5. How much is short term noise due to financial market volatility and how much is real housing shortage is hard to discern. Add in the issue of larger homes with greater accoutrements and it gets harder and harder to see the ratio as indicative of a fundamental housing shortage.
What about occupancy rates? If there is a real housing shortage, then current occupancy rates ought to be very high compared to the long term norm. The data is
here, tables 1 and 2 for rental and for owner occupied.
For owner occupied homes, the vacancy rate for the second quarter of 2022 was 0.8%, both in cities and in the country as a whole. The 66 year average is 1.5% though it has been on occasion as high as 3.0%. If a normal equilibrium of supply and demand is 1.5% vacancy and we are at 0.8%, then there is evidence of a housing shortage.
For rentals, however, the story is more moderate. The vacancy rate for the second quarter of 2022 was 5.6%. The 66 year average vacancy rate is, however, 7.2% though it has been on occasion as high as 11.1% and as low as 4.5%.
In sum, from a vacancy rate perspective, it does seem as if there is something of a shortage in the homes for purchase market. The rental market is tighter than the long run norm but not unusually so.
In terms of both vacancy rates and in terms of housing costs, and especially when taking into account the disruptions of Covid-19 as well as the gradual enlargement and improvement in quality of homes in the past two decades, it just doesn't seem as if there is compelling evidence of a shortage. The numbers are within historical norms, even if indicative of some near term constraints.
Is there a data based argument that cities need to densify and that single family residential neighborhoods need to be revamped to allow for more housing to bring down costs? Not in terms of a sixty year view of market and data norms. There is a short term tightness in the market for reasons related to population movements and to increasing demands for higher quality housing. There is little evidence of a sustained shortage of housing.
