We Need More Homes: Overcoming the Housing Shortage and Production Challenges

In the United States, the housing supply shortage is a key contributor to a housing affordability crisis. Reports estimate that, in order to keep up with housing demand, the United States needs to build an additional 3.8 million housing units.

Numerous factors contribute to the housing shortage—from high construction costs and supply chain issues exacerbated by the COVID-19 pandemic, to the residual effects of the 2008 housing bubble.

All of those factors make finding entry-level housing ‌nearly impossible. With staggering bidding wars, all-cash offers, and the rising cost of home insurance, low- and middle-income families are often priced out of homeownership.

While the quest to solve the housing crisis requires a long-term, multidimensional approach, one element is clear: Increasing housing production is critical in the United States.

The Roots of the Housing Shortage 

While the pandemic certainly contributed to the current issue of the housing shortage, the roots of the crisis can be traced back to the 2008 housing bubble collapse.

During and after the housing market crash, many homebuilders and tradesmen closed their businesses and found other jobs. When Americans started buying—and building—homes again, building levels stayed below normal, leading to a lack of housing stock.

Prior to the Great Recession, the ratio of new population to new home construction was 2:1. After 2007, this ratio increased to 5:1.

The COVID-19 pandemic further exacerbated the housing shortage. Supply chain issues stalled construction and 68 percent of general contractors had a project canceled as a result of the pandemic, according to one survey.

While the pathway to a robust supply of housing stock is long, there has been some positive growth in the sector over the past year. In July 2023, homebuilding rose 3.9 percent from June and the overall number of units was up nearly 6 percent from July 2022.

Barriers to Housing Production 

While the solution might seem simple—build new homes—there are a number of barriers to housing production and development.

Restrictive Zoning and Land Use Regulations 

Land use regulations and restrictive zoning are two macro factors that contribute to the lack of housing production.

Zoning, which is a means of regulating site usage and categorizing different areas, was historically developed to separate industry from residential areas, reduce urban crowding, and create middle-class homes outside urban cities.

However, restrictive zoning codes—which typically limited construction to single-family homes—were also used to enforce racial segregation. While overt housing discrimination is outlawed, subtler methods still surface. Today, exclusionary zoning policies that restrict lower-cost or higher-density housing options play a role in limiting racial and economic diversity.

In the period following World War II, many local governments set aside zoned residential land for single-family homes. An estimated 75 percent of land in American cities is zoned for single-family use only.

As zoning has become widespread across the country, local governments have continued to prioritize single-family residential homes. While these homes are a pathway to building intergenerational wealth and establishing community, entry-level single family homes are in short supply.

In addition, the exclusionary zoning prohibits higher-density homeownership options, such as condominiums or co-ops, which can be produced and sold at a lower cost than traditional single-family homes. These restrictions further exacerbate the unaffordability of homeownership to many lower-income families.

Zoning also has an impact on building costs: One estimate found that local land use and zoning regulations account for nearly one-fourth of the total construction costs for single-family homes and 40 percent for multi-family homes, with many regulations causing substantial bottlenecks and delays in the housing construction process.

Economic Concerns 

Over the past year, rising interest rates and record home prices have made it impossible for most Americans to buy a home—and builders have become less confident in the ability to sell new construction. One poll conducted by the National Association of Home Builders (NAHB) found that builder confidence in the market for new single-family homes is at its lowest level since June 2020—after six straight months of decline.

In addition, the cost of building residential single-family homes has risen exponentially. One release from NAHB’s chief economist noted that costs for building materials are up 19 percent, year-over-year.

High Home Prices and Mortgage Rates 

In September 2023, mortgage rates jumped to their highest level in nearly 23 years—and due to the lack of available housing stock, home prices continued to rise as well. With such staggering prices, many homeowners are waiting for the market to quiet down before pursuing their search. This lull leaves many builders with new construction and no potential buyers.

Incentivizing Housing Production 

Solving the housing crisis requires a multifaceted approach—and incentivizing the production of affordable homes is a critical step.

Local Policies  

One study from the Terner Center for Housing Innovation at UC Berkeley conducted a database and typology of state pro-housing laws, unpacking the intricacies and offering new insights into how states can develop pro-housing policies.

The report outlined four key policy levers:

  • Requiring localities to plan for the housing needs of their respective regions
  • Implementing state standards for local land use and planning regulations, such as requiring localities to allow for at least one ADU per single-family lot
  • Providing incentives to reach a particular production goal
  • Imposing penalties to discourage jurisdictions for failing to carry out their housing obligations

Most states across the country employ at least one of these levers to place pressure on local governments. In the past decade, many state and local governments have leveraged a range of strategies to address land-use and zoning barriers to housing development, including:

  • Minneapolis, Minnesota: In a groundbreaking move, Minneapolis eliminated exclusionary single-family zoning​​ in order to incentivize mixed-use development, affordable housing, and transit-oriented development.
  • Grand Rapids, Michigan: In Grand Rapids, local government initiatives have allowed ADUs by right in all zones and reduced minimum lot sizes.

Federal Policies 

In May 2022, the Biden Administration released a Housing Supply Action Plan, an initiative that aims to close the housing shortage within the next five years through a mix of administrative and legislative policies. The plan outlined the creation and preservation of affordable housing units over the next three years, in addition to other key ways:

  • Reward jurisdictions that have reformed zoning and land-use policies with higher scores in certain federal grant processes
  • Deploy new financing mechanisms to build and preserve more housing where financing gaps exist
  • Expand and improve existing forms of federal financing, including for affordable multi-family development and preservation
  • Ensure that more government-owned supply of homes and other housing goes to owners who will live in them or non-profits who will rehab them—not large-scale institutional investors
  • Work with the private sector to address supply chain challenges and improve building techniques to finish construction in 2022 on the most new homes in any year since 2006

New Markets Tax Credits (NMTCs) 

While land use and zoning policies play an integral role in segregating racial and socioeconomic groups and fueling the nation’s housing affordability crisis, the benefits of homeownership remain evident.

One solution is the New Markets Tax Credit (NMTC) program, which incentivizes sustained investments in low-income communities, helping lift neighborhoods out of poverty. By leveraging the NMTC program for affordable for-sale housing, families can access entry-level homes at an affordable price—an option that greatly addresses the housing shortage and transforms communities across the country.

Since 2000, the NMTC program has empowered economically distressed communities nationwide by providing incentives to investors. As the first organization to pioneer using the NMTC program for affordable for-sale housing, increasing the use of this federal tax credit for affordable for-sale housing development will help greatly address the housing shortage—and transform communities across the country.

To learn more about leveraging the NMTC program for your affordable homeownership needs, we’d love to connect with you.

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Published On: October 10, 2023Categories: Housing News