Home-ownership is beyond the reach of most of the world. Across urban centers and growing suburban areas, housing shortfalls are on everyone’s mind for home buyers, property investors, and policymakers. Why are these shortages occurring, however, and how might they be addressed?

If you’ve been a victim of rising house prices or witnessed homes selling in days of being put on the market, you’re not alone. In this post, we shall examine the prime causes of housing shortages and gain a better idea of the real estate market’s problems and solutions to plug the gap.

How Did We Get Here? Understanding the Origins of the Housing Crunch

The shortage of housing supply did not occur overnight. A blend of historical, economic, and social factors has led to the limitations we currently experience.

The Legacy of Underbuilding

The reason for housing shortages is most often to be found in prolonged periods of underconstruction. Following the 2008 financial crisis, the construction sector was battered. Many small- and medium-sized builders went out of business, and building came close to a standstill. The result? A decade of poor quality development of housing that left us exposed to the surge in demand.

As the National Association of Realtors (NAR) puts it, America needs over 5.5 million units short as it stands and that shortage is building up across decades. That gap between supply and demand keeps widening with each passing year driven by population increases and urbanization that create hunger for more housing.

Higher Cost of Construction

Building homes isn’t an easy feat, and higher construction costs have piled more pressure. These include:

  • Shortages of labor in the construction trades, with fewer youth entering the trades.
  • Rises in material prices, such as the price surge for lumber during the COVID-19 crisis.
  • Increased regulation and zoning ordinances that are more expensive and take longer to build homes.

For instance, prices of lumber in early 2021 rose over 300% and contributed an average of close to $36,000 to the cost of a new single-family home, according to the National Association of Home Builders (NAHB). Prices have come down since but building remains costly.

Zoning and Land Use Policies

Zoning controls and limitation on land use are among the strongest impediments to housing deficiencies. Single-family zoning is most common in the practice of the majority of communities, which restricts the size and number of housing one may construct within an area.

Such policies generate sprawl, widen inequality, and disallow the construction of many types of housing like duplexes, townhomes, and low-income multi-family dwellings. California and other states have begun rezoning to encourage higher density but slowly and sometimes in the face of neighborhood opposition.

Who Is Affected by Housing Supply Shortages?

The impacts of housing shortages ripple through numerous groups of people, widening economic disparities and reshaping the real estate market.

Homebuyers

To prospective buyers, fewer homes on the market means more competition, prices shooting through the roof, and less selection. First-home buyers in particular are faced with steep barriers to getting into the market, with the median price of houses hitting record levels over the past few years.

Renters

Housing shortages don’t just harm homebuyers—they also raise rents. With fewer affordable homes available, low- and moderate-income families pay a disproportionate share of their income for rent, with less left for health care, education, and saving.

Real Estate Investors

While other investors enjoy the benefits of rising property values, others are denied bargains that can yield an acceptable return on investment. The fear of paying more than market value deters many from portfolio building.

Policymakers

The housing shortage presents economic and political problems for policymakers. Satisfying the needs of the developers, residents, and municipalities and ensuring equal access to housing is a complex spider web requiring innovative solutions.

Unraveling the Demand Side of the Formula

Demand-side constraints are no less significant, than supply-side constraints.

Urbanization and Population Growth

Urbanization and population growth across the world have generated increased demands for housing. The United Nations estimates 68% of the world population residing in cities by the year 2050, up from 55% in the year 2018. Cities cannot absorb the influx of people, thereby also placing additional pressure on the housing supply.

Changing Demographics

Millennials—the largest generation currently alive—are moving into prime home-buying ages. Meanwhile, Baby Boomers are retaining homes longer, reducing the inventory of homes for sale. This intergenerational conflict is squeezing the already-thin supply of homes.

Remote Work and Lifestyle Shifts

The COVID-19 pandemic rewrote the rules of how and where we work, and many professionals now work remotely. Remote work has fueled demand for bigger homes, suburban dwellings, and country living, widening shortages in once-neglected areas.

Can We Build Our Way Out?

While the challenges are real, they’re not necessarily insurmountable. Solving housing supply shortfalls demands a multi-pronged approach that involves policy reform, private sector innovation, and community action.

Policy Solutions

It is the responsibility of policymakers to create a housing development-friendly environment. Some of the strongest actions are:

  • Relaxing zoning codes to allow for denser housing and mixed use.
  • Simplifying the permitting process to reduce development delays.
  • Providing financial incentives to developers to build affordable housing units.

Examples of Minneapolis and Portland, which have eliminated single-family zoning in favor of more flexible policies that encourage a range of housing types.

Investment in Technology and Innovation

The private sector can innovate by way of construction technology. Technologies like 3D printing, prefabrication, and modular construction can reduce the cost of construction and construction duration.

An example of this is ICON, which is a Texas-based firm that is applying 3D printing to build affordable homes within 24 hours. These innovations have the potential to alter the manner in which we perceive addressing house affordability and how we go about construction.

Reimagining Community Planning

Innovative inclusive community planning will be capable of solving housing supply shortages in ways that promote economic growth and sustainability. With smart growth strategies—transit-oriented development and mixed-use communities—the affordable, human-scale communities everyone deserves are within reach.

A Future Beyond Shortages

Housing supply shortages are an interconnected issue encompassing everyone from private consumers to economies as a whole. Solving them will take bold action, innovative imagination, and collaboration across parties.

No matter if you’re a prospective buyer trying to sort through a contentious market, an investor looking to invest, or a policymaker with a view to the future, challenges which we now have in front of us present an opportunity to inform the neighborhoods and the homes of the future.