COVID set off a shift in household formation patterns that has not been seen since the early 20th century, according to a report released yesterday, and that shift has exacerbated America’s undersupply of housing.
Up For Growth‘s 2023 Housing Underproduction report found that housing undersupply grew another 3 percent to 3.9 million “missing homes” between 2019 and 2021, and the number of undersupplied counties grew 32 percent.
While more units were delivered in 2020 than 2019, many of the dwellings came online in the more urbanized markets that residents were leaving following the onset of the pandemic, and the markets they moved to—mostly suburbs— become undersupplied or more undersupplied.
The report identified 81 “Migration Magnets,” U.S. counties with a population at or exceeding 10,000 residents that grew more rapidly after March 2020 than they were growing before the pandemic, and experienced rates of underproduction in excess of 2 percent of their total housing stock.
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Many of the “migrants” also moved to small towns. According to the study, housing formation in small towns grew by 300,000 in 2020 and 2021, while new housing construction fell 13 percent due to lack of adequate infrastructure and lack of labor supply.
“When you look at all the communities that have changed over the past few years, this is not an urban problem,” said Concord Group Principal Tim Cornwell during Up For Growth’s Annual Changemakers Summit in Washington, D.C., where the report was launched. “This is spreading throughout the United States.”
The flood of new households not only pressures the housing inventory, it also puts the squeeze on affordability since many of the new residents, with the help of technology and remote work policies, brought their high-paying jobs with them, thereby pushing up the average income for the areas and the average spending budgets for housing.
“People are leaving high-cost areas because of the underproduction in those communities, and the income issues—people aren’t earning sufficient income,” said Bryan Greene, vice president of Policy Advocacy for the National Association of REALTORs. “But then people are moving to other areas. Sometimes they are people of means, and sometimes they are people not of means who are looking for more affordable housing, and that is creating problems in these communities. There is nowhere to run or hide from this issue.”
The report also underscores how a history of exclusionary zoning, land use restrictions, and housing discrimination helped lay the ground for today’s lack of housing. As a result of those policies, three-quarters of the land in many cities today is zoned for single-family when more dense housing is what is needed, and people of color continue to be disproportionately impacted.
“Although race-based zoning ordinances were ruled unconstitutional, they were soon replaced with use-based zoning codes deployed to similar effect,” the report’s authors wrote.
Tighter lending standards resulting from the Great Financial Crisis also slowed the rate of production, which has still not returned to pre-recession levels 15 years later.
A Challenging Outlook
Housing production was moving at a fairly strong pace during 2020 and 2021, but soaring inflation and the subsequent tightening by the Fed has put the brakes on most developers’ future pipelines. That casts a shadow on deliveries in 2026, particularly affordable ones.
Bozzuto Group Chief Administrative Officer Julie Smith described an affordable senior project that the company was considering developing. Each unit would cost $475,000 to build, and that was not including land, design fees and other expenses. The cost to finance the project is also higher as interest rates have risen, and banks have become more conservative. And, affordable is no less expensive to build since 85 percent of what goes into an affordable project is the same as as what goes into a market-rate project, Smith noted.
“If you can get a loan today, your proceeds are much less,” she explained. “Even though rents have risen, it doesn’t pencil out.”
Meanwhile, the construction industry faces a labor shortage of 650,000 as fewer young people pursue the building trades, according to the report. So, even if projects could get financed, it will be a challenge to get them built. “This labor supply issue is a real problem,” Smith said.
On an opportunistic note, lack of housing and the shortage of affordable housing seems to have become a bi-partisan issue politically, Greene said. But merely offering residents rent relief will not solve the problem, and will likely to make it worse. “In terms of solutions, I think we need to be clear there are two sides: the demand side as well as supply side,” he observed.
While the opening panel of Up For Growth’s Changemakers Summit spelled out the problem, the remainder of the conference focused on solutions, with housing advocates, city planners, developers and government officials at all levels coming together to swap strategies and success stories.
Keynote speakers included Montana Governor Greg Gianforte, who spoke about the sweeping package of housing reforms in his state that has been called the “Montana Miracle,” and the Honorable Troy Hashimoto, state representative from Hawaii’s District 10 and chair of the Housing Committee, who discussed efforts to build back better following the devastating wildfires in Lehaina.
