Housing Market Still Coming Up Short

Roughly two years ago, we were asked if a housing shortage truly existed in the U.S. The person keyed in on two key facts. First, that population growth had slowed notably in the U.S., suggesting that demand for housing was not as strong as many had assumed. And second, that several markets in the U.S. had a glut of new apartments, which was pushing up vacancy rates. Those facts seemed incompatible with a housing shortage. But closer examination reveals those facts are not mutually exclusive with a housing shortage and might have even delayed more serious thinking about how to address such a shortage.

At the national level, the demographic profile of the U.S. has certainly changed over the last few decades. The birth rate and the immigration rate (relative to the size of the population) have fallen, which has caused population growth to slow. However, population is not the correct measure of demand for housing. More correctly, households (a unit comprising a dwelling and its occupants) generate demand for housing. Of course, household formation (the growth rate in households) has also fallen over the last five decades. But it still exceeds the population growth rate. To understand this better, we also need to understand the supply story. During the majority of the post-war era, housing supply has largely kept pace with demand. For short periods they have diverged, but they realigned relatively quickly. However, the post-Great Financial Crisis period is different. After the housing meltdown, supply growth, tighter underwriting standards, a tepid economic and labor market recovery, growing NIMBYism and households focused more on repairing their balance sheets than acquiring new assets, all conspired to stymie housing construction. So much so that the growth rate in housing units fell below that of household formation and has remained there since the end of the crisis.

At the current pace of change, it will take more than a decade to close the housing gap.

When we look at the divergence between housing demand and supply, we estimate that shortage is roughly 4 million housing units. But this estimate likely understates the true shortage because limited housing supply actually causes household formation to occur more slowly than it otherwise would. Potential households that feel like they can’t obtain their own housing unit don’t form a separate household. For example, young adults continue to live with parents (or other multigenerational arrangements). Even unrelated people living together can frequently count as one household. Once we make this adjustment econometrically, the shortage increases to 4.5 million to 5 million.

What about the market level? Here, the story differs by location. Some markets have seen a housing development (or at least certain kinds of housing) outstrip demand in recent periods. That has pushed the market-level vacancy rate up in recent years. But that is more than offset by other markets where housing demand still greatly outstrips housing supply. Those markets experience consistently low vacancy rates (with some variation through market cycles). Therefore, while no national housing market technically exists, overall, the demand exceeds the supply. Moreover, even in the markets where vacancy rates have increased in recent years, the forward pipeline has already contracted considerably, suggesting declining vacancy rates and tighter markets sooner rather than later.

At the national level, the demographic profile of the U.S. has certainly changed over the last few decades. … However, population is not the correct measure of demand for housing.

Can this shortage be eliminated? While technically possible, it looks unlikely to end soon. Housing is largely a state and local issue, meaning that national policy (to the extent one could exist) would only have so much impact. Moreover, while some states and municipalities are moving to make development easier, those changes will have marginal results.

At the current pace of change, it will take more than a decade to close the housing gap. But this is where investors can play an important role. Of course, a structural shortage like the one we have suggests that housing in all its various types should remain an attractive property class. Yet, investors can also help to increase the supply of housing by participating in housing development. Certainly, investors cannot do it alone. But housing investment offers the opportunity for both attractive returns and positive societal benefits.

Ryan Severino is the chief economist & head of research at BGO, where he is responsible for global and regional economic research, analysis and forecasting as well as property market research, insights and forecasting. Additionally, he is an adjunct professor at Columbia University and New York University. Severino holds a master’s degree from Columbia University, a bachelor’s degree from Georgetown University, and is a CFA charterholder.

Read the March 2025 issue of CPE.