Housing Market Decoded: The housing deficit, and how to fix it
Housing issues have made their way into presidential politics, but federal policies are unlikely to make a dent in the undersupply in the short-term.
Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.
Both of the major party candidates for president have discussed housing affordability on the campaign trail, and housing is the number-one issue for young voters this election.
A lack of supply is the primary driver of high home prices and worsening affordability in the U.S. Because of the national attention on housing, there has been an uptick in the amount of reporting on the housing shortfall in America.
The numbers
While there is widespread agreement that there is an undersupply of housing in America, there is also a wide divergence in the estimates of exactly how large the housing deficit is. The estimates of the housing shortfall range from 1.5 million, according to analyses of the National Association of Home Builders (NAHB) and Freddie Mac, to a high of 5.5 million units, an estimate produced by the National Association of Realtors.
The explanation
That's a big range but, in general, the differences depend on the ways in which the numbers were produced. Both the NAHB and Freddie Mac estimates rely on assumptions about long-term housing vacancy rates. The approach by Moody's Analytics also takes into account pent-up household formations. Up for Growth, a national housing member network, goes one step further and nets out second and vacation homes, as well as uninhabitable units, leading to their higher estimate. NAR takes a totally different approach by comparing current levels of housing construction with historic averages, leading to the highest of the estimates of the housing shortfall in the U.S.
The different numbers can create confusion, but the important takeaway is that there is simply an insufficient supply of housing to meet demand.
Housing issues are gaining traction at the local, state, and, increasingly, the federal level. For the first time in recent memory, housing has been part of the presidential candidates' platforms.
A federal fix for the housing shortage?
The Harris-Waltz campaign has put forth a proposal that includes incentives to promote new housing construction, including tax incentives for building starter homes, recommendations for streamlining permitting processes, and initiatives to stop predatory investing in single-family homes. The Democratic candidate's goal is to facilitate the production of 3 million housing units over four years.
So far, the Trump-Vance campaign has not issued a specific plan to address the housing shortfall. However, the candidate has suggested that his administration would reduce government regulation and curtail immigration to expand the housing supply.
Both candidates have also put forth policy ideas that would not help solve the affordability challenge.
For example, Kamala Harris has proposed up to $25,000 in down payment assistance for first-time homebuyers. However, without increasing supply, down payment assistance programs will simply increase the number of buyers in the market and push home prices up further.
Meanwhile, Donald Trump has floated the idea of a greater role for the president in setting interest rates in order to reduce homebuying costs. The Federal Reserve, which sets short-term interest rates, has historically acted independently from the administration. Economists broadly agree that presidential involvement in rate setting is a bad idea.
Solutions will take time
There is no magic bullet and no short-term fix for increasing the housing supply. The most effective federal solutions are those that encourage new construction and motivate homeowners to sell their homes, which would increase the inventory available for homebuyers.
Also important are incentives for local and state governments to reduce regulation that adds to the costs associated with homebuilding.
Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.