The Myth of the Housing Shortage
There’s a widely accepted belief in American economic discussions that the U.S. is currently facing a significant housing shortage. Institutions ranging from the Brookings Institution to the Urban Institute, and even entities like Freddie Mac and Harvard’s Joint Center for Housing Studies, almost unanimously agree: the nation has not constructed enough homes.
The estimates regarding how many homes we’re lacking differ—Freddie Mac claims the shortfall stands at 3.7 million, while Brookings cites 4.9 million. The National Association of Realtors goes even further, estimating a deficit of about 5.5 million.
It often seems overwhelmingly clear. Consider the skyrocketing home prices and relentless increases in rent. Home construction has fallen behind historical norms and is on a downward trend. Politicians often find themselves elected on promises to control rent prices or boost housing availability. For many younger Americans, not being able to buy a home is a leading concern.
Many, it seems, point fingers at restrictive zoning laws that hinder developers’ ability to build homes in response to rising prices. There’s a push to encourage local governments across the country to modify these zoning laws, particularly those related to density.
However, the strong consensus among experts and the push to alter local regulations should be concerning for conservatives. It turns out that the housing shortage argument is rather narrow in focus. Advocates promoting government interventions to increase housing supplies seem to be, well, addressing outdated issues.
The Coming Collapse in Housing Demand
This typical narrative of a housing shortage heavily draws from experiences over the last twenty years. Yet, demographic forecasts for the next two decades paint a different picture.
The Census Bureau anticipates America’s population will peak at about 370 million around 2080 before starting a gradual decline. This projection, however, is based on the assumption that immigration rates remain high.
In a scenario where immigration levels are lower, population growth would peak earlier—around 346 million in 2043—and would then start to decrease, potentially reaching 319 million by the year 2100.
This scenario seems increasingly likely given the current sentiments regarding immigration policies.
Furthermore, the Congressional Budget Office’s latest forecast suggests that population growth could hit zero by 2056, and by 2030, deaths might start to outnumber births. That’s not far off.
More crucially, household formation, which directly influences housing demand, seems poised for a significant decrease.
According to projections from Harvard’s Joint Center for Housing Studies, the U.S. could witness an increase of 8.6 million households from 2025 to 2035, but only 5.1 million from 2035 to 2045. This could mark the slowest rate of household growth in over a century.
But those figures represent optimistic estimates. In a low-immigration context, the growth could drop to just 6.9 million households in the next decade and further decline to 3.2 million in the following one.
That’s only about 320,000 new households each year from 2035 to 2045.
Meanwhile, the aging baby-boomer generation will begin selling off their homes as they pass away or choose to downsize. As a result, Harvard predicts that new housing construction demand may drop to around 1.1 million units annually over the next decade, decreasing to only 800,000 from 2035 to 2045. The low-immigration prediction suggests this could instead fall to just 610,000 units each year.
Now, let’s think about the current pace of homebuilding.
The Census Bureau reported that housing completions were at an adjusted annual rate of 1.192 million in September.
Put simply, construction rates are already exceeding Harvard’s baseline estimates for demand over the next ten years, and they’re almost double the low-immigration forecast for the decade afterward. If we maintain this construction pace, we might just erase Freddie Mac’s estimated shortage in less than ten years.
The War on Zoning
Yet advocates for housing reform are calling for significant alterations to communities across the nation, especially targeting the removal of zoning laws that cap residential density. Their belief is that these restrictions limit supply, causing prices to rise.
This perspective often ignores the reasons for these restrictions. Many Americans pay a premium to live in neighborhoods that are low-density, featuring spacious lots, quiet streets, privacy, and a certain predictability in their environment. Zoning aids in preserving these appealing aspects.
In fact, research indicates households have specific preferences for less density. Zoning also offers crucial protection against uncertainty when investing in a significant, long-term asset like a home.
When families buy homes in areas with zoning regulations, they expect the community’s character to remain stable. Such assurances tend to enhance property values. Removing these laws could undermine the value homeowners have invested in.
Interestingly, while housing economists might view the premium attached to restrictive zoning as a market distortion, some of that premium reflects real value that buyers are willing to pay.
In many respects, zoning reflects the triumph of local interests over those of developers and real estate agents. The latter groups would ideally see fewer zoning constraints. Surprisingly, the ones opposed to easing those restrictions are often homeowners.
It’s rather short-sighted to suggest sweeping changes to well-established communities in response to a housing issue that demographic trends may indicate is losing urgency.
Before we rush to revise zoning regulations to accommodate millions of presumed missing homes, perhaps it would be wise to consider whether such homes will genuinely be necessary.
The biggest housing blunder of the next generation might not be a shortage but rather overbuilding.
