You won’t find this term in any serious economics book, but the only clinical way to describe the US housing market is bananas. Affordability is at record lows and mortgage rates are the highest since 2000. However, home prices continue to rise, and the number of days a home stays on the market before selling is down by a third compared to this time before the pandemic. Both indicate strong fundamental demand.
The United States needs more housing. The Americans don’t want to build it.
Everyone knows what the real problem with housing is: lack of supply. But what is less well understood is the reason for the persistent shortage of housing for sale and rent. In a market economy, higher prices are supposed to increase supply. At least when it comes to multifamily, government data shows that developers have begun building about 1 million units, surpassing the previous record set in the early 1970s.
But beginnings are not the problem; They’re completions we need to worry about. A combination of bureaucratic red tape and worker shortages prevents all this supply from reaching the market, and in theory helps contain prices and rents. So, although the number of homes under construction has remained near record levels for more than a year, the number being completed each month remains far behind.
This is partly because the ratio of condominiums to single-family homes under construction has reached high levels not seen since the 1970s. Historically, there have been more single-family homes under construction at any given time than apartments. But since May 2022, the relationship has reversed, with more condominiums being built than single-family homes.
It takes more than twice as long to build an apartment building as it does to build a single-family home, or 20 months versus nine months. But that’s just some explanation. A decade ago, it took just 12 months for the average multifamily project to hit the market. This time to completion has since been extended due to burdensome regulation and increased supply constraints.
The Biden administration has made efforts to reduce red tape. The Housing Action Plan offers local governments grants of up to $10 million in exchange for removing regulatory barriers to housing construction. However, even the White House is not expecting much demand. Only $85 million was allocated to fund these grants. The majority of construction restrictions are rooted in local rules, reflecting the most determined desires of citizens to prevent new construction that are difficult to reverse.
In past years, supply constraints were also usually related to issues of obtaining necessary materials, but the biggest problem over the past three years has been labor shortages. In hot construction markets like Texas and Minnesota, wages for construction workers rose more than 10% between 2022 and 2023, yet shortages persist.
The main factor appears to be the difficulty the construction industry has in attracting American workers. According to the National Association of Home Builders, the number of construction workers in the United States was 9.4 million in 2006, and the number of homes under construction was on average 1.2 million. In 2021, the latest year for which data is available, NAHB estimates there are 8.6 million such workers and an average of 1.4 million units under construction.
Industry executives cite factors such as competition for workers from companies like Amazon.com Inc. The perception among young Americans is that construction work is physically demanding. A 2017 survey showed that 21% of adults ages 18 to 25 said it would take a salary of more than $100,000 a year to get them to consider a construction job, and 48% said no amount of money would be enough.
More generally, the construction industry appears to be suffering from the same problems that have plagued most U.S. industries since 2021. The massive surplus of job opportunities over job seekers, coupled with health savings, has given workers the opportunity to inherit the business they were working in. It is considered dangerous, difficult, or extremely menial.
The obvious solution is to increase the number of foreign-born workers. The industry estimates that 2.8 million of these workers were employed in housing construction in 2021. But with the Biden administration’s immigration policy under fire, there is little prospect of any substantive immigration reform that would lead to the hiring of these people. It is true that the White House has a few levers it can pull, but they are unlikely to have a large enough impact.
Housing costs, whether prices, rents or mortgage payments, are out of control. The free market’s natural response to the crisis—oversupply—has been hampered by regulation and worker shortages. The current political reality in America makes any short-term solution, or significant reduction in housing costs, just a distant dream.
More from Bloomberg’s opinion:
• Millennials are right to complain about housing: Justin Fox
• House prices are high and likely fake: John Authers
• The US housing market is now completely broken: Senator Connor
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Carl W. Smith is a columnist for Bloomberg. Previously, he was vice president for federal policy at the Tax Foundation and an assistant professor of economics at the University of North Carolina.
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