Is America Running Out of Homes? A Loaded Question

The housing crisis in the United States has reached alarming levels, and families are feeling the squeeze. Interest rates are high (well, higher than what most new buyers are used to), prices of homes are daunting to many, and finding that starter home we all talk about is either in an area many don't want to live, or held down by a retiree who has zero reason to downsize. Especially when downsizing means upsizing your expense.

WTH? Are We Really Running Out of Homes?

There are multiple theories as to what is happening. All are credible and there is likely no simple answer. Supply and demand is the simple answer. If there is massive demand but no builder sees a grandiose opportunity, what gives? This shortage seems to be doing more than just causing many to throw their hands up and sign a rental lease—it is changing the way some see the function of homeownership in their lives.

It is no secret that buying a home has never been an easy feat. Sure, there have been times of special new homeowner borrowing rates, tax credits and little to zero down payments (see 2008 for the byproduct here). But tackling a 30-year commitment on a dollar amount sometimes more than four times your salary is a leap. Seeing the long term value of home equity is tough when you are in your 20’s and 30’s. And understanding that a mortgage payment is one of the most amazing inflation busters in personal finance is hard when it tightens today's wallet. This is why owning a home is considered such an accomplishment. Not only financial but mental.

Recent times have uncovered a shift in appetite. From many of our grandparents celebrating that two-bed, one-bath home and eventually moving up to a 3-bed, 2 bath, there now seems to be a couple different camps. One camp wants a tiny home and the other believes the starter home is a minimum of 3,000 square feet, with a two-car garage, home office and a multi-media room. It is great that we live in amazing times and that this is a possibility, but there is a large part of the population that simply can't play at this level. Not everyone can play the subject of a Realtor.com commercial. Some are starting from a dead-stop while others are already rolling.

The big question is ‘why are we running out of homes, especially starter homes?’ We build cars for all levels of income. We make food, furniture and consumer goods for all levels, as well. But it seems we went off track with housing at some point.

Where are the Starter Homes?

With limited affordable homes to choose from, many are left struggling. A crucial factor contributing to this dilemma is zoning restrictions. While these regulations are meant to maintain community standards, they often end up restricting the availability of starter homes, which are essential for many starting out.

Zoning regulations emerged in the early 1900's and dictate how land can be used in specific areas. These laws govern what types of buildings can be constructed, how tall they can be, and, in some cases, how many homes can be built on a plot of land. They are important. Nobody wants a dance club going up in their neighborhood or a chemical factory being built next to a children's playground. Nor would someone in a three million dollar home want a mobile home parked next door. It kills the vibe. Heck, even pickleball and its noisy play has the neighbors collecting signatures to give it the boot in some neighborhoods.

While zoning is intended to help plan communities and ensure they serve local needs, it often stifles the construction of new homes—setting minimum size standards, lot size standards and even building materials. This issue has been an elevated focus across the US as of late.

Today, many cities still apply outdated zoning codes that fail to adapt to the needs of their growing populations. According to some estimates, more than 75% of cities utilize zoning regulations that prevent the development of multi-family housing, further compounding the housing shortage.

Coming Up Short

According to the National Association of Realtors, the United States is short nearly four million homes. This deficit is most acute in urban areas, where zoning laws often limit the creation of affordable housing. 

In cities like San Francisco, where zoning laws heavily restrict the construction of duplexes and triplexes, the result is skyrocketing housing prices. For instance, a study found that the median home price in San Fran reached approximately $1.5 million in 2023, significantly out of reach for most first-time homebuyers. Remember, Danny Tanner's San Francisco home from Full House wasn’t realistic.

All yours for a measly $6.5mm

The Starter Home Problem

Starter homes are vital for individuals and families looking to enter the housing market and build equity. These smaller, affordable properties are crucial for younger households. Due to zoning regulations favoring larger single-family homes, larger lots, or a plethora of other rules the availability of starter homes has dropped. 

In cities like Austin, the stock of homes priced under $300,000 has decreased by over 50% in the past decade, as developers pivot towards luxury projects. This shift leaves many potential homeowners struggling to find options within their financial means. This also means that demand is hot and opportunity could be lurking for the builder how wants to do it right. The numbers just need to work.

The Forever Renter - How Will This Look Long Term?

According to research from the Economic Policy Institute, about 30% of renter households in the U.S. spend over half of their income on housing. Someone catches a case of bad luck or a job loss and poof! This situation contributes to rising eviction rates. 

It has been widely reported that many folks love to rent, will always rent and think buying is dumb. I am sure there are plenty that do feel this way. But, the skeptic in me wonders if we are seeing the real diamond vs. lab diamond debate. Some say, “You are crazy to buy a real diamond when the lab ones are better and cheaper.” Okay, if you could afford the real one would you still buy the fake one and gloat about it? What is driving the trend?

There is also concern around the cost control factor later in life. Having a home as an asset later in life provides an asset to borrow against, sell and invest for income, or to simply cut a huge expense from your fixed budget. Are the forever renters factoring in the inability to control this cost and saving more to hedge it?

Where Did These People Go?

To add to the complexity of this question we now look at data on rental vacancies. Peak vacancies in July 2020. Then a huge trough. Now back to peak vacancies? Where did these people go? Did they move back home, find roomates, buy homes, or get beamed into outer space? Or maybe apartment complexes boomed and now supply is high in certain areas. A lot of experts have the answer, but nobody has a definitive one.

Stuck in Orbit

Covid created a moment of hope. People left the ball and chain of cities and found lives outside of the pricey areas. The ability to work from anywhere has certainly spread the love of homeownership to more affordable areas. Progress was beginning to simmer.

But as quickly as it began, companies are trying to reverse course and want butts in seats. The traffic is piling up, smog has reappeared and although some lucked out and kept flexibility, many found themselves back in the orbit of high-priced housing due to their physical work location.

Like anything, sometimes the fever has to break for a trend to change course. Incentives, technology, demand, etc. will all play a role. Or maybe it will be something else surprising. Nonetheless, the effects will be felt as a ripple for decades to come.