The Outlook for US Housing Supply and Affordability

A prolonged slowdown in US housing supply has made it increasingly difficult to afford a home, according to Goldman Sachs Research. Restrictive land use regulations are the most important housing market obstacle, and addressing these constraints could significantly close the gap in supply.

The muted housing growth since the Global Financial Crisis in 2007-09 can be seen in the sharp decline in the share of homes available for sale or rent, Goldman Sachs Research economists Elsie Peng and Pierfrancesco Mei write in a report. Today, both rental and homeowner vacancy rates—the share of total housing stock available for rent and sale respectively—are below those seen in the two decades preceding the crisis and the housing market collapse that triggered it.

These measures of housing stock availability point to a growing gap between supply and demand—the root of the affordability problem. Rents and mortgage payments are taking a bigger chunk of income, according to multiple measures, and the trend accelerated post-pandemic.

The home price-to-income ratio, for example, has surpassed the peak it reached in the 2000s housing boom, according to Goldman Sachs Research. Mortgage rates surged to a 20-year high in 2022 and have stayed elevated since. The average monthly mortgage payment as a share of potential home buyers’ income has risen from below 20% prior to the pandemic to a historically high ratio of over 30% since 2022. Affordability is less of a problem in the rental market, but still, the rent-to-income ratio of today is at its highest level since 1980, Peng and Mei note.

How big is the housing shortage?

Our economists looked at what it would take to restore price-to-income and rent-to-income ratios back to levels seen in the 1990s. They also assessed what would be needed to get vacancy rates back to where they were in that period.

Their analysis suggests that fixing the shortage and restoring affordability will require the addition of around 3-4 million housing units. That’s equal to about 2% to 2.6% of the current housing stock. Researchers elsewhere have estimated that the US housing shortfall is between 1.5 million and 5.5 million units, or as much as 3.7% of today’s supply of homes.

How to make US housing more affordable

One issue limiting the growth in US housing stock is land use regulations, which have become more burdensome over time. They are the “first and most crucial constraint on US housing supply,” our economists write. The regulations come in many forms and are mostly set by local jurisdictions, making large-scale reforms more difficult.

Height restrictions hold construction to a maximum of about two or three stories on around 60% of residential land in the 240 largest US metropolitan areas. That’s similar to the height of a single-family home. Buildings are allowed to rise to five stories or more on just 7% of all residential land. There are also regulations affecting minimum lot size and open space, and rules about the maximum number of households allowed in a building.

“The fragmentation of US land use policies has made large-scale reforms particularly challenging to implement,” Peng and Mei write.

The economists simulated how housing production might respond if regulations in major metropolitan areas were reduced to match the rules that prevail in the 25% of cities with the least stringent land use restrictions. The analysis shows that around 2.5 million more housing units would be added in the next decade under this scenario. This would eliminate about two-thirds of the estimated housing shortage, the researchers find.

There are other constraints beyond zoning and land use rules. There has been a steady decline in land available for housing near city centers. The share of land that is both vacant and available for development has decreased from more than 70% at the start of the 1960s to about 40% today.

“Since land is a fixed resource and it is costly to demolish existing developments, any new development will increasingly face higher production costs as a result of this shrinking supply,” the team concludes. What’s more, in large cities with abundant jobs, empty land for housing is mostly located away from the center, creating a tradeoff between outward expansion and increased commuting costs for workers.

Another drag on housing supply is declining productivity and a shortage of skilled labor in construction. Productivity in the housing industry has been trending lower for decades. While this is partly explained by costs related to land-use rules and land availability, it’s also likely driven by slower technology investment in construction and increased barriers for new homebuilders to enter the market, Peng and Mei write.

As a result, it takes longer than ever to complete housing construction. Average completion times have recently touched all-time highs for both single family homes and multifamily projects.

The result is that housing supply does not rise as quickly in response to higher housing prices—there is less elasticity in the market response. Data show that, between 1970 and 2000, a 1% price appreciation would cause a 0.5% increase in housing supply. In the 2010s, by contrast, the increase in supply dropped to 0.3% by this measure of supply elasticity.

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