In case you were curious, this week, I’m examining the Four Factors Causing the Housing Shortage That You Must Know.

The 2021 housing market has been insane!!

There really are no other periods in history that compare to 2021 in terms of robust sales activity.  According to REALTOR Magazine, a National Association of Realtors publication, “From listing to contract, homes typically sold in 17 days in April, the fastest rate ever.”  Homebuyers no longer have the luxury of taking their time to contemplate the pros and cons of a particular property.  Instead, they must strike immediately if they want the possibility of getting the home of their choice. 

The current activity in the housing market is a confluence of several factors resulting in historically low inventory.  The housing shortage can be traced to 4 unprecedented circumstances

1.  Historically Low Interest Rates

Congress has given the U.S. Federal Reserve Bank (Fed) two mandates for monetary policy: first, to promote maximum employment; and, second, to maintain stable prices, meaning low, stable inflation. This “dual mandate” brings about a third, lesser-known goal of moderate long-term interest rates. Currently the Fed has been implementing an easy money policy to allow cash to build up within the banking system thereby making it easier and cheaper for banks to make loans. The central bank has indicated that the low interest rates could remain in place through late 2023.

Low interest rates make mortgages cheaper for homebuyers and thus drives demand.  Despite the increased cost of homes, buyers still want to purchase properties at these historically low rates.  For instance, a home that sells for $500,000 will have a monthly mortgage payment of $2,684 with a 5% interest rate.  The mortgage payment goes down to $1,976 if the interest rate is reduced to 2.5%.   FOMO (Fear of missing out) has taken hold due to these types of savings.

2.  Building Shortfalls

Up until the housing bubble burst in 2006, America had a surplus of 2.1 million housing units. That’s 2.1 million more units than were needed. When the housing market crashed, home building stopped which allowed demand to catch up to the supply.  By 2015, the surplus had given way to a 2-million-unit shortfall.  At the end of 2020, the housing shortfall was 4.8 million homes.  Even if home construction bounces back to 2006 levels, it will be years before housing inventory rises to meet demand.

3.  Fewer Skilled Tradespeople

Another issue that is not often discussed is the lack of skilled plumbers, carpenters, electricians, etc. to build more housing. Prior to the 2006 recession, there were about 900,000 construction companies building homes, an all-time high. After 2006, many of these construction companies closed and their workers took jobs in other industries.

The trade labor shortage is caused by the disparity between retiring skilled workers and those that are entering the workforce.  Baby boomers are leaving the workforce in large numbers, but not enough young people are opting to take their place.

School systems have contributed to the lack of skilled workers by prioritizing 4-year college and university education over trades.  Many educators have pushed a false narrative that skilled workers are poorly educated or less intelligent than college graduates.  The reality is that skilled workers spend many years honing their craft as apprentices and journeymen (or women) and are required to complete rigorous training programs to become a master in their chosen field.   

Training more skilled workers is a no-brainer.  It would address the housing crisis in the U.S. while providing more high paying jobs that don’t require a college degree.  One other benefit of trade school education would be a reduction in student loan debt.  In the meantime, construction companies are using skilled immigrants to meet short-term needs.  Unfortunately, the skilled labor shortage will take years to be reversed.

4.  Restrictive Zoning Laws

Readers of social media were shocked and outraged by a recent article that blamed the lack of available housing on baby boomers who are not selling their homes.  Baby boomers are the group of Americans born between 1946-1964 during the post-World War II baby boom.   Apparently, baby boomers make up 23% of the U.S. population but own 44% of the real property.  The author surmised that the housing shortage would just go away if the boomers would sell their homes.  The argument is absurd, of course.  Baby boomers have purchased their homes and have the right to continue living in their homes if they so choose.

One issue that older Americans are guilty of is NIMBY, or “not in my backyard”.  In many areas where building proposals are presented by developers, the plans can often be scrapped based on the objections of local homeowners who avail themselves of zoning laws. 

What is Zoning?

Zoning is a restriction on the ways you can use your property.  Local governments are empowered to make zoning rules and regulations in New York State.  These rules affect residential, commercial, and industrial districts.  Some local governments restrict building height, building size, the distance of the building from the street and type of structure.  Additionally, a landowner, including a developer, cannot use a property in a way that causes injury to others.  For instance, if something on your property disturbs your neighbor’s use or enjoyment of their property, your neighbor can file a lawsuit against you.  The lawsuit can seek money damages or an injunction, which is a court order forbidding you from engaging in the harmful activity.  A possible result is that only one-family homes get built in areas with existing one family homes even though that community may need townhouses or an apartment complex to satisfy demand.

The collapse of the Surfside condominium complex in Florida put the importance of zoning laws front and center.  It is crucial that homes be constructed that are safe for residents and the community at large but there should be balance.  Zoning laws can be costly and time consuming and often cause developers to settle for housing that is satisfactory to some but does not meet the overall needs for more housing.

In Conclusion…

There are complex problems that affect today’s housing market.  Four factors causing the housing shortage are low interest rates, building shortfalls, a lack of skilled workers and restrictive zoning.  These trends were years in the making and will take years to rectify.  Meanwhile, national median home prices are expected to rise 9% this year and 3% in 2022.  Fanatical homebuying is expected to decrease as supply increases and affordability challenges continue.