What’s the Real Reason Behind the Housing Shortage?

A report by Business Insider states that labor shortages, lack of available lots, and higher material costs—although key talking points of Federal Reserve Chairman Jerome Powell—are not what’s holding the housing industry back. 

The report from Business Insider said many ignore that the housing-supply shortage is a “self-inflicted wound from policy mistakes” made by many local governments. 

Restrictive zoning and regulations, which have all been enacted by local governments, are the real reasons behind today’s housing shortage, the report states. 

Recent data from the AEI Housing Center revealed California markets, Los Angeles, San Jose, and San Francisco, as well as Seattle, Washington, and Denver, Colorado, has seen construction activity fail to keep up with employment growth. 

Data shows that the influx of people and slower pace of construction has resulted in growing home price appreciation (HPA). In the aforementioned markets, new-construction shares for all sales averages about 10%, while HPA has averaged nearly 60% since 2012—three times the income growth. 

Regarding material costs, the report states the logic of building materials being more costly “appears flawed.” 

“Raw material prices, as well as lending practices, don't vary much across the country. While in the short run higher tariffs can certainly cut into margins, lumber prices, after spiking from 2017 to mid-2018, have now fallen back into the same range they had for from 2013 to 2016,” the report states.  

Home prices, however, grew 3.4% in May, according to the latest CoreLogic Case-Shiller Home Price Index. 

The 10-city composite annual increase came in at 2.2%, which is a slight decrease from 2.3% in the previous month. 

“Despite the stabilization, home price growth has slowed from over 6% in early 2018 to less than 3% in May,” said Tian Liu, Chief Economist at Genworth Mortgage Insurance. “That slowdown has made homes less attractive as an investment, especially for investors with a shorter time horizon, even though the cost of financing has decreased. This is one factor contributing to the slower than expected rebound in home sales this year.”