Why Housing Supply Has Lagged Behind. NewsWire

NewsWire: 5/20/20

• Even before COVID-19 struck, housing supply around the U.S. was lagging behind demand. Despite low vacancy rates, homebuilders haven’t been rushing to build—a trend that experts attribute, in part, to increasing NIMBYism and growing market concentration. (The Economist)
• NH: Despite an unprecedented decade-long economic expansion (2009-2019), housing starts peaked at the lowest annual level (1.3 million per month during 2019) of any U.S. economic expansion since the mid-1950s. That's despite the fact that the U.S. population has grown by 150% since 1957!
• Why? There are several basic explanations. To begin with, the population growth rate has slowed down, which means there are fewer new people each year who need to be housed. There has been a rising trend in the average number of adults living in each household. Much of the rise is driven by Millennials who prefer to live with each other or with parents. This means an even smaller rise each year in the number of households. (See "Household Formation: Why Is It Declining--and Where Is It Going?") Housing quality is improving, which means units don't have to be replaced as often. And, of course, there was a lot of overbuilding before the last recession, which suppressed demand for several years thereafter.
• But we aren't done yet. The Economist essay outlines three more reasons for the housing industry's sluggish unit output growth over the last decade.
• First--though probably least in importance--there has been a steady ramping up in the cost of production. The import price of raw materials has risen, especially wood (after Trump hiked the tariff on Candian lumber). Meanwhile, construction wages have also been rising. Boomer retirements and shrinking immigration from Latin America are tightening the supply of skilled and semi-skilled workers. Higher costs translate into higher prices and less affordability.
• Second, land-use regulations are tightening almost everywhere, especially in or near affluent urban centers. According to Joseph Gyourko at U Penn, project review times are lengthening and minimum lot sizes are growing. Ed Glaeser at Harvard notes that environmental restrictions on the east and west coasts are often prohibitive for builders. As a result, economic expansion in cities like San Francisco, Seattle, or Boston currently generates only higher wages and higher real-estate prices--with virtually no increase in housing units. (See "Biggest Metros Spawning Greatest Inequality.") A Bank of England working paper points out that the price-elasticity of U.S. housing supply fell steadily during the 2008-2018 decade.
• Third, bankruptcies and mergers coming out of the last recession have led to a smaller number of larger firms in the housing industry. Nationally, home builders can hardly be considered a concentrated industry: The top 20 home builders accounted for 17% of the U.S. market in 2000--and 29% in 2018. That's rising, sure, but not to a point that seems worrisome. In each local market, however, the concentration may be reaching the tipping point. According to Jacob Cosman and Luis Quintero at John Hopkins, only four (or fewer) builders now account for 90% of housing in half of local markets. And only two (or fewer) account for 90% in one-quarter of local markets. They also show that regional concentration is positively correlated with less output and higher prices. See the two charts below.
• In practice, explanations two and three likely work in tandem. Older property owners, once they see their home prices rise, are likely to press for NIMBY regulations that further throttle new construction. A shrinking number of regional builders, who often develop close personal relationships with regulators, local elected officials, and homeowners groups, will quickly figure they can make more money by sitting on new lots or infills than by rushing their projects to completion. The result, even near the end of the decade, was high prices, tight inventory, and surprisingly little new construction.