The American dream of homeownership is slipping away for millions of Americans due to persistent affordability challenges. To restore this aspiration, the United States needs a substantial increase in new home construction, according to a recent report from Ned Davis Research (NDR).
The Root of the Crisis
“Years of rising house prices, modest income growth, and high mortgage rates have made housing unaffordable for large swaths of Americans,” stated NDR strategist Joseph Kalish and economist Veneta Dimitrova in a note released on Wednesday. Over the past year, the 30-year fixed mortgage rate has hovered around 7%, briefly reaching 8% at the end of 2024 before dropping again.
The Shortage
The research firm highlighted a shortage of 2.2 million homes, exacerbating the affordability crisis. This deficit is primarily due to a prolonged period of underbuilding following the 2008 US housing crash. “Since 2015, we have been warning about a chronic housing shortage, leading to a supply/demand imbalance. Following the Great Financial Crisis, new residential construction effectively stopped, and we have been trying to catch up ever since,” NDR noted.
Challenges to Increasing Supply
Despite a renewed focus on boosting home supply, numerous obstacles remain. Rising development costs across various sectors indicate that housing supply will likely stay constrained for years. Factors such as higher insurance premiums, elevated taxes, increased capital costs, soaring land prices, and stringent environmental regulations have combined to severely restrict the nation’s capacity to build enough homes.
Moreover, increased labor costs present another significant barrier. The recent surge in immigration, traditionally a source of labor in the construction industry, has not alleviated the labor market tightness. “The wave of immigrants has not seemed to impact the supply/demand balance for workers, a traditional area for Latino immigrants,” NDR said. Federal Reserve Chair Jerome Powell has mentioned that the influx of immigrants could help rebalance the labor market. However, these immigrants will eventually require permanent housing, further increasing demand, keeping rents high, and preventing the Federal Reserve from sustainably achieving its 2% inflation target.
Future Outlook
For prospective buyers, the outlook is bleak. Higher home prices appear to be the new norm, with no significant correction anticipated. If the Federal Reserve cuts interest rates, leading to falling mortgage rates, home prices could rise even more, making affordability a persistent issue.
In conclusion, to revive the American dream of homeownership, the United States needs to address the deep-seated supply shortage and tackle the multifaceted challenges that hinder new home construction. Only then can the nation hope to make homeownership attainable for the broader population once again.
