The Housing Shortage Is Hurting Almost Every Part of the Economy

Name a problem with the U.S. economy, and chances are it’s connected in some way to the country’s failure to build enough homes.

In the first two decades of the 21st century, the U.S. built 5.5 million fewer homes than were needed, the National Association of Realtors estimated in a 2021 report. To further exasperate the issue, high interest mortgages are making homeowners reluctant to sell their homes and lose the low interest rates they got at the height of the pandemic.

The effects of that housing shortage are rippling through the economy, most obviously in the form of soaring home prices that have made it nearly impossible for anyone but high-income earners to get into the housing market. 

Beyond that, the housing shortage has caused problems with inflation, economic growth, job creation, and wealth inequality, for starters. 

“If accessibility to affordable shelter becomes problematic, that’s obviously bad for the U.S.,” said Mark Fleming, chief economist at First American, a title insurance company. “We need to be able to shelter—affordably—the people who live in this country.” 

Worse Inflation

For most households, housing costs are the biggest single budget item. That means official inflation rates, which are designed to measure the cost of living, are highly sensitive to any changes in housing costs. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation.

Indeed, rising rents are responsible for the vast majority of inflation as measured by the Consumer Price Index, and are a major reason why inflation that spiked after the pandemic hasn’t yet fallen to the Federal Reserve’s goal of a 2% annual rate.

Whether or not your household budget is affected by changes in housing costs, higher inflation affects the economy in countless ways, for instance, driving up borrowing costs on all kinds of loans.

“Even if you’re not taking on a new mortgage right now if you needed to borrow to buy a car or to invest in a business, or make any sort of major purchase that you’re going to finance, you would pay higher rates as a result,” said Danielle Hale, chief economist at Realtor.com.

Inefficient Job Market

Higher housing costs make it much more difficult to move, meaning it’s harder for people to relocate to take jobs they might otherwise prefer. That also makes it harder for employers to find the workers they need. 

For example, Cape Cod businesses have had trouble hiring because housing has gotten too expensive for prospective employees to afford, according to a report this week by the Federal Reserve Bank of Boston. 

And when jobs and workers have a harder time matching with one another, the whole economy is less productive, a report on the housing shortage by White House economists noted in March. 

“The strength of the labor market in terms of matching the right labor to the right industries and stuff like that has been a historical hallmark of the U.S. economy,” Fleming said. “Now, with everybody being less willing to move because of the financial penalty, that should, in theory, be a drag on the benefits that we would otherwise have gotten from labor mobility.”

That drag has been less than it might otherwise be because of the rise of remote work, Fleming and Hale said.

Less Economic Growth

The economy is also missing out on all the activity generated by moving. For instance, economists cited the frozen housing market as a reason that sales of furniture and appliances have been falling. 

Not to mention, homebuilding itself is a major contributor to overall economic growth, making up 3% to 5% of the gross domestic product (GDP), according to an analysis by the National Association of Homebuilders.

“That underbuilding, in effect, is lost economic activity,” Fleming said. 

Wealth Inequality

For most middle-class families, the value of their home is the biggest component of their net worth. People shut out of homeownership because of high costs are shut out of a major opportunity to build wealth, potentially widening the gap between financial haves and have-nots.

“That wealth creation is very important for the economic success of your household directly, and future generations of your household,” Fleming said. “In a market where there’s such short supply, where it’s harder to become a homeowner than in times past, that means fewer people are going to be able to gain those wealth creation benefits.”

Why Is This Happening? 

There’s no single cause or solution to the housing shortage, Hale said.

“The economy is big and interconnected and thinking about the impacts of the housing shortage bring that to light,” Hale said.

However, experts say one major factor is zoning laws in cities and towns across the country, which restrict how much and where housing can be built.

The White House report pinned some of the blame on dynamics in local governments. Homeowners often oppose the construction of new housing, on the logic that it will make their own homes less valuable, and wield political power to restrict new construction. President Joe Biden’s administration proposed using federal funds to encourage zoning reform as part of a broader effort to promote affordable housing in 2022.

Building more new homes also has been cited as a way to relieve some of the pressure in the housing market. However, high interest rates have made it hard for homebuilders to capitalize on the unmet demand.

“The economy just hasn’t built enough homes to keep up with households that have formed over the last 10 years,” Hale said. “One of the things that makes it such a big problem is that there is no one single solution. It is going to require dedicated interest from local officials and state officials and federal officials thinking about how we can improve policy to tackle the shortage.”