The Impact of Housing Shortages on the U.S. 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, according to a 2021 report by the National Association of Realtors. This housing shortage has caused ripple effects throughout the economy, affecting jobs, economic growth, wealth inequality, and inflation.
Worse Inflation
For most households, housing costs are the biggest single budget item. Housing costs make up 45% of the Consumer Price Index (CPI), the most widely watched measure of inflation. Rising rents are responsible for the majority of inflation as measured by the CPI, and are a major reason why inflation spiked after the pandemic hasn’t fallen to the Federal Reserve’s goal of a 2% annual rate. Higher inflation affects the economy in countless ways, such as driving up borrowing costs on all kinds of loans.
Inefficient Job Market
Higher housing costs make it much more difficult for people to move, meaning it’s harder for individuals to relocate to take jobs they might prefer. This also makes it harder for employers to find the workers they need. The strength of the labor market in terms of matching the right labor to the right industries has historically been a hallmark of the U.S. economy. However, with fewer people willing to move due to financial penalties, this could be a drag on the benefits that would otherwise come from labor mobility.
Less Economic Growth
The economy is missing out on all the activity generated by moving due to the frozen housing market. For instance, sales of furniture and appliances have been falling as a result. Homebuilding itself is a major contributor to overall economic growth, making up 3% to 5% of the gross domestic product (GDP). The underbuilding of homes results in lost economic activity.
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 due to high costs are missing out on a major opportunity to build wealth, potentially widening the gap between financial haves and have-nots.
Why Is This Happening?
There is no single cause or solution to the housing shortage. Zoning laws in cities and towns across the country restrict how much and where housing can be built, contributing to the issue. Homeowners often oppose new housing construction, fearing it will devalue their own homes, and use political power to restrict new development. President Joe Biden’s administration has proposed using federal funds to encourage zoning reform as part of an effort to promote affordable housing in 2022.
Building more new homes has been cited as a way to relieve some of the pressure in the housing market. However, high interest rates have made it challenging for homebuilders to capitalize on unmet demand. Addressing the housing shortage will require dedicated interest from local, state, and federal officials to improve policies and tackle the issue.
In conclusion, the housing shortage in the U.S. is having far-reaching impacts on the economy, affecting inflation, job mobility, economic growth, and wealth inequality. Addressing this issue will require a multifaceted approach that includes building more homes, reforming zoning laws, and addressing high interest rates that hinder home construction. By taking action to alleviate the housing shortage, the U.S. can work towards a more stable and equitable economy for all its citizens.
