The underbuilding problem — and what we can do about it

Q: Why is it that we don’t build more new houses? Surely the demand is there. In a country with such a sense of enterprise, how come no inventive company has come up with a solution to this problem?

A: We know there is a shortage of new homes — the so-called underbuilding crisis — but we can’t instantly build our way out of it.

First, there’s an acute labor shortage. The government estimates that in October there were 371,000 job openings in the construction industry. There simply aren’t enough workers.

Second, home construction has been down for a long time.

“After the Great Recession,” says Jeffery Hayward, Fannie Mae’s executive vice president and chief administrative officer, “new-home construction dropped like a stone. Fewer new homes were built in the 10 years ended 2018 than in any decade since the 1960s. By 2019, a good estimate of the shortage of housing units for sale or for rent was 3.8 million.”

Third, new homes cost more than resale properties. In October, the typical new home cost $493,000 versus $379,100 for an existing property. That’s a difference of $113,900 — a huge number, especially when it comes time to finance at today’s mortgage rates.

It might seem as though affordability would be an especially acute issue in high-cost markets, such as those in coastal centers. New research from Fannie Mae shows that the problem impacts even smaller markets with generally lower prices.

Hayward explains that “some of the nation’s most significant shares of housing-cost-burdened households are in less expensive metros such as Fresno, Charlotte, and Las Vegas. Even many smaller metro areas, such as El Paso or McAllen, Texas, do not have a housing supply that is affordable for large swathes of their populations.”

Traditional thinking suggests that the solution to the housing shortage is to build more single-family houses and condos, but that obviously has not worked. The alternative is to redefine housing.

You can see this happening across the country. For instance, lots of people have big houses and big properties, more than they need or want. Rather than let such valuable space sit idle, there is a broad and growing movement to create ADUs, or accessory dwelling units.

Restrictive building rules are now being changed to allow widespread ADU development. For instance, garages can be converted into small apartments, separate units can be built on existing lots and existing homes can be divided to create so-called grannyflats and in-law suites. To encourage ADUs, single-family zoning requirements are now being lifted. For instance, since 2018 Minneapolis has allowed duplexes and triplexes where only single-family housing was once allowed.

The movement toward ADUs is largely invisible but it is real. A 2020 study by Freddie Mac identified 1.4 million distinct single-family properties with accessory dwellings. These units may not be “new houses” in the usual sense, but they provide the affordable housing that many people want and — for many property owners — additional income.