The United States needs at least 1.5 million additional homes to alleviate the nation's housing shortage, according to a recent report by Freddie Mac.

Housing Market Tightness

In the first quarter of 2024, the homeowner vacancy rate fell to 0.8%, down from 0.9% the previous quarter. This is significantly lower than the 1.6% average from 1994 to 2003, and near the all-time low set last year. Rental vacancies remained flat at 6.6%, well below the historical average of 8.2%.

“To bring the vacancy rate, both rental and homeowner, back in line with historical averages, the U.S. would need to add an additional 1.5 million vacant for-sale and for-rent homes,” states the report. Without these units, housing market pressures will continue.

Rising Home Prices and Limited Supply

Despite higher mortgage rates, the housing market remains tight due to a shortage of homes. Demand continues to outstrip supply, pushing prices to new heights. This week, the U.S. home price index hit a record high, with a 47% surge over the past four years.

Homebuilders have been constructing new units but have not kept pace with demand. The nation’s housing stock increased by 1.6 million units over the past year, reaching 146.4 million units. However, most of these new units are rentals. Owner-occupied homes only increased by 600,000 units, while rentals grew by about 1 million.

Challenges Faced by Homebuilders

The National Association of Home Builders (NAHB) cites excessive regulations, inefficient local zoning rules, and costly building codes as obstacles to construction. NAHB Chief Economist Robert Dietz emphasizes the need for policy changes to accelerate permit approvals, provide resources for skilled labor training, and resolve building material supply chain issues.

“With a nationwide shortage of roughly 1.5 million homes, the lack of housing units is the primary cause of growing housing affordability challenges,” Dietz said.

Underestimating the Shortfall

Freddie Mac warns that the 1.5 million shortfall is likely an underestimate, as it doesn’t account for latent demand and vacant housing not on the market. A 2021 report from Freddie Mac estimated the U.S. needed an additional 3.8 million units to achieve a target vacancy rate of 13%.

Shifting Towards Smaller Homes

Construction of entry-level homes has declined significantly since the early 1980s, with only 65,000 new entry-level homes completed in 2020. Builders are now shifting towards smaller homes to attract buyers frustrated by high prices and mortgage rates. In April, the median new-home sale price was $433,500, slightly down from March but up 3.9% compared to a year ago.

Conclusion

The U.S. housing market faces significant challenges, with a severe shortage of homes driving up prices and making affordability a major issue for many Americans. Addressing this crisis requires a concerted effort from policymakers to streamline regulations, support skilled labor training, and improve supply chains. Additionally, homebuilders must continue to innovate and meet the demand for both rental and owner-occupied units. By working together, we can help ensure that more Americans have access to the housing they need. For more information and updates on the housing market, stay connected with Simply Title.