The housing shortage is hurting almost every sector of the economy

If a problem with the American economy is mentioned, it is likely to be related in some way to the country's inability to build enough housing.

In the first two decades of the 21st century, the United States built 5.5 million fewer homes than needed, the National Association of Realtors estimated in a 2021 report. Further exasperating the problem, high-interest mortgages are making homeowners reluctant to sell their homes and losing the low interest rates they earned at the height of the pandemic.

The effects of that housing shortage are rippling throughout the economy, most obviously in the form of skyrocketing home prices that have made it nearly impossible for anyone except high-income earners to enter the housing market.

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

“If affordable housing becomes problematic, that's obviously bad for the United States,” said Mark Fleming, chief economist at First American, a title insurance company. “We need to be able to affordably house the people who live in this country.”

Worst inflation

For most households, housing costs are the largest budget item. That means official inflation rates, which are designed to measure the cost of living, are very sensitive to any changes in housing costs. Housing costs represent 45% of the Consumer Price Index (CPI), the most closely watched measure of inflation.

In fact, rising rents are responsible for the vast majority of inflation as measured by the Consumer Price Index, and are one of the main reasons why the inflation that skyrocketed after the pandemic has not yet fallen until the Federal Reserve's goal of a 2% annual rate.

Whether or not the household budget is affected by changes in housing costs, higher inflation affects the economy in countless ways, such as raising borrowing costs for all types of loans.

“Even if you're not taking out a new mortgage right now, if you needed to borrow to buy a car or invest in a business, or make any kind of major purchase you're going to finance, you'd pay higher rates. As a result,” said Danielle Hale, chief economist at Realtor.com.

Inefficient labor market

Higher housing costs make it much harder to move, meaning it's harder for people to relocate to take jobs they would 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 become too expensive for potential employees to afford, according to a report this week from the Federal Reserve Bank of Boston.

And when jobs and workers have a harder time matching each other, the entire 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 workforce with the right industries and things like that has been a historical hallmark of the American economy,” Fleming said. “Now that everyone is less willing to move because of the financial penalty, that should, in theory, be a drag on the benefits we would otherwise have gained from job mobility.”

That burden has been less than it might be due to the increase in remote work, Fleming and Hale said.

Less economic growth

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

Not to mention, home construction itself is a major contributor to overall economic growth, accounting for between 3% and 5% of gross domestic product (GDP), according to an analysis by the National Association of Home Builders.

“That underdevelopment, in effect, is a loss of economic activity,” Fleming said.

Wealth inequality

For most middle-class families, the value of their home is the largest component of their net worth. People who are unable to own homes due to high costs are deprived of an important opportunity to build wealth, which could widen the gap between the haves and have-nots.

“That wealth creation is very important to the economic success of your household directly and future generations of your household,” Fleming said. “In a market where there is such a shortage of supply, where it is more difficult to become a homeowner than in times past, that means fewer people will be able to reap those wealth-building benefits.”

Why is this happening?

There is 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 brings that to light,” Hale said.

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

The White House report placed some of the blame on the dynamics of local governments. Homeowners often oppose the construction of new homes, reasoning that this will make their own homes less valuable, and they exercise 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 has also been cited as a way to relieve some of the pressure on the housing market. However, high interest rates have made it difficult for homebuilders to capitalize on unmet demand.

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