Home completions are at the highest levels in almost 20 years. And yet there was a gap of 3.7 million homes between the demand and supply of housing, leaving hundreds of thousands – especially younger Americans -- out in the cold.
According to a study by Realtor.com, the shortage in housing is partly due to a factor it calls “the headship rate” – the rate at which the population forms households. It has fallen for the 18-44 year age group for more than 10 years. “By comparing today’s millennial and Gen Z headship rates to those of similarly aged Americans in the early to mid-2010s, we can estimate “pent-up” housing demand and paint a more complete picture of the housing supply gap,” the study said.
In 2014, there were 685,000 households in the 18-44 year age group with pent-up demand; the total shortage for all households was 745,000. By 2024, there were 1.63 million households in this millennial-Gen Z age group experiencing pent-up demand, while the total housing deficit stood at 3.7 million.
The inadequate supply of housing occurred even though 1.36 million homes began construction in 2024, including the second-highest level of single-family housing since 2007. However, multifamily starts – especially in the high-density segment – fell to their lowest level in seven years. That brought total housing starts to their lowest level since 2020. Homeowner vacancy stood at 1.1% in 4Q 2024, well below the historic norm.
Cost is a primary factor contributing to the housing gap. To purchase a starter home at today’s prices and mortgage rates, the minimum recommended income would be about $94,000 – a level well above what younger households would likely earn, the report found. For some, renting may be the answer. “It remains more affordable to rent than to buy a starter home in 48 of the 50 largest U.S. metro areas,” the report noted.
Despite the high number of new apartments, the report noted that there has been no significant drop in rents in much of the country as more households have been forced to lease.
The result is that many individuals and families who might have been house-hunting or renting continue to live at home or with roommates, experiencing pent-up demand instead of setting up their own households.
There were regional differences in housing supply. The South (751,000) had the most housing starts followed by the West (303,000) and the Midwest (185,000). The Northeast had the fewest starts (125,000) and the largest household supply gap due to “missing young households – a testament to the degree of unaffordability and undersupply in this region”. It was also the only region to see the housing gap grow, with tight housing conditions, including tough buyer competition and climbing home prices.
Inventory in the Midwest is tight because the region’s affordability has attracted new residents. It will take 41 years to close the 843,000 housing gap in the Midwest, three years to close the 1.15 million home gap in the South, and 6.5 years to close the 830,000 home gap in the West, the report found.
Solving the housing supply problem nationwide has become more challenging for several reasons. They include zoning regulations and other restrictions, policy uncertainty that affects the cost of materials and labor, and the future sales outlook.
“If these concerns are sustained, this could mean a slower pace of single-family homebuilding ahead,” the report cautioned. “While existing-home sales are near 30-year lows, new home sales have slowed to a pace seen just before the pandemic.”
The report noted that some builders have adapted to the new environment by constructing smaller, more affordable homes with additional incentives like mortgage-rate buydowns.
“New homes in 2024 comprised the highest share of all homes sold since 2005… Affordable new-construction sales picked up in 2024, climbing from 43% of sales in 2023 to 46% in 2024, and new-home prices fell annually in Q4 of 2024,” the report stated.
“Closing the housing supply gap would take a step change in new-construction activity. At the 2024 rate of improvement, it would take 7.5 years to close the current housing gap. Building more affordable housing, especially in areas with high demand and strong jobs growth, will be important to making homeownership accessible to Americans.”