2023 Housing Underproduction™ in the U.S. - Up For Growth (2024)

In the face of unprecedented housing demand, why is America building fewer homes than ever?

To answer this question, it is essential to understand how economic, social, and policy forces converged throughout history to shape housing supply and demand.

The Great Depression and the First Period of Housing Underproduction (1929 – 1948)

On October 29, 1929, Black Tuesday ushered in the Great Depression. Its far-reaching impacts included a significant downturn in the housing market. By 1933, home values had fallen 35% (Davies, 1958), more than 250,000 people had lost their homes to foreclosure, renters fell behind and faced eviction (Fishback et al., 2013), and construction of residential property fell 95% (Glabb & Brown, 1967).

In response to the housing crisis, Franklin D. Roosevelt’s New Deal aimed to stabilize the market through key programs like the Federal Housing Administration (FHA) and the Home Owners’ Loan Corporation (HOLC). While these agencies helped steady the housing market, they also institutionalized the practice of redlining, which led to the racial segregation of communities (Rothstein, 2017). The federal government also aggressively encouraged exclusionary zoning through a series of requirements and incentives (Toll, 1969). Just as the New Deal policies began to take effect, the nation’s focus pivoted to World War II. Most non- essential construction, including residential projects, was halted, and rent control was introduced through the Emergency Price Control Act of 1942, a measure to prevent price gouging during a period of constrained supply.

A Note on Rent Control

Nobel Prize winning economist Milton Friedman noted in 1946 that World War II-era rent control carried significant social costs, including deterioration in the quality of rental housing and the disincentive to build new rental homes (Friedman & Stigler, 1946). Resulting disinvestment in inner city rental housing set the stage for urban renewal and blight removal in the 1950s.

From the 1930s onward, America settled into a prolonged period of housing underproduction (Newcomb & Kyle, 1947). Fueled by war-related job growth and then by the demobilization of 16 million troops and the subsequent baby boom, America’s urban population grew four times faster than it had during the previous decade (Boehm & Corey, 2015).

This population boom, coupled with slow residential constructionduring the economic downturn of the 1930s, caused housing tobecome both scarce and expensive. Housing vacancies in April 1940 stood at a little under 5%, plunging to a mere 1.4% by November 1945 (von Hoffman, 2012). By 1946, six million people were living with relatives due to housing scarcity (Palen, 1994).

Suburbanization and Slow Growth (1948 – 1990)

Economic Expansion and Return to Cities (1990 – 2008)

As America entered the 1990s, the economy was in a state of unprecedented stability, often referred to as the Great Moderation (Hakkio, 2013). This economic calm was accompanied by significant societal and financial shifts. The 1970s and 1980s brought a sharp and steady decline in household size (Nelson, 2013), and by the 1990s, the popular appeal of city life was growing (Leinberger, 2009). The tech and finance sectors flourished, and a growing consumer preference for urban convenience, coupled with increasing awareness of the repercussions of suburbanization, prompted a significant return to city-life. Yet, renewed urban demand collided with housing constraints created by earlier downzoning efforts.

Amid this backdrop, remnants of the 1980s savings and loans crisis lingered. The U.S. Congress had created the Resolution Trust Corporation (RTC), which introduced innovative financial instruments to resolve the assets of failed savings and loans associations. One such tool was the commercial mortgage-backed security (CMBS), wherein Wall Street and the RTC repackaged non-performing loans into securities for investors (Mandzy, 2017).

The CMBS market quickly exploded in prominence, providing an influx of credit and liquidity. By the early 2000s, the CMBS market overtook life companies as the second largest category of commercial real estate lending (Chandan, 2012). The growing market share of CMBS lenders offering very aggressive terms also led banks and life companies to loosen their underwriting standards and mortgage terms in order to remain competitive (Wilcox, 2012). Housing supply limitations, coupled with intense demand, drove up home prices. Loose lending standards and risky financial speculation created a housing bubble that would soon burst.

In 2008, the inevitable happened. Capital markets, straining to capture red-hot demand for housing, imploded, plunging the nation into the Great Recession (Federal Deposit Insurance Corporation, 2018). Financial instability and a return to tighter mortgage lending standards led many to continue to rent rather than buy (Fry & Brown, 2016), further straining urban rental markets. Housing production came to a standstill, and millennials—America’s largest living generation—became the first generation unable to buy a home at the age their parents did (Both, 2023).

Second Period of Housing Underproduction (2008 – Present)

The repercussions of the Great Recession persist. Even fifteen years later, the U.S. has not matched pre-recession housing starts. Around 2015, many millennials started families. Household formation spiked, and driven by the pursuit of affordability and space, millennials looked to settle in suburbs and small towns.

American Urbanization and an Era of Housing Abundance (1820 – 1929)

From the early 19th century through the 1920s, the American Industrial Revolution transformed the nation from an agrarian society into a majority urban one (Taeuber, 1941). Advances in transportation in the 1870s led to the growth of streetcar suburbs beyond the urban core (Hayden, 2004). These streetcar suburbs provided an alternative to overcrowded city centers, drawing long-standing residents and opening space for waves

of immigrants from Eastern and Southern Europe seeking opportunities in American cities (Boehm & Corey, 2014).

By 1920, over half of the U.S. population lived in urban areas (Census History Staff, 2022). Fueled by economic opportunities, cities like Chicago and San Francisco became targets for migration (Schleicher, 2017). With the exception of a brief housing shortage and early experiments with rent control following World War I (Fogelson, 2013), limited regulation supported abundant housing construction. Rapidly growing cities were able to house throngs of newcomers, creating widespread economic opportunities and boosting the young nation’s economic productivity (Fischel, 2016).

With so many Americans living in close proximity to one another, new challenges arose. Pollution, poor sanitation, and unsafe living conditions in downtown business districts were common (Riis, 1890). Social tensions also began to surface, in part a reflection of the global rise of nationalist and racist ideologies (Higham, 2002). Many white and upper-class individuals, uncomfortable with the increasing diversity and density of the city, sought refuge from these burgeoning urban centers. Around this time, the enactment of the first racial zoning ordinances (Pietila, 2011) signaled the beginning of what would eventually be called “white flight” (Shertzer & Walsh, 2018). Although race-based zoning ordinances were ruled unconstitutional, they were soon replaced with use- based zoning codes often deployed to similar effect.