Evolving Challenges in Housing Supply

Evolving Challenges in Housing Supply

Multifamily housing construction reached a 35-year high in 2023 with 450,000 new units completed and is beginning to show signs of overbuilding, while shortages remain in the national single-family housing market.

The housing supply shortage in the United States predates the COVID-19 pandemic, and the underlying factors and nature of this long-term shortage are still being uncovered. On October 25, 2024, Fannie Mae and the Federal Reserve Bank of Philadelphia hosted an event, "Workshop on Changing Demographics and Housing Demand," at which researchers shared new findings concerning the nation's housing supply. Zhong Yi Tong of the Office of the Comptroller of the Currency and Joshua Coven of New York University presented their research on housing supply trends by geography and the impact of institutional investors on the rental market.

Supply Trends Vary by Geography

Although the need for increased housing supply is widespread, housing shortages are not necessarily uniform across regions. Zhong Yi Tong presented new research that examines the geographic distribution of housing shortages and new construction. Long-term shortages, changing preferences, and low mortgage rates triggered an uptick in housing construction during the COVID-19 pandemic. This demand was intensified by a mortgage rate "lock-in" effect, wherein rising interest rates incentivized homeowners against selling, creating a need for new supply. Multifamily housing construction reached a 35-year high in 2023, with 450,000 new units completed. Tong looked at 2023 construction rates relative to demand, calculating "per capita" production rates in 369 metropolitan areas to understand the degree to which the recent "building boom" addressed housing shortages across the country.  

Tong found that the housing supply shortage persists, with more growth in the multifamily sector and in certain regions. The United States produced 2.98 new single-family units per 1,000 residents in 2023, below the 40-year average of 3.56 units. However, the multifamily building average was 1.19 units per capita, or 13 percent higher than the long-term average. The multifamily sector is beginning to show signs of overbuilding, particularly in certain areas; per capita building rates were especially high in the South, Southeast, and Mountain West, which saw significant growth. Shortages remain in the national single-family housing market, however, and many regions are still underbuilt in both single-family and multifamily housing. Shortages relative to demand were particularly pronounced in the Northeast, Midwest, and California. Overall, the combined construction rate for multifamily and single-family housing was 4.33 units per 1,000 people, running well below historical averages.

The resulting picture, Tong said, is of "a great geographic mismatch between where new homes are being built and where acute housing supply shortages still exist." Tong noted that overbuilt areas may struggle to absorb new units into the housing market without adversely affecting home prices and rents, especially if the influx of new residents into these areas were to slow down, whereas housing affordability in underbuilt areas may face continually inflating home prices and rents. Without a rapid increase in housing production, challenges related to underbuilding in these areas could be exacerbated by rising demand if mortgage rates decline substantially.

The Impact of Institutional Investors on Rental Supply

Shifting from broader supply considerations to focus on the rental market, evidence suggests that landlord type can influence rental supply challenges. Joshua Coven presented research focusing on the impact of institutional investor ownership on the single-family rental market, which has historically been dominated by smaller landlords. As of 2022, 71 percent of single-family rentals were owned by landlords with 1 to 3 properties. Institutional investors with large, spatially concentrated portfolios have tended to focus on multifamily rentals but have become more prominent in single-family rental markets since 2012, buying as much as 10 percent of the housing stock in some areas. Between 2012 and 2021, just 7 institutional investors accumulated 300,000 homes, with 2 investors owning 80,000 homes each. Larger investors can scale operations more efficiently than small landlords, many of whom lack a professional manager, based on Coven's analysis. However, institutional investors' larger portfolios give them greater market power, which could lead them to function as oligopolists and raise prices. Coven looked at three similar large landlords in Georgia and developed a structural model to estimate the impact of their entry into the single-family housing market for both renters and homeowners.

Coven found that the presence of institutional investors appeared to benefit renters but may harm potential homebuyers. Their presence was associated with increased rental supply, lower operating costs, and lower rents, although the investors' market power dampened this effect. Institutional investors seem to lead neighborhoods to include more low-income renters. Markets where institutional investors purchased homes en masse, however, also had higher prices for homebuyers; Coven estimates that institutional investors were responsible for 27 percent of the price increase in the markets they invested in most heavily. According to Coven's models, this effect would have been much more drastic if construction in these areas did not also increase. Coven also modeled the potential impact of two potential policy scenarios: one in which institutional investors were banned entirely and one in which rent increases for large landlords were limited to 5 percent. Both scenarios reduced the overall supply of rentals, and when institutional investors were banned outright, home prices fell, rents rose, and small landlords picked up the remaining rental supply. These findings suggest that the relationship between the quantity of housing units and resulting affordability may not be straightforward for the rental market; the ownership of the units also plays a role.

The research presented during the session indicates that a range of issues affect housing supply challenges. Production trends appear to vary by unit type, geography, macroeconomic trends, and ownership structure, and these factors may further influence the eventual affordability of the homes that are produced.