The Roots of the Housing Shortage

Due to a confluence of many factors, a severe national housing shortage has resulted.  The short version of the causes for this crisis is simple economics – an imbalance between supply and demand where homes have maintained high prices even as mortgage rates have soared.    

As noted by housing experts, a main reason for this shortage has been the hesitancy of empty nest baby boomers to sell their homes.  There are a multitude of financial and lifestyle factors that explain why this delay has occurred.  First, while many boomers would opt to downsize, there is an insufficient supply of smaller homes available for them in desirable neighborhoods.  New construction is geared to building larger homes.  Second, many states, such as Florida, have fixed property taxes that do not increase as the value of the home rises.  The purchase of a new home would result in larger property taxes based on a higher purchase price.  Third, many boomers have a small mortgage at low rates or no mortgage at all and are unwilling or unable to increase these expenses.  Finally, and especially true in many major metropolitan areas, the gain from selling their home would often result in substantial capital gains taxes.  While every single homeowner has a $250,000 capital gains exclusion and $500,000 for husband and wife, the gain on a home bought decades earlier might still result in the payment of capital gains tax.  For example, if a house was purchased years ago for $100,000 and can be sold for $1 million, even with the $500,000 exclusion for a married couple the capital gain would be $400,000.  After applying a capital gains rate of 20%, the result would be taxes of $80,000.  Even if a smaller residence were available, the payment of capital gains taxes, realtor’s commissions and closing costs reduces the ability to cover the price of a new home.  
Following the aftermath of the 2008 financial crisis where there were massive amounts of foreclosures, the government provided incentives for deep pocketed investors to fill the void and buy these homes.  Companies such as Tricon Residential, Progress Residential and American Home 4 Rent began purchasing them by the thousands and renting them often to foreclosed homeowners.  These companies were often financed by private equity firms such as Blackstone.  At the same time, home building slowed to a crawl due to this vast over supply.  

Meanwhile, over time with rising rents and low interest rates, cash flow from renting single family homes became very profitable as rents exceeded interest on similar fixed income instruments.  Essentially, these homes became bond proxies and investments by these companies accelerated.  During the third quarter of 2023, approximately 44% of single-family homes sold nationwide were purchased by large financial groups.  Millennials who wish to participate in the American dream of owning their own home are unable to compete against billionaire institutions.  Without legislative action, it is estimated that by 2030, institutions may hold up to 7.6 million homes or more than 40% of all single-family rentals on the market. While both houses of Congress have introduced legislation to block private equity firms and hedge funds from buying single family homes, no legislation has yet been passed.  
Of course, the main factor that has suppressed demand is rapidly rising mortgage rates currently at approximately 6.5% for a 30-year mortgage after remaining below 3% during the pandemic.  Many homeowners who would like to sell are reluctant as they would be surrendering a very low mortgage rate for one much higher.  Furthermore, as previously noted, the supply of newly constructed homes declined significantly during the financial crisis and has been slowly rising.  It is estimated that 1,469,800 housing units were authorized by building permits in 2023 which was 11.7% below the 2022 figure.  This decrease can be explained by the meteoric rise of mortgage rates.  With stable mortgage rates, experts have estimated that new construction will rise 4.4% this year and a robust 15% in 2025.  There is optimism as December housing starts were up 28% year over year, the largest gain since 2006, and 31% of all U.S. home sales are new construction.

It will take several years for the housing shortage to shrink but a combination of rising new construction, boomers downsizing or dying, divorces, other life changes such as job transfers out of the area, and a pressing need to house larger families should eventually result in an equilibrium between supply and demand thus alleviating this shortage.  


Clifford L. Caplan, CFP®, AIF®