To address the housing affordability problem, experts have been recommending the solution of building more homes. This makes economic sense since when the demand for housing is greater than the supply, prices go up. Currently, although there has been a slow increase in housing inventory since last year, the supply still falls short of demand. In fact, despite the sluggish market conditions due to affordability issues, the number of home sales has had multiple offers, making it evident that building more houses is necessary to cater to the demand. According to the National Association of REALTORS®, the number of homes available for sale has surpassed one million units, which is a promising sign for future housing supply.
Understanding the Connection Between Affordability and Housing Shortage
It is important to keep in mind that not everyone can afford the same type of home when estimating how many homes are needed in the housing market. Depending on their income, buyers can only afford homes at different price levels. For example, households earning $75,000 or less can afford to buy homes that are priced up to $256,000. Therefore, it's crucial to specify the number of missing homes based on price range.
The analysis shows that the current housing affordability and shortage issues wouldn't be as severe if there were enough homes available for all income levels. There are over one million homes available for sale, but they are not equally distributed based on income level. This disparity exacerbates the mismatch between housing supply and demand, especially for middle- and lower-income households. For instance, households earning $75,000 or less represent 51% of all households, but only 23% of the available homes are priced within their budget.
To address both the shortage of affordable homes and the housing supply shortage, a two-fold approach is necessary. Building homes for all income levels could be a solution.
The Report from NAR (National Association of Realtors)
The Housing Affordability & Supply report highlights the pressing issue of the shortage of affordable housing. Economic theory dictates that when demand for housing exceeds supply, housing prices surge. While the number of homes available for sale has increased by over five percentage points compared to previous years, the market still struggles to keep up with the slow rise in inventory. Home sales are trying to recover, but multiple offers are still common, indicating a dire need for increased housing supply to accommodate demand.
To achieve a balanced market, it's important to estimate the number of homes needed at different price ranges. A recent study by NAR Research and Realtor.com® identified the number of missing homes for each income level. Buyers' income determines the price range of homes they can afford. The current market fails to cater to middle- and lower-income households. Nearly 51% of households earn $75,000 or less, but only 23% of listings are priced to accommodate them. On the other hand, for buyers earning $250,000, 85% of listings are currently affordable to purchase.
To address the issue of low affordability and the housing supply shortage, building homes for all income levels could help. The report also reveals that inequalities in housing availability among income levels are more prominent in expensive big city centers. Therefore, identifying the number of homes missing for each income level could aid federal and local governments in tackling the two-fold challenge of low affordability and low supply of homes.
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