Supply of Affordable Housing
The Biden-Harris Administration believes that every American should have access to safe and affordable housing (White House 2023a). Where people live determines their available housing quality and amenities, such as labor market access, transportation options, schools, protection from crime, environmental quality, and social networks—all of which affect their quality of life and intergenerational economic mobility (Chetty and Hendren 2018).
However, the housing supply has failed to keep up with demand over the last several decades, leading to a nationwide shortage of 1.5 to 3.8 million homes and driving up the cost of housing (Calanog, Metcalfe, and Fagan 2023; Khater, Kiefer, and Yanamandra 2021; Lee, Kemp, and Reina 2022). As a result, 45 percent of renters are now cost-burdened, meaning that they spend 30 percent or more of their family income on rent, more than twice the share who were cost-burdened in 1960 (Ruggles et al. 2023).
Economic analyses of housing markets identify at least two frictions restricting supply: (1) land-use regulations and zoning restrictions that limit what can be built, and (2) rising input costs associated with construction (Khater, Keifer, and Yanamandra 2021). While some land-use regulations can be a reasonable part of community planning—for example, keeping factories away from schools or ensuring that parks are situated near residential areas—many other building regulations—for example, limiting housing density and building heights, or imposing minimum lot sizes or parking requirements—can create artificial barriers that hinder growth and drive up the cost of housing.
These policies arise naturally from a local decision making process that is influenced by homeowners, who prefer higher home prices and account for the local costs of increased housing, such as more congestion, but they fail to account for any regional or national benefits. This classic market failure negatively affects individuals in neighboring communities and potential new residents.
The costs of these housing restrictions reach across neighborhoods. Housing shortages can lead to inefficiently low levels of labor mobility and human capital investment, affecting both individual well-being and the macroeconomy. Research shows that relaxing local land-use regulations increases migration, allowing workers to relocate from low- to high-productivity regions, and boosts aggregate output (Peri 2012; Moretti 2012).
Moreover, homeownership is a wealth-building tool with a long tradition in the United States, and restrictive housing policies are an important factor explaining class and racial gaps in wealth and economic outcomes (Rothstein 2017). Increasing the housing supply, especially when combined with policies that directly support the production of affordable rental and ownership units, can increase access and equity for groups with few financial resources, increase overall wealth, and reduce disparities across groups (Carroll and Cohen Kristiansen 2021).
This chapter focuses on the major causes and consequences of the United States’s long-standing shortage of housing—and especially affordable housing—as well as Federal policy’s ability to alleviate these issues. While there are policy levers at all levels of government, this chapter focuses on Federal policy. For example, public funds could be tied to zoning reforms and used to reduce financing constraints for affordable housing developments, and workforce training could increase the supply of labor used to construct housing.
The first section illustrates the magnitude and trends in the housing supply shortage over the last six decades. The second and third sections discuss the causes and consequences of housing shortages. The fourth section highlights several areas where Federal policy can equitably boost the housing supply and alleviate rising housing unaffordability.
Housing costs are demanding a growing share of household budgets in the United States. At the same time, the U.S. housing market faces a long-run supply shortage.
The housing price increases have outpaced wage growth in the last 20 years. Between 2000 and the early 2020s, housing prices tripled while household income doubled; in other words, the price of housing rose by 50 percent more than household income in the last 20 years.