Norbert Michel and Jerome Famularo
In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly, with the median home price increasing almost $100,000. (Figure 1.) Unsurprisingly, many potential homebuyers were—and still are—shocked and upset.
As they have in years past, many politicians have latched on to the anger surrounding the recent housing market turmoil. During the presidential debate, Vice President Kamala Harris said, “Here’s the thing: we know that we have a shortage of homes and housing. And the cost of housing is too expensive for far too many people.” Prior to the election, Donald Trump outlined his own solutions, and now federal officials want to implement a host of policies, ranging from subsidies to selling federal land.
But is the United States really facing a housing crisis? Or a shortage of homes? And should Americans really expect recent federal policy proposals to make housing more affordable?
This Cato at Liberty post is the sixth in a series that examines these questions. (Previous posts are here, here, here, here, and here.) While the series presents evidence that the United States is not facing a true housing crisis or shortage, nothing in the series suggests that local officials should refrain from relaxing zoning restrictions and other regulations. Elected officials should reduce rules and regulations to make it easier and less costly for people to live. Additionally, federal officials should end the many demand-side policies that place upward pressure on prices across the nation.
Just as important, nothing in the series ignores that many Americans have taken an economic beating these past few years—real wages have fallen, and prices have not reverted to pre-COVID-19 levels.
Although the rate of growth in the overall price level has moderated, the post-COVID-19 price spike still angers people. After remaining above 5 percent between June 2021 and February 2023, the annual inflation rate has been below 4 percent since June 2023 and below 3 percent since July 2024. Similarly, the median home price increased from $317,100 in 2020 to $442,600 by the end of 2022. Just as many consumers remained upset about high grocery prices after inflation moderated, few prospective buyers took comfort in the median home price falling to $415,000 by June 2024, a price well above the pre-pandemic level.
It is no surprise, therefore, that so many people have been calling for increased government intervention.
Yet if federal officials answer those calls, it will likely only further increase Americans’ economic burden. Evidence shows that over the long-term people have overcome the many federal roadblocks that increase the nominal cost of housing, but housing markets would function better in the absence of those policies.
Fortunately, federal officials have an excellent opportunity to improve the housing market because the lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies distort supply and demand, resulting in harmful outcomes. The housing market is just a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.
Major Changes Remain Post COVID-19
Regardless of the level of anger over these recent price spikes, the COVID-19 pandemic and the government shutdowns changed the way people live and work. The rise in remote work, for example, reduced Americans’ average commuting time and increased the utility they receive from housing. (Before anyone makes an angry X post: No, we are not endorsing government shutdowns to increase Americans’ utility.)
Before the pandemic, only about 5 percent of Americans worked from home (fully remote or hybrid), a figure that rose to 60 percent by the spring of 2020. Though the share has since fallen, it appears a fundamental shift has occurred. As of November 2024, the share was still 27 percent.
As this shift occurred, many people were able relocate to areas with less expensive housing, more amenities, and more appealing climates. Many buyers also wanted more space at home because they wanted additional workspace.
Researchers from the Federal Reserve Bank of San Francisco report that this shift to remote work led to an increase in demand even after controlling for relocating. Specifically, they estimate that increased demand from remote work caused house prices to rise approximately 15 percent from November 2019 to November 2021. This figure represents more than 60 percent of the overall increase in housing prices during the period. The Fed researchers also report that “remote work has essentially identical effects on rents as it does on house prices.”
While the longer-term effects on housing from the COVID-19 pandemic remain unclear, there are important lessons to be learned from the boom-bust experience in some metro areas.
For example, housing construction boomed in Austin between 2019 and 2023, with increases in both single family and multifamily housing. In 2019, Austin added almost double the square footage in multifamily housing compared to 2018, added roughly that same amount in both 2020 and 2021, and then added 45 percent more in 2022. In 2022 and 2023, Austin increased its number of single-family homes, condos and co-ops by 85 percent and 23 percent, respectively.
Yet, Austin is now being referred to as “ground zero” as the Texas housing market faces a downturn. Nick Gerli, CEO of real estate data platform Reventure App, claims that “Austin has the highest inventory surplus of all Texas” and the market “is now oversupplied.” According to Gerli:
Investors are having difficulty earning cash flow due to high prop taxes and stagnating rents. Builders are needing to do big markdowns to sell houses, which is hurting the resale market.
Although the median home price at the state level declined (year over year), “the average Austin house price was $553,275 as of September … up 1.5 percent from a year earlier.” Figure 2 presents single-family home values, new construction, and inventory for the Austin metro area between 2019 and 2024.
This same sort of phenomenon, where a decline in home prices hurts the resale market, is occurring in the Austin rental market. After a roughly two-year construction boom added thousands of new apartments (more than 10,000 by the end of 2023), developers are pulling back because they “can no longer make the same kind of cash.”
In both Austin and Boise, Idaho, new construction of single family homes followed similar paths between 2018 and February 2022. However, the steady increase that started in 2021 ended for Boise in February 2022, while it increased for Austin until April 2023. Yet, home price growth for both metro areas remained on a similar path in both places between 2018 and 2024, with Boise’s average home price going from $247,388 in 2018 to $472,447 by August 2024 and Austin’s rising from $296,952 to $453,130. (See Figure 2).
Additionally, Figure 3 shows that the price-to-income ratio has been higher in Austin than in Boise for most of the last 12 years, and that it followed a very similar path—increasing and decreasing—in both places starting in 2020. Yet despite Austin’s large inventory of housing in 2023, its ratio remains higher than at any point prior to the pandemic and higher than the ratio in Boise, which had much less construction. Just as important, both Boise and Austin became more affordable at the same time, at a similar rate, even though Austin uniquely (compared to Boise) experienced a recent construction boom.
The point of this comparison is only that house prices can change at different rates in certain locations despite differences or similarities in new construction. That is, the supply of housing is not the sole determinant of house prices.
Further, this episode in Austin serves as a reminder that affordability for the buyer works against the seller. That is, while buyers (and renters) would love to get a lower price, sellers (and landlords) would prefer a higher price. As prices go down, it provides an added incentive to buy but less incentive to sell or build new housing.
This tension produces the best outcomes when builders are allowed to meet demand in their local markets, with as few regulatory obstructions as possible.
The other big lesson is that housing markets are dynamic and can change rapidly. A tight market, with rising prices and low inventory, can quickly morph into a market with an “oversupply” of available housing. The kinds of “shortages” discussed in the last post of this series can quickly and unexpectedly morph into (on those same terms) a “surplus.” Thus, federal policies based on “fixing” these kinds of “shortages” can easily distort local supply and demand conditions and make it more difficult for housing markets to provide the kinds of housing that people want.
Experience also demonstrates that the federal government should not be in the business of deciding the type and number of homes that people can build in their communities, or whether people should rent or buy. Federal policies that distort markets in such a manner will likely end badly just as previous federal efforts have ended.
Housing Availability Counters the Crisis Story
As our previous post argued, one problem with many of the so-called housing shortage metrics is that they do not measure the optimal demand or supply for housing. A more practical problem is that many of those metrics are based on household formation, and the aggregate count of households exhibits a considerable amount of volatility, some of which is due to the ability of individuals (both family and non-family members) to move in and out of households on a regular basis.
We make no judgment as to what household formation rates should be. We also maintain that federal officials are just as incapable of knowing when family and friends should either stop or start cohabitating and forming households. Federal officials should not provide incentives for people to speed up or slow down the rate at which they form new households, and federal housing policies are no exception to this rule—the government should not intervene in housing markets based on anyone’s preferred household formation rates. (Arguably, incentives like first-time buyer tax credits and downpayment grants only speed up the rate at which people become homeowners.)
Of course, this argument does not answer whether the United States is facing some kind of housing shortage, crisis, or market failure. To help answer that question, we suggest using population growth instead of household formation. Rather than try to estimate a “shortage” of some kind, we use changes in population to estimate basic housing availability. That is, we examine whether housing construction has broadly kept up with population growth. (Other studies have used similar population-based metrics, and we use this alternative in a working paper with S. Sayantani. It is currently under revision, but we stand by the original results, some of which we present here.)
We do not offer this measure as an improved method for estimating the equilibrium supply and demand of housing. We merely offer this measure as a better way to examine whether, as so many critics claim, the US housing market has been experiencing a crisis or a market failure. Simply put, if housing construction has kept up with population growth in the long run, it is very difficult to support the idea of a widespread shortage or market failure. Such a market would not be one in crisis.
It is still possible that more housing would benefit more people. But the underlying question of whether the housing market generally provides housing for people—or fails to provide it—is at the heart of whether the United States is experiencing a crisis or market failure.
Figure 4 presents a graphical look at two versions of this housing availability measure. The first is the annual change in population divided by the number of housing units started (in blue), and the second is the annual change in population divided by the number of housing units completed (in orange). In both cases, as the ratio decreases, it implies that a relatively higher volume of housing is being built compared to the demand created by population growth.
Figure 4 shows a decreasing trend in the ratio from about 2009 to 2021, suggesting that units started and completed steadily kept pace with annual population changes for this period. Before rising slightly in 2022, the 2021 ratio was lower (0.35) than at any point during the past five decades.
Of course, this simplistic national-level analysis ignores geographic differences and the possible effects of all kinds of other factors that might affect the housing market.
To capture some of these other factors and provide a more robust analysis, we use a 22-year panel of county-level data for 362 counties. Due to data accessibility, we estimate housing availability with annual building permits issued. We include permits for both single-family and multi-family buildings, consisting of those with up to 4 units and 5+ units, respectively.
Using this data set, we construct a county-level availability ratio, defined as the ratio of resident population change to units permitted. As with the national-level ratio, a higher availability ratio implies lower housing availability (a higher number of residents allotted per housing unit), while a lower ratio implies higher housing availability (a smaller number of residents per housing unit).
Based on this county-level ratio, availability has been improving almost steadily since 2010, with a ratio of less than 1 since 2020. Figure 5 demonstrates that housing availability worsened during the financial crisis and was the lowest (corresponding to the highest ratio) immediately following the crisis. Additionally, while availability slightly worsened in 2022, it has been better than average since 2016.
We also perform further analysis of this availability metric using a regression that controls for both location and time-varying characteristics.
Using this approach, our main result is that between 2000 and 2021, the average building units permitted per 100-unit change in resident population was approximately 93 housing units. These figures are hardly indicative of a major supply shortage or market failure across the United States—the amount of building has essentially matched the population change for the past two decades.
A bit more broadly, housing construction has kept up with the growing population, even as people chose to move into more densely populated areas and pay higher prices. Based on this evidence, anyone characterizing the US housing market as one in crisis is guilty of abusing that term.
While there is no doubt that many people would love to pay less for US housing, that preference alone does not indicate that there is a housing shortage. The same can be said for virtually any good or service. That is, even though people prefer to pay less for everything that they buy, this preference does not indicate the existence of market-wide shortages or market failures. This preference for cheaper goods does not justify federal intervention to regulate either supply or prices in any market, including housing.
Nonetheless, many groups blame high housing prices on a lack of construction and argue that federal intervention is necessary. Some of these groups focus on relaxing local zoning and other regulatory constraints to improve housing affordability. While we argue against federal intervention and agree that local officials should relax regulations that make building unnecessarily difficult and expensive, we caution against the idea that increasing the housing supply will single-handedly bring housing prices down.
Supply Factors are not a Panacea
It is true that an increase in supply would put downward pressure on prices, holding all other factors constant. This description applies to any basic supply and demand analysis. In real life, of course, many of these “other factors” tend to change. In some cases, these factors can outweigh the effects of added supply.
People often pay a premium to live in certain areas for all kinds of reasons. In any given area, there is only so much available land, and land cannot be created the same way other goods can be produced. As a result, many of the areas people want to live in are already so well developed that even relaxed zoning might have limited supply effects.
For decades, people have earned higher incomes and chosen to relocate to more densely populated areas. Building has generally kept up, but the increased supply of housing in those areas has not led to a decrease in prices. Our paper examines one instance where increased supply has slowed the rate of growth in prices, though it has not led to a decrease in prices.
Evidence From Reforms in Denver
While most studies of zoning changes in the US housing market find that relaxing restrictions leads to increased supply (although the effect on the supply of low-cost housing is mixed), the findings on the relationship between relaxed restrictions and prices are more ambiguous. For instance, some studies report that upzoning efforts have led to increased home prices, possibly because the upzoning creates positive “amenity effects” that attract higher-income households to the neighborhood.
Our own study of a 2010 zoning change in Denver shows that while zoning reforms moderated the rate of growth in home prices, they did not lead to a decline in prices.
Specifically, the average annual home price appreciation in Denver was about 4.5 percent before rezoning (between 2000 and 2009). The rate increased to about 6.6 percent after rezoning (between 2010 and 2018). Based on our estimates, rezoning reduced the average home price appreciation between 2010 and 2018—without the rezoning, home price appreciation would have potentially been 8.55 percent instead of the realized value of 6.6 percent. Thus, rezoning is associated with a continued rise in prices, but at a rate slower than what would have occurred in the absence of rezoning. (For context, adjusting Zillow data for inflation to 2018 dollars, the typical home price in the city of Denver increased from $267,015 in 2010 to $431,190 in 2018. It is more difficult to get a reliable rent series, but according to the Census Bureau’s American Community Survey data, real median rent in Denver was approximately 35 percent higher in 2018 than 2010.)
This reduction represents a sizeable impact from zoning reforms on price growth, one that would be very large over a long period if it is sustained. However, just as the rate of inflation slowed in 2022, but the price level did not fall, this kind of slower growth does not represent the improvement in affordability that many buyers might hope to realize. It certainly does not represent the type of affordability improvements that several of the groups mentioned in our previous posts are calling for.
Our next and final post summarizes the main points from the series and wraps things up.