To explain the high and rising price of housing, the standard economic intuition is that growth in supply isn’t keeping up with growth in demand. One piece of evidence supporting this intuition is the “vacancy rate”–that is, what share of owner-occupied housing or rental housing is empty?Here are a couple of figures from the ever-useful FRED website managed by the St. Louis Fed, with the first showing national vacancy rates for owner-occupied housing and the second showing national vacancy rates for rental housing. As you can see, vacancy rates spiked higher during the Great Recession of 2007-09, but now are near historically low levels for the last half-century.
When people say there is a “housing shortage,” what they are often referring to are estimates that if there had been sufficient housing construction in the past to bring the vacancy rate up to historically average levels, then housing would not feel so costly and unaffordable. David Wessel offers a crisp overview of existing estimates in “Where do the estimates of a `housing shortage’ come from?” (Hutchins Center at the Brookings Institution, October 21, 2024).Estimates of the size of the housing shortage will differ according to various factors: the underlying assumption about a “normal” vacancy rate; whether the calculations are being made at a national-, state-, or census-district level; whether the estimates include only metropolitan areas or also rural areas; and so on. Here’s a set of estimates on the size of the housing shortage from the National Association of Home Builders and others. The first three estimates are based on the “vacancy” method. The last estimate, from a study commissioned by the National Association of Realtors, is based on the fact that about 1.5 million per year home were added to the total housing stock annually from 1968-2000, but only about 1.225 million homes were added to the housing stock each year since then.
The constraints on home-building, whether owner-occupied or rental, typically happen at the state and especially the local level. I won’t try here to delve into the range of proposals in metropolitan areas in the US and around the world for building more housing. But I will note that when vacancy rates are very low, subsidizing home-buyers or renters for their housing costs will only drive up the price. One way or another, making housing affordable needs a supply-side solution.More By This Author:
Housing: Supply Chasing Demand
