The U.S. is currently facing one of the worst housing shortages in decades, with millions of Americans struggling to find affordable homes. While this crisis is driven by a combination of factors, there are six primary causes that are contributing to the shortfall in housing supply. From zoning restrictions in cities to corporate purchasing of homes, these issues are creating long-term problems in the real estate market.
Bob Waun, co-founder of DIRT Realty, believes that while the causes are complex, one solution is clear: cities need to embrace Accessory Dwelling Units (ADUs) to increase the housing supply. “Allowing ADUs is one of the quickest ways to alleviate the housing shortage,” Waun says. “They provide a way to add housing without massive new construction projects and can create more affordable options in urban areas.”
But to fully understand the solution, we first need to look at what’s driving the housing shortage in the first place.
1. Zoning Restrictions in Cities
One of the biggest obstacles to building more housing is zoning restrictions. In many urban areas, zoning laws prevent developers from constructing anything other than single-family homes. This limits the ability to build higher-density housing like apartments, townhouses, or even duplexes in areas where demand for housing is skyrocketing.
Zoning laws, often dating back decades, are in dire need of modernization. Many cities enforce strict rules that require large lot sizes and prevent multifamily housing developments, effectively capping the number of new units that can be built. These regulations were originally intended to preserve the character of neighborhoods, but they’ve had the unintended consequence of limiting the supply of affordable housing.
"Zoning laws are one of the biggest bottlenecks for new housing," Waun explains. "If cities modernized their zoning codes, we could see a huge increase in housing units."
2. Migration to Cities and New Housing Demands
Another significant factor contributing to the housing shortage is the mass migration to cities. Over the last few decades, millions of people have left rural areas in search of better economic opportunities, education, and lifestyle improvements in urban centers. Additionally, immigration into the U.S. has increased demand for housing in metropolitan areas, further stretching already limited resources.
The result is that cities are absorbing large populations without building enough new housing to accommodate them. The National Association of Realtors (NAR) estimates that between 2010 and 2020, nearly 87% of population growth in the U.S. occurred in metropolitan areas. This has led to a massive demand for housing in urban regions that outpaces supply.
“People are moving into cities faster than housing can be built,” says Waun. “We need more housing options to meet this demand, and that means everything from small apartments to larger multi-family units.”
3. Rising Construction Costs from Energy Efficiency Standards
In recent years, construction costs have soared, driven in part by higher standards for energy efficiency and environmental regulations. While these standards are important for sustainability and reducing carbon footprints, they have made building new homes significantly more expensive.
Builders are now required to meet strict guidelines for energy efficiency, including better insulation, high-efficiency windows, and more advanced HVAC systems. While these improvements are necessary, they have added thousands of dollars to the cost of constructing new homes, making it more difficult for developers to deliver affordable housing units.
4. Demand for Larger Housing Units
As consumer preferences have shifted, so has the demand for larger housing units. Over the past few decades, the average size of homes has increased, even as family sizes have shrunk. Many buyers now expect homes with multiple bedrooms, larger living spaces, and more amenities like home offices and gyms.
This demand for larger homes has led developers to focus on building higher-end, more spacious properties, further reducing the supply of smaller, more affordable units. The National Association of Home Builders (NAHB) reports that the average size of new single-family homes has increased by over 1,000 square feet since the 1970s, despite household sizes declining during the same period.
“People want bigger homes, but that’s making it harder for first-time buyers and renters to find affordable options,” Waun explains. “We need a more diverse housing stock that includes smaller, more affordable units.”
5. Corporate Purchasing of Homes for Rentals
In recent years, large corporate buyers have entered the residential real estate market, purchasing thousands of single-family homes to convert them into rentals. These investors, including private equity firms and real estate investment trusts (REITs), often have deeper pockets than individual buyers, allowing them to outbid small investors and first-time homebuyers.
According to CoreLogic, institutional investors accounted for 18% of all single-family home purchases in 2021, compared to just 9% in 2013. This trend is effectively crowding out smaller investors and reducing the number of homes available for purchase, particularly in affordable markets.
“Corporate buyers are turning neighborhoods into rental markets, and that’s making it harder for individuals to buy homes,” says Waun. “We need to level the playing field so more homes are available for ownership, not just renting.”
6. Lack of Financing and High Interest Rates
Lastly, the lack of financing for new housing construction, combined with high interest rates, is slowing down the development of new homes. After the 2008 financial crisis, banks tightened lending standards for developers, making it more difficult to finance housing projects. And now, with interest rates rising, the cost of borrowing money to build housing has become even more expensive.
Developers who do secure financing often pass those costs onto buyers, driving up home prices even further. As a result, fewer new homes are being built, and those that are built are often out of reach for many prospective buyers.
“The high cost of financing is keeping many projects on hold,” Waun says. “We need more innovative financing options to get housing developments off the ground.”
A Starting Solution: Embrace ADUs
One immediate solution to this housing crisis is to allow for more Accessory Dwelling Units (ADUs). An ADU is a small, secondary housing unit that can be built on the same lot as an existing home. These units are often referred to as granny flats or in-law suites and can be an affordable way to increase housing density without the need for major new construction projects.
“ADUs are one of the quickest ways to add affordable housing,” says Waun. “They can be built in backyards or above garages and provide an affordable option for renters or extended family members. Plus, they can be added in neighborhoods where larger developments might face resistance.”
Cities like Portland, Los Angeles, and San Francisco have already loosened zoning restrictions to allow for ADUs, leading to a surge in new housing units without the need for large-scale developments. If more cities follow suit, ADUs could be a key part of solving the housing crisis.
The Path Forward
Addressing the housing shortage will require a combination of policy changes, smarter financing, and innovative solutions like ADUs. By modernizing zoning laws, supporting small investors, and providing more affordable financing options, cities across the U.S. can begin to meet the housing needs of their growing populations.
As Waun concludes, “There’s no single solution to the housing crisis, but allowing ADUs and encouraging more diverse housing options is a great place to start. It’s time to rethink how we build and who we’re building for.”
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