More Homes on the Market. Why the Shortage Remains | Robert Dietz

The cost of buying a home is now double renting. A lot of people have decided to rent. Will this cause the housing market and prices to come down significantly? Today we sit down with Robert Keats who's an economist for the homebuilders. He's going to tell us what he's seeing and what the homebuilders are seeing in the housing market. About a quarter homebuilders are outright cutting prices. In fact that has resulted in something really interesting right now which is for the last year more often than not the typical resale home has a higher price than the typical newly built home. That's a really unusual situation. If you look at the historical data typically new homes were 20 percent higher priced than the typical resale. I'm Siamak. Welcome to Market Insider. Robert it's great to have you on. Welcome. It's great to join you today. You have a good pulse on the housing market. You've been studying it. You're part of the Homebuilders Association. What are you seeing right now in the housing market? What's happening? Yeah it's a challenging housing market for prospective homebuyers. Housing affordability conditions are at multi-decade lows and we view that as a consequence of both short-run and long-run conditions. So the short-run challenges are the fact that interest rates have moved up again. That's a consequence of higher inflation. Some of the pressures from the macro economy particularly connected to higher oil prices. So the cost of servicing a mortgage has gone up and that's particularly challenging for younger homebuyers. But the other challenge of the housing market is really long run and that's a consequence of the last decade and a half of under building the housing market. So a lot of economists who look at the residential real estate market will tell you we have a housing shortage. And there's different estimates out there. We think the housing shortage is about a million or so homes. But that housing shortage means that as housing demand has built up and a lot of those younger homebuyers have tried to get into home ownership, they're simply unable to find the inventory in the market that matches their budget. And so the result has been, particularly in the post-COVID period, this steady rise in home prices brought about by demand and those home prices rising faster than incomes. So the combination of the short-run effect of higher interest rates combined with the long-run effect of a higher price level, particularly compared to incomes, means that housing affordability conditions are really challenging combined with a set of perfect storm conditions for homebuilders. What are the homebuilders doing right now based on what you're seeing? Yeah, so in the post-COVID period what we've seen is an expansion of the kinds of housing that's being built, an expansion of where that housing is being built. So the big sort of unicorn in the marketplace has been to try to build more entry-level construction. After the Great Recession about 15 years ago, it was that entry-level construction that was the most difficult to build. And one of the ways that the market has tried to adapt to these challenges is to build more dense housing. So for example, we've seen a big rise in townhouse construction. So these are homes that are connected, they require less land, and the market share of single-family home building that's built as a townhouse has doubled in the last 10 years. It's gone from a little less than 10 percent to about 18 percent as of today. And that's a great way to add entry-level construction. I said before, it's also geography. We've seen an expansion of building in more affordable areas. And this includes the Sunbelt. It includes some of the mountain states where it's more affordable to build than, say, the East Coast or the West Coast. And then we also continue to see an expansion in the Midwest. And in fact, for home building, which has seen a down year in 2025, likely to see a down year again in 2026 because of higher costs and higher interest rates, development in more affordable areas like the Midwest have been a bright spot for the housing market. In fact, in 2025, Midwest home building was up 3 percent when single-family construction nationwide was down 7 percent. You mentioned that we have a shortage of a million homes and some other numbers are saying 3 to 4 million and even bigger numbers. We can get into that later. But why is the home building down when you have this kind of a shortage? We've faced a long-run set of complicated supply-side issues. I've been calling them for about a decade the five L's. It's basically the industry had significant impacts coming out of the Great Recession that restrained the ability to increase output quickly. So those five L's are a lack of labor, a lack of lots, a lack of lending, particularly to smaller private home builders, fragility we see with respect to lumber and building materials. We particularly saw that in the post-COVID period where at one point lumber prices had quintupled, so the overall growth in building material costs. And then the really big one that is connected to policy are the legal and regulatory burdens. And in fact, today we have new estimates out that indicate for a typical single-family home, about 26 percent of the purchase price is made up in regulatory burdens, costs, inefficient zoning, red tape and bureaucracy, and taxes and fees. So for the typical home, it's about $130,000 regulatory burden. So when you take all those combined, the lack of labor, the lack of lots, you have an industry that has not been able to build to the potential demand, the demographic demand that exists. And so the result is the emergence of a housing deficit and a rise in that home price to income ratio, which historically has been about three to one and is today five to one. That makes it incredibly difficult for younger, prospective homebuyers to be able to purchase a home. Just think about the down payment requirement when you're facing a five to one price to income ratio compared to where it was in the 70s and 80s at three to one. It was a lot easier to save for a down payment back in the day. Robert, that ratio, some people say that might say that the housing values are very high right now. They're overvalued and the prices must come down. What would you say to that? How would you look at that? Yeah, you'll hear this argument sometimes from those who are trying to make the claim that the housing market's in a bubble. Well, I think you can go back in time, say 2006, 2007, where we had a big expansion of demand due to loose mortgage underwriting, but the supply side was not constrained. So the result was when mortgage underwriting tightened up, when interest rates went up, demand fell, and we did see a big decline in home prices. That's not the situation today. Today we have a lot of demand on the sidelines. We have limited supply. So the price going up is really a reflection of that underlying scarcity. And I think if you look at the long-term averages, what's driving that gain in pricing today is not some artificial sense of demand that could be quickly removed from the market. Rather, it's the rise in construction and development costs. And so it's like anything else in the United States. It's just gotten harder and harder to build anything, whether it's bridges or infrastructure and housing. And so the result is when you look at the demographic data and compare it to the size of the housing stock, we have this significant mismatch, which has led housing to be scarce and has increased not just the cost of for sale housing, but for rent housing as well. Now, Robert, when you talk to your builders that you're involved with, do they see this demand when they build these homes, or do they have to wait a while to sell them, and do they have to give incentives? Yeah, the demand is there. We're in this kind of moment right now because of the fact that mortgage interest rates are closer to six and a half percent compared to the 5.9 percent rate that we saw back before the Iran war began. The demand has pulled back on a cyclical basis. The demographics are there. There's a lot of households. They're simply looking to get into homes. And in fact, one really interesting data point that we track is the number of young adults who live with their parents. These are 25 to 34-year-olds. Right now, one out of five of those 25 to 34-year-olds live on their parents' couch. Back 20 years ago, it was one out of 10. That share has doubled. But as you noted, because of the fact that interest rates have gone up, that demand right now is hesitant to make the purchase, or it's simply outside of their budget constraint. What builders have undertaken is a set of incentives and upgrades and amenity items to try to attract buyers. In our surveys, we find about two-thirds of builders any given month are deploying those incentives. Larger builders are using things like mortgage rate buy-downs to try to bring down the interest rate and improve the affordability equation. About a quarter of home builders are outright cutting prices. In fact, that has resulted in something really interesting right now, which is for the last year, more often than not, the typical resale home has a higher price than the typical newly built home. That's a really unusual situation. If you look at the historical data, typically new homes were 20% higher priced than the typical resale. Well, that lack of scarcity, that housing deficit has resulted in resale pricing being higher, but builder pricing peaking in 2022 and having come down for the last three-plus years by about 10%. That's due to the fact that builders have used price discount. Now, there's limits on how much of that can take place because they're limited by the underlying construction costs. When you get this mismatch between budget constraints and construction costs, often the result is that projects simply do not move forward, making the housing shortage worse. From what I'm gathering, you're saying the demand is there, but some of the demand wants a lower price. Is that the case? And that's why the construction is not happening as fast as it should be. That's correct. And then you combine it with other limiting factors like simply you cannot zone to develop land, or you have NIMBY forces that say, not my backyard, thus increasing the cycle time, increasing the cost of development. All these are factors that hurt the supply side, but they ultimately materialize on the demand side of the market because those home purchases don't take place. And that really is a long-run consequence because we know when we look at a typical household in the United States, homeownership is a really important source of wealth. So if people are becoming homeowners later in life, they're getting married later in life. And then that has demographic effects, including the fact that the fertility rate in the United States has fallen below the replacement level. It's around 1.6 right now. It needs to be about 2.05 to hold the population constant. And I would argue strongly that that's connected with the cost of living and the ability to obtain homeownership. Do you see the prices going up from here, or do you see the prices going down, or will they stabilize here? Yeah, so our forecast is a little bit more bearish in the short run. We're expecting new home pricing to level off. We do expect some declines in resale pricing. As I said, we have that sort of unusual mismatch right now. And we think a lot of existing homeowners will find that they may have to drop their price just a little bit to clear the market to enable that sale, effectively doing what builders have had to do for the last three or four years. But in the long run, home prices tend to grow with incomes. So when you think about that question of what's the long run consequence, or where does the outlook go for home prices over the next five to 10 years, it's really a question of where do you think incomes are going to go. And if income growth is going to exceed inflation growth, then home price growth will move with it. And incomes haven't grown as much as home prices, have they? So is there going to be a catch-up period for that to happen in the short run? Yes, that's right. So the fact that home prices have grown in a lot of markets, 55%, 60% since COVID, incomes have not grown by that amount. So the result is we're expecting relatively flat conditions to allow for incomes to catch up. And that's basically what we're going to experience during the back half of the current decade. Now, in terms of the resale, you mentioned the resale market, and it's been kind of locked in because people have lower mortgages and they have a lot of equity, they don't have to sell. How do you see that open up? Is there a chance for that to open up, or will it take a long time? Yeah, more the latter. That's going to be a slow process. The mortgage rate lock-in effect that is causing a lot of people to stay in their homes longer is a real thing. It is one of the reasons why when you look at existing home inventory, it's in the three to four to five-month supply compared to the six-month supply you would typically see in a more balanced market. And it's also responsible for a big decline in the mobility rate of American households, which has some important long-run consequences for the economy, because when people are more mobile, they can pursue a better-paying job or move to an area that's got a faster-growing economy, and that's good for national economic growth. But we think this is going to basically cure itself over a long period of time. It's going to take some slow period of time. It will accelerate when we ultimately see mortgage rates dip on a sustained basis below 6%. That's a ways out because of current macroeconomic conditions, but that will help release some of that mortgage rate lock-in effect. But if people are concerned about a big release of inventory due to an unlocking of currently locked-in households, we think that's unlikely, at least over the next couple of years. Do you see the mortgage rates going below 6% and sustained there in the long run, or do you think this is normal? Some people say that this was normal before the last couple of decades. Certainly, if you look at the historical data, 6% to 7% is not out of range. In fact, if you think about the late 80s, the mid-70s, you had mortgage rates that were well in the double-digit range. But for the next, say, four to six to eight quarters, mortgage interest rates above 6% represent the new normal. We do think over the long run, so over the next, say, three, four, five years, we will ultimately see mortgage rates settle in just below 6%. But that's going to take some time. Homebuyers are often not recommended to try to time the market. It's really more about finding a home that matches your affordability conditions today. But over the next three to four years, we would expect mortgage rates to dip just below 6% and then form that as the new normal for the 2030s. If you like Market Insider, we have a Substack channel that has exclusive content with some of the guests we're interviewing on what they are buying and why, and what they are avoiding and why. You can find this channel in the description below. There's going to be a link for you. Make sure to check out this link, and if you like it, follow it to stay in touch with us to see this exclusive content. Robert, when we look at the housing market, there's like different areas in different locations, different parts of the country. Is there a huge difference for builders, homebuilders, and the amount of inventory that they're putting in the market and the demand in different areas? Yeah, well, first of all, I would say there's an enormous difference in the conditions around building across the country. If you think about the geography of home construction, more than 50% of homebuilding occurs in the American South. And the reason for that is the regulatory burdens and the ability to get a permit and get approval and move forward. All of those factors are easier to accomplish than they are, say, in the coastal markets. Likewise, we've seen a lot of growth in the mountain states. So you're thinking about the markets like in Utah and Colorado and Idaho and Montana, where there's been a big uptick in homebuilding conditions. Now, the flip side of the coin, of course, is that those areas were easier to build in. They saw more supply, more inventory. And when the market hits a slowdown period like we are in right now because mortgage rates went back up to 6.5%, inventory conditions are going to increase in those markets. And right now, I think you could categorize the Florida markets, the Texas markets as in a bit of a breather. New home inventory has increased. The foundational elements of the economy are really strong in those markets. Job growth, population growth, and some of the bigger Florida and Texas markets are two to three times national averages. So there's long-run demand, but the short-run supply is exceeding that right now. And so those are markets where builders are more likely to be using mortgage rate buy-downs or various kinds of incentive effects. The other way to think about geography as well is within a metropolitan area. So take a typical city, you've got your core area, your inner suburbs, your outer suburbs, and rural areas. One of the things that we've seen after the COVID experience that drove housing demand higher is a real shift in home building activity to those more affordable areas. And that would include the exurbs and the outer suburbs. So within metropolitan areas, regardless of region, one of the things we've seen is a shifting out of demand. And it's kind of interesting that that's occurring at the same time we see a rise in townhouse construction because that's kind of filling in some of that inner suburb development. So it's a really kind of complicated structure where you have big master plan communities out in the outlying areas. You have infill development, townhouse construction in some of the inner suburbs, and then teardown construction where you're taking an existing home and building a new home on that site. That's about 7% of home building. That's occurring closer in to the core areas within individual metropolitan areas. What about states like California and New York, the coasts? Is it very different, the dynamics of home building and the housing market here? Yeah, much more difficult to build in California and New York. It's a combination of a lack of lots. Again, that's one of those those L's that we mentioned at the very beginning of our talk. But the regulatory costs are a lot higher. I mean, the typical regulatory burden in California, $200,000 to $250,000 per single family home. And that's before you've even stuck a shovel in the ground. So it is difficult to build a five, $600,000 entry level homes when you've got that kind of regulatory concern. The consequence of that is under building. And of course, we can see the impact in the demographics in California where there's a lot of ex-Californians who have moved to markets like Austin or Denver or Las Vegas as a result of that's where buildings occurring. And then businesses chase those individuals in terms of thinking about job location and business location. So the regulatory costs, the natural geography, the availability of construction workers, all those factors dictate the cost of building and therefore dictate the volume of construction that takes place in individual markets. Robert, when you talk to your members and your company's builders, do they look at California and New York in a different way? Do they not want to build here? Is there hesitation? How are they looking at these markets versus other markets? There's hesitation, but there's also potential. I mean, California is still a large economy with a lot of economic activity and houses are where a job goes at night. So you still need to build housing, but it's been a real challenge. So hats off to the builders who operate in some of these higher regulatory environments. It's a lot more challenging. They've got to be more patient. They got to have long run plans, but there's still a lot of construction that takes place. For example, in California last year, California built about 55,000 single family homes. So the building's still taking place. The question is how many homes need to be built. And I would argue that 55,000 is simply not sufficient. And that's the reason why when you look at various kinds of housing affordability conditions, the majority of the top 20 least affordable housing markets are in California. It's directly related to the cost and difficulty of home construction and not just single family construction, but multifamily construction as well. And you mentioned New York. New York and the Mid-Atlantic and the Northeast offer kind of an interesting counterexample where you have an aging housing stock, but a lot of wealthier households. And so the remodeling market is showing particular strength in the Northeast and in the Midwest where you have this aging housing stock. Typical age of a home in the United States right now is about 41 years old. And just a decade ago, it was in the low 30s. That's a pretty big move and it's due to the lack of construction. So one of the things we're expecting to take place across the country, particularly in these older metropolitan areas, is a big growth in rehab and remodeling. And in fact, in our 10-year forecast, we have the remodeling market growing by 30% over the next decade. And do you see right now, is there a good opportunity for builders? Do you see this market favorable for builders? Yeah, the real kind of growth area right now is in custom home building. So that's building on an owner's lot where the builder's not really selling real estate, they're operating under a construction contract. That market expanded by 2% to 3% last year. It is reflecting the persistent demand by older, wealthier households. And so that is an area of opportunity. Townhouse construction, I think, is a great opportunity because one of the challenges is having not enough land to build on. So if you can build townhouses, it requires less land. And we're seeing opportunities, for example, with commercial real estate, an old shopping mall that has died because of the rise of e-commerce. Well, what's good to replace a shopping mall? An urban village that has low-rise multifamily and townhouses. And then the other item that I mentioned is teardown construction. I think with that aging housing stock, you're going to have a lot of community builders engaged in rehab, full house rehab, and then outright teardown construction over the next 10 years as we continue to invest in that aging, existing housing stock. Some people are kind of giving up on buying. What are your thoughts on that? Yeah. I mean, if you look at prior generations, there's always been periods of time where it was difficult to buy a home. I remember 10, 15 years ago, there was a big discussion about the millennials didn't want to become homeowners. That was nonsense. I mean, at the time, it was part speculation. It was part normative analysis. What there was a challenge was a lack of attainable supply. So each generation tends to go through that. The rent-buy decision tends to look complicated. But over time, what we find is about two-thirds of households want to become homeowners. And so it's simply a challenge whether the industry can supply the housing necessary for that to take place. And in fact, we find in the long run, something like 90% of American adults spend some period of time as homeowners. So with nine out of 10 becoming homeowners, homeownership and single family is an important part of the supply equation. But I would also argue that housing is a ladder. You need every rung for it to work. And often those initial rungs are rental housing. So that includes multifamily and the ability to add additional affordable multifamily construction. And it also includes this kind of a new item, single family built for rent construction. That's about 10% of the home building market. These are dedicated single family homes that are offered for rent in the same way that an apartment building would be. In fact, we often call this horizontal multifamily, an apartment building that's spread out of space. That allows for those more mobile, younger households that want a single family structure to rent for a few years, often while they're saving for a down payment to be able to purchase a home. So to get an efficient housing market that's going to benefit homebuyers, to benefit renters, to benefit businesses that are looking for housing for their workers is really just a complicated equation in order to get the right housing supply onto the market. Robert, some people argued that because corporations came into this market, they've kind of driven up the price. And this type of single family for rent is a sign of corporations owning these homes and us becoming renters, everyone becoming renters in the long run. What are your thoughts on that? Yeah, I tend to reject that position. If we go back to what we were talking about initially, which is home prices rising faster than incomes and the housing shortage, I would argue it's really not a question of who owns these homes. The prices have gone up and the affordability conditions have become a challenge because of simply the lack of supply. And in fact, if you think about single family built for rent construction, it's a way to add housing supply into the market. Now, yes, you can probably have a little bit of a discussion of whether businesses are buying the existing housing stock. Is that creating competition for somebody right at the margin that wants to be a homeowner? You can have a debate. I can see both sides of that argument. But when it comes to single family built for rent construction, any form of new supply, single family, multifamily, for sale, for rent is going to improve housing affordability conditions and improve the efficiency of the real estate market. So it's really important. And there is a policy angle here. We're seeing a housing bill move through Congress right now. The Senate had basically said to builders, if you use institutional capital, and remember, one of the five L's is lending, a lack of lending into the building market. But as a builder, if you use institutional capital, you can't build single family built for rent construction. Fortunately, the House of Representatives said, look, that is moving in the wrong direction in terms of encouraging housing supply. And the House ruled that provision out. So we'll have to see how potentially a conference committee will work out the differences in that pending housing legislation. But I think that's a good reflection of this particular debate. And I would argue strongly, we don't want to do anything that's going to hurt housing supply. And frankly, we need more of the for rent and the for sale housing in today's marketplace. Why is lending an issue? You mentioned that it looks like a great opportunity to be in because there's a lot of demand. The price has been going up. Why is lending an issue for the builders? Yes. And we should be careful when we talk about lending, particularly on the supply side, we're talking about financing available to builders and land developers. So we're not talking about mortgage financing. As you said, it is a great market to be in. But it's some of the scar tissue from the Great Recession. We saw a big decline in capital financing, debt financing available, particularly to small private builders who build about two thirds of the homes across the country. I think often when people think about home building and think about the big national builders, they're only about 30 percent of housing completions. These smaller community builders and regional builders depend on community bank financing. Well, the policy rules change when the policy rules change. It made it more costly, more difficult. There's more regulatory burdens. And so the result is the amount of financing available to home builders. And this includes things like the missing middle and townhouse construction. All that became more scarce and more expensive. So if we can find ways to help the supply side of the lending equation, that will enable more construction, which will then help those Do you have any policy suggestions? Is there anything the policy can do to help the home buyers and builders? Yeah, it's hard to enact. But I think the biggest thing that would benefit homebuyers and renters going forward are state and local efforts to rationalize zoning rules and speed up permitting time. So this was a discussion item, for example, in Los Angeles after the fires. How long is it going to take to rebuild and moving some of those regulatory requirements out of the way? So the rebuilding process wasn't a five year measure, but was closer to a two year type process. We need to institute those kinds of thinking and reforms across the country. So finding ways to to build more with density, for example, the typical single family home right now sits on about a fifth of an acre of lot size. If you look at the lot size in New England, the typical newly built homes sits on one acre lots. That's way too big. And it's due to exclusionary zoning practices. So zoning reform, I think the Trump administration can help incentivize state and local governments to make improvements there. That would be a positive. And then getting the availability of financing up. And then lastly, we need to really tackle that skilled workforce shortage in the construction industry. I mean, it's sort of ironic when we have a lot of discussion about the future of work and employment, given the AI revolution. Well, we know one area of the economy that's going to continue to see demand for workers, and that's any kind of job that requires using your hands. So chefs, nurses and construction workers. And right now, the construction industry has got about a quarter of a million worker shortage. And that too holds back the volume of supply for housing. You mentioned we're short one million homes. There's a lot of other calculations. And how did you come up with that number? How do you guys? Yeah, our one million estimate is by looking at vacancy rate data across the country in Census Bureau data. And what we found is that after the Great Recession, during that period of underbuilding, the vacancy rates for for sale and for rent housing continue to decline year after year, indicating a tighter market. So what we did was take a look at the demographics and say, how much housing stock would you have to add overnight to get those vacancy rates to return back to their historic norms? And that calculation yields a housing shortage estimate right now of about one point two million homes. Now, there are larger estimates out there. For example, Freddie Mac has talked about a housing shortage of four million homes. There are even larger numbers from other sources. And often those estimates are coming by looking at the traditional relationship between household formation growth, which is population growth, and building conditions. And building conditions have not kept up with household formation growth. So you get kind of a larger estimate. The other factor that distinguishes ours is that in the last 10 years or so, we've seen a lot of development of what are called ADUs, accessory dwelling units, particularly in markets like California. And an ADU is just simply installing effectively a small apartment in an existing owner-occupied home. Well, there are about 1.5 million of those ADUs, and that counts as a form of housing supply and reduces that shortage estimate. And the other reason that ours is a smaller estimate is those young adults living at home with their parents. You have differing assumptions among economists on whether that particular population source of demand is unlockable, or it reflects a long-run sociological change. We take a conservative approach and say that's a permanent change and cannot be unlocked. But in theory, we know it can be that with additional affordable supply, you will get an uptick in household formations, you will get an uptick in marriage rates, and Americans having more children. And it's really just a function of how expensive it is to live and acquire housing. And how long do you think it will take for builders to build up to this demand to catch up with the 1 million shortage? It took us years to get into the shortage, and it's going to take us a few more years to at least get out. In fact, our estimates indicate that it's probably going to be an issue of the housing shortage until the early 2030s. That does not mean based on today's trends that the housing affordability crisis will end. It just means the housing stock size catches up to the potential demand based on today's demographics. So we think the housing shortage is going to last at least a few more years. The housing affordability crisis, I think, unfortunately, is going to be something we're going to be dealing with over the next decade. We do see some improvements with eventually some declines in mortgage interest rates. But really, we need to reduce the cost of construction. And that means addressing those five L's and some of those structural frictions on the supply side of the housing market. Now, Robert, a lot of people are surprised by the way the housing market has been performing ever since the pandemic. What was it like for you to see this market? That's a great question, because I kind of think back to 2012. We're only about two or three years out from the Great Recession. We've had this huge housing glut, this big sustained period of time where home prices went down 30 or 40 percent. And we began to sound the warning that the housing supply side of the sector, the residential construction industry had fundamentally changed, that we were looking at worker shortages. We had lost a million and a half workers. We were looking at a tighter regulatory environment. And we began to sound the warning that we were going to face a housing shortage. So in some ways, this proved us correct. I wish we had been wrong. I think the housing market would have been a lot more affordable if we had been wrong. But we were sounding that warning all the way back in 2013 and 2014 and saying, look, if this happens, we're going to have a housing deficit and home prices are going to go up faster than incomes. And if anything else, COVID gave us this natural experiment where mortgage rates went down, you had this change in economic geography and this big jump in home prices. And it unfortunately proved us correct. So if our thesis is correct, we know what the solution is, which is continue to make progress on all these supply side frictions, including getting workers in the sector, more land available for building and addressing those regulatory costs that make it too expensive to build rental housing and for sale housing. Robert Dietz, it was great having you on Market Insider. It was great to join you today. What do you think of this conversation with Robert? Do you think the housing costs should come down significantly, or do you think they will go up because of the shortage that we're facing? Make sure to comment and let us know. I'm Siamak. This is Market Insider. We'll see you next time.