The untold reason why America's housing shortage is out of control

Rising development costs are fueling America’s housing affordability crisis as scrambling builders can't keep pace with demand.

According to Ned Davis Research, the U.S. currently faces a housing shortage of 2.2 million homes. The chronic shortage isn’t a new phenomenon, but one that goes all the way back to the Great Recession.

“Since 2015, we have been warning about a chronic housing shortage, leading to a supply/demand imbalance,” the researchers wrote. “Following the GFC, new residential construction effectively stopped, and we have been trying to catch up ever since.”

Fixing this imbalance today is much harder because developers face higher insurance costs, taxes, and land prices, as well as more environmental regulations.

The rise in labor costs has also made it harder for developers to build affordable units. Instead, they opt for larger, more expensive home projects to make up for surging development costs.

The end result is a housing market that’s become much more unaffordable for average buyers. As Bank of America recently noted, U.S. home prices jumped 46% between January 2020 and 2024.

Much of that growth came despite a noticeable drop in home sales, a fact that seems to defy basic economics.

Home prices continue to rise, albeit at a slower pace

With housing inventory still at record lows, homebuyers don't have many options to choose from. That partly explains why existing home prices notched record highs in May, even as sales slumped.

According to the National Association of Realtor’s latest report, existing home sales—which account for roughly 87% of the housing market—fell 0.7% during the month, while home prices hit a record high of $419,300—a 5.8% increase year over year.

A separate report from the Federal Housing Finance Agency (FHFA), which tracks home prices with a slight lag, said average single-family home prices in April were up 6.3% over the past year.

While home prices continue to rise, the one silver lining for shoppers is that the pace of growth seems to be “normalizing,” or slowing, says FHFA. But even if price growth comes to a dead stop, homebuyers will still have to pay record prices.

According to ResiClub co-founder Lance Lambert, home price growth in the first 50 months of the 2020s has outpaced the last three decades combined.

“One thing that is unique about the current decade is that we've seen a greater level of overall price inflation compared to the same point in the previous three decades,” Lambert wrote.