The Great Housing Shortage Myth: Why Building More Units Might Not Be the Solution

For years, the conventional wisdom driving real estate policy, investor sentiment, and public discourse has been clear: The United States is facing a massive, structural shortage of housing. The mantra, repeated by industry leaders and policymakers alike, has been that the answer to soaring rents and home prices is simple—we must build more units to close the gap.

However, new research from Professor Emeritus Kirk McClure of the University of Kansas and his co-author, Alex Schwartz, is challenging this foundational narrative. By analyzing decades of census data, their findings suggest that the perceived shortage may be a misdiagnosis, one that could lead to inefficient policy and misaligned investment strategies.

The Foundation of the Debate: Challenging the "Shortage" Narrative

The prevailing narrative posits that a failure to build enough housing following the 2008 financial crisis created a supply-demand imbalance that has since spiraled out of control. When Dave Meyer, host of the On the Market podcast, sat down with Professor McClure, the conversation centered on a provocative question: What if the shortage doesn’t actually exist in the way we think it does?

McClure admits that he and Schwartz began their research with the same assumption held by most experts. "Our initial working hypothesis was that we would find a greater shortage in the so-called hot markets—Boston, New York, Seattle, San Francisco," McClure explained. "Simply put, we couldn’t find it."

Chronology of the Data: From 2000 to 2020

To understand the scope of the housing market, McClure and Schwartz examined the period between 2000 and 2020. Their findings reveal a pattern of growth that contradicts the idea of a nationwide supply crisis:

• Population Growth: During this two-decade span, the U.S. population grew by approximately 18%.
• Household Formation: The number of households grew by 20.3%. Household formation is often considered a more accurate metric for housing demand than raw population growth, as it tracks the actual number of living units required by individuals and families.
• Housing Production: The total housing stock grew by 21.2%.

Because the housing stock grew at a faster rate than both population and household formation, the math behind a "nationwide shortage" becomes difficult to sustain. McClure notes that for a shortage to exist, household formation would have to outpace the production of new units, which was not the case on an aggregate level during this period.

Examining the "Starting Point" Bias

A significant portion of the debate hinges on the starting year of analysis. Many studies that claim a housing shortage, such as those from Freddie Mac, often use 2010 as their starting point. McClure argues that this is fundamentally flawed.

"2010 was the aftermath of a massive bubble," McClure explains. "We had built in excess of 140 units for every 100 households between 2000 and 2010. By choosing 2010 as a starting point, these studies ignore the massive glut of housing that existed at that time." When viewed across the full 20-year span, the slowdown in construction post-2010 appears less like a systemic failure and more like a necessary market correction to absorb the previous oversupply.

Supporting Data: Dissecting Market-Specific Realities

When the researchers drilled down into the data, they examined approximately 900 metropolitan and micropolitan markets. After filtering out roughly 140 areas experiencing population decline, they analyzed the remaining 760-plus markets. They found that only 19 of these markets actually met the criteria for a consistent housing shortage—defined as housing production failing to keep pace with household formation.

This suggests that the "shortage" is not a national emergency, but rather a localized phenomenon or, more accurately, a problem of affordability rather than raw availability.

The "K-Economy" and the Affordability Crisis

If there isn’t a national shortage, why are prices and rents skyrocketing? McClure points to a phenomenon often described as a "K-shaped economy."

"It’s really the aggregate dollars in a market that set house prices," McClure says. He highlights that high-income, high-wealth households are aggressively bidding up home prices, often fueled by tax incentives that favor homeownership. While the median home price has decoupled from median household income, it has tracked closely with the income of the top tier of households.

The Rental Market Conundrum

The situation in the rental market is more complex. While renters are indeed struggling, it is often not because of a lack of physical units. Instead, low-income earners are being priced out by middle-income households who, unable to purchase homes, are flooding the rental market. This increased competition for rental units drives up prices, creating a "shortage" for the lowest-income tiers even when mid-market supply is sufficient.

Implications for Public Policy and Investment

The implications of McClure’s research are profound for both private developers and federal policymakers.

The Misguided Focus on New Construction

McClure argues that current efforts, such as the Low-Income Housing Tax Credit (LIHTC) program, are often inefficient. While the program is designed to create affordable housing, he points out that it frequently ends up serving middle-income households rather than the "truly poor." Furthermore, he cites research suggesting an 85% displacement rate, meaning that for every 100 tax-credit-subsidized units built, 85 market-rate units are not built, resulting in a negligible net gain in total supply.

A Call for Targeted Assistance

Rather than focusing solely on "hammers and nails," McClure suggests that the government could achieve better outcomes through direct rental assistance. "We know the units are out there," he asserts. Expanding programs like the Housing Choice Voucher (Section 8) would put resources directly into the hands of those who need them most, allowing them to access existing inventory rather than waiting for new, expensive, and often ineffective construction projects.

Official Responses and the Road Ahead

The real estate industry is currently built on the assumption of a housing deficit. For investors, underwriting deals based on a permanent shortage has become standard practice. McClure’s findings suggest that investors should be cautious. If the market is actually saturated in certain segments, the assumption of perpetual rent growth may be flawed.

"I have yet to meet a home builder who ever thought there was such a thing as too much housing," McClure says. However, he warns that if we continue to overbuild in the middle-market segment, we may be setting the stage for a period of stagnation or correction.

Ultimately, the goal of housing policy should not be blind production, but rather the creation of a stable, inclusive market. By shifting the focus from the quantity of units to the affordability of existing stock and the financial stability of the lowest-income households, policymakers could move toward a more sustainable future.

As the debate continues, one thing is certain: the conversation has shifted. The question is no longer just "How much can we build?" but rather "Who are we building for, and is there a more efficient way to ensure everyone has a place to live?" For investors, policymakers, and prospective homeowners, understanding the distinction between a supply shortage and an affordability crisis is now the most critical task in the industry.