June 12, 2019

Key Takeaways


  • Annual household formation this decade has averaged 1.04 million, while housing production has averaged 880,000 units.
  • The resulting annual housing undersupply of 160,000 units has been a major contributor to rising housing costs.
  • Over the past seven years, single-family sales prices increased by 7.1% per year, much higher than the average wage growth of 2.5%.
  • Multifamily’s 3.1% annual rent growth also outpaced the average wage increase.
  • Trends in 2019 will not necessarily mitigate housing unaffordability but should not exacerbate the situation.

The Roots of Housing Unaffordability

Housing affordability is a common concern throughout the housing industry. For a good portion of American households— especially more moderate-income families—housing costs are taking a larger portion of the paycheck. Finding affordable housing options has been a growing challenge.

Figure 1: Household Formation & Housing Production, 2000-2018

Source: CBRE Research, U.S. Census Bureau, Moody's Analytics, Q1 2019.

Figure 2: Average Annual Household Growth & Housing Production
Source: CBRE Research, U.S. Census Bureau, Moody's Analytics, Q1 2019. *Average for entire 1968-2018 period.
Given the cyclical nature of the housing market, much of the increase in housing costs this decade represents recovery of the value loss from the recession and mid-2000's overbuilding in single-family housing. Yet both single-family sales prices and multifamily rents have gone beyond prior peak levels and, through the 2010s, average sales price and rent increases have outpaced wage growth.

This Research Brief compares housing cost increases relative to wage growth over recent years, and it identifies a major source of the problem: the undersupply of new housing over the past decade.

Figure 3: Long-Term U.S. Household Growth - Annual Increase

Source: CBRE Research, U.S. Census Bureau, Moody's Analytics, Q1 2019.

Undersupply of Housing Production in 2010s

Figure 4: Comparative Price Changes
MFRB 68 Figure 4
Sources: CBRE Research, CBRE Econometric Advisors, National Association of Realtors, U.S. Bureau of Labor Statistics, AEI Housing Center. Rent data through Q1 2019; other data through April 2019. Average annual SF increase for the West was 9.6%. For AEI’s FHA sales price index, January 2012 = 100; low represents all sales ≤40th percentile.

Over the past eight years, U.S. housing construction has not kept pace with household formation even though household growth continues to edge down. The resultant undersupply has been a major contributor to rising single-family home sales prices and multifamily rents. Rising land costs, increased labor costs, greater development regulations and many other factors have also contributed to rising housing costs.

In the 2010s, total U.S. households rose by 1.04 million annually, while housing production (single-family and multifamily combined) averaged 880,000 units. This resulted in an undersupply of 160,200 units per year. The undersupply is even greater if obsolescence is factored into the equation. The undersupply is also much more pronounced in various locations and by price ranges.

In the 2000s, housing construction (especially single-family) far outstripped household growth, so the 2010s undersupply is partly a reaction to and balancing of the prior decade's oversupply. However, the 2010s undersupply also led to a rapid rise in housing costs (costs climbing beyond the prior peak). Single-family housing experienced the most significant cost increases. Average multifamily rent growth over the past seven years is about half that of single-family home sales price appreciation, based on data from National Association of Realtors. The FHA sales price index also shows single-family price increases outpacing multifamily rents, especially in lower-priced homes.

Figure 5: Single-Family Median Sales Price

Source: CBRE Research, National Association of Realtors, April 2019.

Housing Unaffordability Situation Stabilizing

Figure 6: Annual Increases in Sales Price & Rents
Source: CBRE Research, CBRE Econometric Advisors, National Association of Realtors *2019 represents year over year change as of Q1 for multifamily and April for single family.
Housing affordability challenges will not disappear soon but, at the national level, the gap between housing cost increases and wage growth should narrow this year. Wage growth continues to rise. The April 2019 increase was 3.2%. Given the very tight labor market, wages are likely to rise further this year. Total housing production caught up to household formation in 2018. The National Association of Home Builders expects 2019 single-family housing starts to rise by 3.4%. Multifamily completions are projected to climb slightly in 2019 and starts will likely be a little less than in 2018.

Single-family median sales price increases have been edging down for the past few years, and the April year-over-year increase was a relatively modest 3.7%. The West had an increase of only 1.7%. Single-family sales price increases will likely stay in the 3%-to-4% range through 2019, while multifamily rent growth is expected to remain around 3%.

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