America Underbuilt Inc.: The Supply Side of the U.S. Housing Challenge

In a recent post, we documented how housing prices have dramatically outpaced income growth across most U.S. counties over the past two decades. One of the key drivers identified was inelastic housing supply—the inability of new construction to respond adequately to rising demand. This companion post examines the supply side of the equation: How much housing is the U.S. building, and is it enough?

Building Permits: A Long-Term Perspective

To understand housing supply, we start with building permits—the first step in the construction pipeline that also captures the optimism of real estate developers and households about the future. Looking at permits adjusted for population growth provides a clearer picture of whether construction is keeping pace with a growing nation. (See the first figure.)

As the figure shows, there are several distinctive periods:

• The 1970s peak: Permit activity peaked in 1972 at 10.6 permits per 1,000 people. This was no accident—the baby boom generation was entering prime household-formation age, the interstate highway system had opened vast suburban lands for development, and federal policies—from Federal Housing Administration loan guarantees to mortgage interest deductions—actively encouraged homeownership. This confluence of demographic pressure, available land and policy incentives created the high-water mark of postwar housing construction.
• The 1980s to the 2000s, from volatility to growth: The period of high inflation and interest rates is reflected in the volatility of permits, until the mid-1990s that started a decade and a half of stable growth.
• The 2008 collapse: The housing crisis triggered a dramatic decline in permits. Total permits fell from 7.3 per 1,000 in 2005 to just 1.9 per 1,000 in 2009—a 74% decline and the lowest level on record since data collection began in 1960.
• The incomplete recovery: Despite over a decade of recovery, total permits per capita in 2024 stand at 4.3 per 1,000—still 35% below the 1960-2000 average of 6.6 permits per 1,000. The U.S. is building less housing per person than at almost any point in the postwar era.

Why Has Housing Construction Stayed Low?

Several factors constrain today’s housing supply:

• Labor shortages: The construction workforce never fully recovered after the 2008 financial crisis, as many workers left the industry permanently and fewer young workers entered the trades.
• Rising costs: Building material, land and labor costs have increased faster than overall inflation, squeezing builder profitability.
• Regulatory barriers: Zoning restrictions, lengthy permitting processes and community opposition to new development all limit where and what can be built.
• Land constraints: Developable land near job centers has become scarcer and more expensive, pushing construction to outlying areas.

The Multifamily Shift

One notable trend is the growing share of multifamily construction (5+ units). Multifamily permits have risen from 0.4 per 1,000 in 2011 to 1.3 per 1,000 in 2024, partially offsetting weak single-family activity. Single-family permits remain at 2.9 per 1,000—well below the historical average of 4.1.

From Permits to Completions: The “Leaky Pipe” of Supply

A building permit is a statement of intent, not a finished home. By analyzing the growing divergence between permits issued and final completions, we can identify the specific structural bottlenecks—from labor shortages to regulatory hurdles—that prevent permitted units from flowing to completion.

The second figure reveals three hurdles to finishing construction:

• The completion lag: Permits consistently lead completions by several months to a year, reflecting the time required to build. In 2024, permits stood at 4.3 per 1,000 people while completions were 4.8 per 1,000 people—the gap has narrowed as the postpandemic construction pipeline works through.
• Historical patterns: At the 1972 peak, permits reached 10.6 per 1,000 while completions hit 9.5 per 1,000 the following year. During the 2008 crisis, both series collapsed together, with completions falling to just 2.1 per 1,000 by 2010.
• Postpandemic divergence: The COVID-19 pandemic period shows notable dynamics—permits surged to 5.2 per 1,000 in 2021 as demand spiked, but completions lagged as builders faced unprecedented supply chain disruptions and labor shortages.

Housing Stock and Household Size

Total housing inventory must be measured against the evolving American household. As average household sizes shrink and the desire for independent living grows, a “static” housing stock effectively becomes a shrinking one. Examining this ratio reveals whether our current infrastructure is designed for 1970s household sizes or today’s demographic realities.

The figure above makes two things clear:

• Six decades of growth: The housing stock per capita has grown steadily over the past 60 years: from 332 units per 1,000 people in 1965 to 386 in 1980, 415 in 2000, and 432 in 2024. This represents a 30% increase since 1965—roughly matching the decline in household size.
• Declining household size: Average household size has fallen dramatically: from 3.37 persons per household in 1965 to 2.81 in 1980, 2.65 in 2000, and 2.57 in 2024. This means family size has declined by nearly a quarter (23.7%) since 1965; as a result, far more housing units are needed to house the same population.

So, on this back-of-the-envelope calculation, the U.S. doesn’t look obviously “overbuilt” at the national level: Units per person increased by roughly the same amount as the household-formation pressure implied by smaller household size—if anything, slightly less.

Finally, consider the gap between occupied and the total stock. Occupied housing grew from 297 per 1,000 in 1965 to 387 per 1,000 in 2024. The difference between total stock and occupied units represents vacancy—which has tightened considerably in recent years.

Vacancy Rates: A Market Tightness Indicator

Vacancy rates provide a real-time signal of market conditions. Low vacancies indicate that available housing is being absorbed quickly, often correlating with rising prices and rents.

These vacancy rates have shifted dramatically in the past two decades.

• Postcrisis spike: Vacancy rates spiked after 2008 as foreclosures flooded the market. Rental vacancies hit 10.6% in 2009, while homeowner vacancies reached 2.9% in 2008—both elevated as distressed properties sat empty.
• The current tightness: Both vacancy rates have fallen to near-historic lows. Rental vacancy stood at 6.8% in 2024—down from the 2009 peak and below the 1960s levels of 7% to 8%. Homeowner vacancy was just 0.95% (2024)—the lowest on record, down from 2.9% in 2008.

What do low vacancies mean? Low rental vacancies give landlords pricing power and indicate few options for renters seeking affordable units. Low homeowner vacancies signal intense competition among buyers, driving prices higher.

Supply vs. Demand: Are We Building Enough?

The ultimate litmus test for the housing market is simple: Are we building enough roofs for every new household formed? When construction lags behind household growth, housing isn’t just expensive—it becomes a game of musical chairs in which the lowest earners are left without a seat.

This figure shows two distinct changes during the past two decades:

• The precrisis overshoot: In the years leading up to 2008, housing completions frequently exceeded household formation. In 2004, 1.83 million units were completed while only 1.35 million new households (three-year average) were formed—contributing to the oversupply that precipitated the crash.
• The postcrisis undershoot: Since 2008, the pattern has been mixed. In several years, household formation outpaced completions. In 2011, only 585,000 units were completed while 1.30 million households (three-year average) formed—a striking imbalance.

The result of these changes has been a cumulative gap. Various studies estimate a cumulative housing shortfall of 3 million to 5 million units that has built up since 2008, contributing to today’s tight market conditions.

The Affordability Consequence

These supply shortfalls have real consequences for housing affordability. As we documented in our companion post on housing affordability, median home prices have increased roughly 207% since 2000, while per-capita incomes rose only 155% over the same period. When housing supply cannot keep pace with demand, the result is predictable: Prices rise faster than incomes, and homeownership becomes increasingly out of reach for many American families.

Conclusion: The Supply Imperative

The data tell a consistent story: The U.S. is not building enough housing to meet demand. Building permits per capita stood at just 4.3 per 1,000 in 2024—35% below the 1960-2000 historical average and 59% below the 1972 peak. Vacancy rates have fallen to historic lows, with rental vacancy at 6.8% and homeowner vacancy below 1%, signaling intense competition for limited housing stock. Various estimates suggest a cumulative shortfall of 3 million to 5 million units has accumulated since 2008.

Demographic pressures compound these challenges. Average household size has fallen 23.7% since 1965—from 3.37 to 2.57 persons per household in 2024. Yet construction has not kept pace with this structural shift in how Americans live.

These supply-side constraints are a key driver of the affordability challenges documented in our companion post. When housing supply cannot respond elastically to demand, price increases are the inevitable result. The evidence suggests that addressing housing affordability likely involves more than just demand-side interventions. Navigating these challenges may also require examining the regulatory and structural constraints—such as zoning frameworks and labor availability—that limit the market’s ability to expand supply in response to need.