The U.S. housing market has largely returned to normal ten years after the housing crash, but shortages of homes for sale and rent are pushing costs higher for potential owners and tenants, according to the latest State of the Nation’s Housing report from the Joint Center for Housing Studies (JCHS) at Harvard University.

“While the recovery in home prices reflects a welcome pickup in demand, it is also being driven by very tight supply,” said Chris Herbert,  managing director of the JCHS. The U.S. has added just nine million new units during the last decade, more than four million units less than the next-worst ten-year period in the late 1970s. “Any excess housing that may have been built during the boom years has been absorbed, and a stronger supply response is going to be needed to keep pace with demand—particularly for moderately priced homes.”

Because fewer entry-level homes are being built, conditions are especially tight at the lower end of the market. Between 2004 and 2015, completions of smaller single-family homes (under 1,800 square feet) fell from nearly 500,000 units to just 136,000. At the same time, the number of townhouses started in 2016 (98,000) was less than half the number started in 2005.

Labor shortages are a major reason for lower rates of new-home construction. Additionally, regulatory requirements have limited the supply of land available for both single- and multifamily housing. Those two factors work together to raise development costs and home prices.

“In certain markets, it’s impossible to build a unit for much under $450,000 to $550,000 a unit,” said Bob Kettler, chairman and CEO of real estate development firm Kettler. “That’s just the reality of it.”

Until supply catches up with demand, housing will be a major financial drain for many Americans. The report says that in 2015, nearly 19 million U.S. households dedicated more than 50 percent of their incomes to housing.

Home Prices Rise

In 2016, home prices across the U.S. finally exceeded those seen before the Great Recession. However, the gains varied widely across the country, with some markets seeing prices rise more than 50 percent since 2000, while others seeing modest gains or even declines. That’s increased the gap between home prices in the nation’s most and least expensive housing markets.

The national homeownership rate is leveling off as well. As of the first quarter of 2017, the rate stood at 63.6 percent, which is nearly unchanged over the past two years. Last year’s growth in homeowners was the largest increase since 2006, and early indications point to growth in homebuying in 2017.

“Although the homeownership rate did edge down again in 2016, the decline was the smallest in years,” said Daniel McCue, a senior research associate at the JCHS. “We may be finding the bottom.”

Multifamily construction has led the housing recovery in recent years. Despite that, the rental vacancy rate hit a 30-year low in 2016. As a result, rent increases continued to outpace inflation in most markets last year. Although rent growth did slow in a few large cities, there is little evidence that additions to rental supply are outstripping demand. In fact, strong growth at the high end of the market and losses at the low end means higher housing costs for low- and moderate-income households.

Demand for both rental housing and entry-level homeownership is set to soar over the next ten years as millennials enter the housing market in huge numbers. The baby-boom generation will also continue to play a strong role in housing markets, driving up investment in both existing and new homes to meet their changing needs as they age.

“Meeting this growing and diverse demand will require concerted efforts by the public, private, and nonprofit sectors to expand the range of housing options available,” said McCue.

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