The prices listed to rent or purchase an apartment, condominium, or house are the products of multiple inputs. When we look at the supply and demand in a particular market, demographics and local economies have major impacts on demand. Markets with a diverse local economy and an educated workforce attract people from other places and retain folks who are already there. As a result, many people are competing for a limited supply of housing. 

What are the inputs on the supply side in every place that has a serious housing shortage? And, given the recent uncertainties, what changes can we reasonably expect in those supply inputs?

Mortgage Interest

Mortgage lenders tie the interest rate on loans to the yield on the U.S. 10-Year Treasury Note. Investors from across the globe have considered Treasury bonds to be a very safe and secure investment. The interest rate set for Treasury bills, notes, and bonds are established by auctions. If there are a lot of bidders, the interest rate gets lower; when there are fewer bidders, the interest rate climbs. When the U.S. stock market is performing poorly, investors sell their stocks and park their money in Treasury issues to wait out market volatility, typically moving the yields at auction lower with the increased volume.

These days, many investors are selling stocks and treasuries to invest somewhere else. Yields on the 10-Year Treasury Note, the benchmark for mortgage rates in the U.S., are rising because international investors do not have confidence in the American economy and the current federal administration. This means that mortgage interest rates will continue to rise. Homeowners with low interest rates from the pandemic period will thus be more likely to hold on to their homes, further constraining supply.

Insurance

Mortgages require homeowner’s insurance to protect the assets securing those loans. Insurance premiums continue to rise with higher levels of claims for wildfires and hurricanes, but as the costs of construction material and labor continue to rise with tariffs and threats of deportation, the replacement costs insurers must factor into their premiums also rise. Increased insurance costs add to the higher mortgage payment, further reducing what homebuyers can qualify for.

Construction Labor

There was already a chronic shortage of construction labor before the Trump administration started its aggressive deportation campaign. If it continues, the labor shortage will be exacerbated, driving up construction costs.

Construction Materials

The five materials most critical to housing construction are steel, aluminum, copper, concrete, and lumber. All of these are subject to tariffs. In addition to the tariff premium, we should expect supply chains to be impacted.

Local Zoning

In most places experiencing significant population growth, zoning continues to constrain production of housing types other than single-family houses. More-expensive mortgages and insurance, labor, and materials costs will predominantly be channeled into the type of housing that is already the most expensive to build: single-family houses. However, they produce less tax base per net acre than other forms of housing, which puts local municipalities in a position where they must increase the tax rates to make up for the diminished tax base, or reduce services to local residents.

What Can We Do?

It will take a long time for America to regain the confidence of international investors in U.S. treasuries and to unwind actual tariffs and the uncertainty of an erratic trade policy. The effort to recover some form of equilibrium will extend beyond the term of the current administration. We will continue to see a shortage of construction labor—even if, by some miracle, Congress passes comprehensive immigration reform. At the same time, the demographic pressure on the demand for housing will not go away.

For small-scale developers and builders, there are a couple things we can do at the local level to partially mitigate all the global and national level impacts upon housing. Grassroots training in the construction trades can improve access to construction labor for small builders and developers. Large projects by big outfits will depend on community colleges and union apprenticeships, so small operators will need to focus on job training and adhoc workshops.

Local zoning reform can open up opportunities for greater housing choice, legalizing accessory dwelling units (ADUs), duplexes, cottage courts, row houses, and small apartment buildings. Unfortunately, it can take years for some local governments to approve minor changes like ADUs. These reforms will also require bottom-up, grassroots support. Neighbors will need to see good examples when opportunities to build differently become available.

Let’s bear in mind that it will not be easy to cultivate bottom-up changes in local zoning at a time when people are being impacted by top-down structural economic problems. Our national housing crisis was already dire before the recent uncertainties unleashed by the Trump administration. We should expect the housing crisis to worsen during the recession that is predicted to occur in the months ahead. 

Can small operators reduce their participation in the recession by building community at the local level? Strengthening connections with our neighbors will be critical for zoning reform and cultivating new construction trades. Success in those two efforts could actually grow a small enterprise in tough times.

Featured image: Cottage Square,  Ocean Springs MS., courtesy of the author.