Supply crunch hits would-be homebuyers, makes renting cheaper

Young workers flocking to America’s fastest-growing metropolitan areas in search of good jobs are finding it increasingly difficult to buy homes as decades of public policy decisions collide with a shorter-term supply chain crisis.

The result is that for millions of Americans who live in the nation’s economic powerhouses, renting is now cheaper than buying a home: In about half of the country’s largest cities, median rent is less than the average monthly mortgage of a starter home.

“Home prices are rising at double digit growth in 90 percent of metro areas,” said Gay Cororaton, director of housing and commercial research at the National Association of Realtors. “It’s really the supply that’s constraining homeownership, not the desire to rent.”

In cities like Austin, San Francisco, Seattle, Boston and Los Angeles, median rents are 40 percent or more lower than the monthly cost of buying a starter home, according to data from Realtor.com. The real estate firm Zillow, which monitors both home and rental costs, found renting is cheaper than monthly mortgage payments in 22 of the top 100 metro areas.

The higher costs of buying a home come from an overall shortage in inventory that has sent home prices soaring in recent years. Home builders are constructing fewer new homes than they were before the great recession, a decade ago. The millennial generation is entering prime home-buying ages and more older Americans are looking for second homes, adding to an increase in demand.

“There is so much pressure in the housing market,” said Nicole Bachaud, an economic data analyst at Zillow. “The supply deficit started at the end of the Great Recession. Builders stopped building at the same level they had been prior to the financial crisis.”

More recent supply chain problems have added to the squeeze. The coronavirus pandemic caused manufacturing delays, from lumber to appliances, and a labor shortage that has meant some contractors have slowed their already tepid building pace.

“If there’s no lumber, they can’t put up the door or the window frame. Or even appliances — you can’t sell a home with a missing appliance,” Cororaton said.

At the same time, apartment construction has boomed at an unprecedented pace. Twenty-six of the nation’s largest metro areas have added more than 10,000 new rental units in just the last year, according to the National Association of Realtors. The Dallas and Houston metro areas combined have added 100,000 new units during that period.

The pace of growth in new rental units does not appear to be slowing: In Washington, D.C., where cranes dot the skyline and new buildings sprout up from Navy Yard to the Wharf to the NoMa neighborhood, 19,000 new units have been added in the last year — and 35,000 new units are under construction, Cororaton said.

The growing availability of inexpensive — or less expensive — rental units and the shrinking housing inventory has added a level of transition to the mega-metro areas that increasingly drive the American economy, forcing workers into rental living for longer periods than earlier generations experienced at similar points in their lives. That shift is falling disproportionately on millennials, who entered the labor market in the midst of or just after the recession and now must contend with a pandemic-era shock.

“These places are becoming temporary places to labor while starting your career. These kind of dynamics are creating a pretty broad sense of dissatisfaction among younger workers, some of the most important workers, actually,” said Mark Muro, policy director at the Brookings Metropolitan Policy Program. “It’s very important that we have super dynamic early stage technology centers, but this has always been part of the problem with housing stresses.”

There are some hints that the rapid growth in housing prices is near a plateau, Bachaud said, as Federal Reserve policymakers signal higher interest rates ahead and apartment costs rebound from pandemic-era lows. And even though it may cost less to rent on a month-to-month basis, the longer-term benefits of buying — building equity and credit — remain attractive to many first-time homebuyers.

“If you’re living in a rental versus a home for 5, 10 years, eventually it’s going to skew more beneficial to own a home because you’re getting equity,” Bachaud said. “We’re going to see the peak of home price appreciation soon, and appreciation will start to drop back to normal levels.”