HOUSING DATA AND POLICY SNAPSHOT
Measuring the Underproduction of Housing
The nation’s housing crisis is complex and multifaceted, yet one of the basic truths behind the crisis is that there is simply not enough housing for everyone who needs it. Researchers are increasingly citing the long term underproduction of housing as one of the primary culprits for this shortage, and the sales and rent increases that have resulted from it. Underproduction is a term used to describe the difference between the total number of housing units needed and the total number of housing units available.
In October 2023, Up for Growth (UFG) released its latest report on housing underproduction, warning that the nation’s housing supply gap is getting wider, faster. The report, sponsored by the American Planning Association, estimates that the country is missing approximately 3.9 million homes. This figure represents a three percent increase from 2019 and a 136 percent increase from 2012. According to their research, 193 metropolitan areas were experiencing underproduction in 2021, and housing underproduction had worsened in 83 percent of all markets.
UFG is not alone in their analysis. Several organizations have used different methodologies to arrive at similar conclusions:
- Research from the National Association of Realtors suggests that the gap between new home construction and new households grew to 2.3 million homes nationally between 2012 and 2022.
- Freddie Mac, the government-sponsored purchaser of mortgage-backed securities, estimates that the U.S. had a housing supply deficit of 3.8 million units as of the fourth quarter of 2020.
- The National Multifamily Housing Council found that the U.S. needs to build 4.3 million more apartments by 2035 to meet the demand for rental housing.
This emerging consensus suggests that the underproduction of housing is a national problem that has consequences for individual households, local economies, and housing politics. This begs the question: Is there a housing shortage in Greater Philadelphia? If so, how does our region compare to other metropolitan areas? This snapshot will take a closer look at issues related to underproduction and use UFG’s research to explore how these issues are playing out in Greater Philadelphia.
Underproduction in Our Region
UFG’s analysis is conducted for Metropolitan Statistical Areas (MSA). This geography groups eight of DVRPC’s nine counties into the Philadelphia-Camden-Wilmington (PA-NJ-DE-MD) Metro, along with Salem County, NJ, New Castle County, DE, and Cecil County, MD. Mercer County is classified as a distinct metro known as Trenton-Princeton, NJ.
UFG estimates that the Philadelphia MSA was missing nearly 80,000 housing units in 2021, the 10th highest total of any metropolitan area in the country (see Figure 1). This total represents a slight improvement from 2019, when the Philadelphia MSA, again ranked tenth in the country, had a shortage of roughly 90,000 units.
Figure 1: Housing Underproduction by Metropolitan Area (2021)
The region’s prominent placement on these lists is partially a function of its large size. However, the region’s underproduction problem appears to have worsened significantly since 2012. That year, UFG calculated an underproduction total of only 7,513 units, and the Philadelphia MSA’s housing shortage was ranked 31st in the nation.
UFG tries to contextualize these totals by measuring a region’s missing housing units as a share of its total housing stock. According to this measure, Philadelphia’s underproduction total represented 0.3 percent of total units in 2012, 3.6 percent in 2019, and 3.1 percent in 2021. When viewed as a share of total housing stock, the Philadelphia MSA’s 2021 underproduction gap is smaller than the Los Angeles (7.1 percent), Washington DC (5.7 percent), and New York (4.3 percent) MSAs and roughly equivalent to that of the Chicago and Baltimore metropolitan areas.
UFG calculated an underproduction total of 6,084 housing units for the Trenton-Princeton, NJ region in 2021. This shortage registers as 4.1 percent of Mercer County’s total housing stock.
How is Underproduction Measured?
Generally speaking, UFG tabulates potential housing supply shortages by comparing the number of occupied housing units in a region to a target number of housing units for that geography (more information on their methodology is available on page 14 of the 2022 Report). The formula they use includes four elements that are described below: missing households, insufficient availability, uninhabitable units, and unoccupied units.
Missing households are those that may not have formed due to lack of availability and affordability. For example, households with adult children living with their parents or people living together as roommates at levels exceeding historical norms. Recent data shows that New Jersey is the state with the highest incidence of people ages 18 to 34 living with their parents—45 percent in 2019, compared to 34 percent nationally and in Pennsylvania. Another 20 percent in both New Jersey and Pennsylvania were living with other relatives or roommates.
UFG calculates this figure by comparing the headship rates (total households divided by total population) across age cohorts dating back to a baseline year of 2000. In 2019, the Philadelphia metro had an estimated 109,133 missing households (roughly 4.4 percent of total households). The Trenton metro had roughly 5,155 missing households (3.6 percent).
A well-functioning housing market requires some vacant properties for sale and for rent. Insufficient availability occurs when the supply of housing is so constrained that it cannot absorb market fluctuations or otherwise support a balanced housing market. Often this means there are simply too few units available due to exclusionary zoning arrangements that prohibit building the types of homes that the population demands, resulting in low vacancy.
According to Freddie Mac, the main driver of the housing shortfall has been the long-term decline in the construction of single-family homes. Nationwide, the insufficient supply of new housing is particularly severe for starter homes, including townhouses and duplexes. The share of new “entry-level” supply (defined as units under 1,400 square feet) decreased from as high as 40 percent of all single-family units nationwide in 1982 to under 20 percent in the 1990s and 2000s, an era when low mortgage rates and subprime lending products led to a mostly upward trajectory of supply growth until the onset of the Great Recession. By 2020, less than 10 percent of new single-family homes were under 1,400 square feet.
Permitting data from the Delaware Valley over the past few decades can help illustrate how housing supply failed to keep up with demand. As shown in Figure 2, the total number of permits approved peaked in the mid- to late-1980s at nearly 30,000; they were mostly stable throughout the 1990s and early 2000s; then, they sank after the housing market crashed circa 2007. Since then, single family permits have recovered only marginally and have mostly stagnated at around 5,000 per year, while multifamily permits have continued to trend upward since the early 2010s. Indeed, permits for multifamily housing units first surpassed those for single-family homes around ten years ago, helping to push the total permit supply up after it bottomed out in the recession years. This and related trends were documented in DVRPC’s investigation of the Community Impacts of Multifamily Development.
Figure 2: Total Housing Units Approved by Type in the DVRPC Region
Figure 3 illustrates how these trends break down geographically. The City of Philadelphia has had the largest and most consistent upward trajectory in housing permit activity since the recession. In 2020, more permits had been issued in the city—about 5,600—than the region’s four suburban Pennsylvania counties combined (roughly 5,100), or the combined total of the region’s four New Jersey counties (around 4,200). Before plummeting in 2007, both suburban portions of the region had experienced a solid decade of issuing around 10,000 and 6,000 permits, respectively.
Figure 3: Total Housing Units Approved by Location in the DVRPC Region
Uninhabitable units are residences that lack complete kitchen or plumbing facilities and have been vacant for more than a year.UFG removed these units from the short-term supply of housing as the renovation costs are assumed to be cost-prohibitive. In 2019, the Philadelphia metro had an estimated 33,928 uninhabitable units (1.4 percent of all units), and the Trenton metro had roughly 1,025 uninhabitable units (0.7 percent).
Though uninhabitable units comprised only 1.4 percent of the share of all units in the Philadelphia area, the region ranked 12th on this figure among large metros with over 1 million residents. Generally, the Philadelphia MSA only trailed other Rust Belt metros like Detroit, St. Louis, and Pittsburgh, and some slower-growing Southern metros like New Orleans, Memphis, and Louisville.
The older age of Greater Philadelphia’s housing stock can make it more affordable, but also more prone to disrepair. Costly maintenance to make such homes habitable adds to the expense of homeownership and can block lower-income buyers or push existing owners out of the market. A report from the Federal Reserve Bank of Philadelphia published in March 2023 estimates the total cost of repairs needed across the Philadelphia metro to be at least $3.7 billion.
The Fed also found that roughly 37 percent of owner-occupied homes and 41 percent of rentals needed repairs in 2022, representing an even larger share of the housing stock than those categorized as uninhabitable by UFG. Fortunately, some local lawmakers have been responding to this particular challenge: Pennsylvania’s legislature recently instituted the Whole-Home Repairs Program, through which the Department of Community and Economic Development is awarding funds to counties to help needy property owners pay for home maintenance.
Units not occupied by renters or owners are homes that are used as second residences or vacation properties, which often distort the housing market in small towns and resort areas that attract tourists and recreational visitors.
What Factors Are Contributing to Underproduction?
The roughly 1.6 million housing starts observed across the United States in 2021 was the highest total since 2006. Despite this relative surge, a combination of economic, social, and policy forces have resulted in decades of housing production that is chronically below demand. Some of the leading factors include:
- a lack of land available for development;
- exclusionary zoning laws that restrict the type and number of homes that can be built in certain neighborhoods;
- the lack of available construction labor;
- public opposition to new development (“NIMBYism”);
- unfavorable lending conditions; and
- the increasing cost of the raw materials needed for housing construction and infrastructure.
Research conducted by Yonah Freemark for the Urban Institute helps to illustrate how underproduction can manifest itself in different types of communities. After studying municipalities across the country between 2000 and 2020, Freemark found significant housing underproduction in both undervalued communities as well as in many high-housing-cost communities. He posits that underproduction in many low-housing-cost communities stems from the fact they have difficulty attracting private development. Conversely, underproduction in more affluent communities often stems from land use regulations that are purposefully leveraged to prevent new construction despite local demand for housing.
Examples of exclusionary regulations can include zoning laws such as minimum lot and square footage requirements, limits on the height of buildings, and restrictions on building multifamily homes. These laws have historically been used to exclude lower-income residents from living in more affluent suburban developments with access to higher-performing schools, employment, and other amenities. In some instances, these laws were also used as a vehicle for explicit racial discrimination excluding Black residents from predominantly white neighborhoods.
How Can the Region Respond to Underproduction?
Effectively addressing the housing affordability crisis will require strategies that extend well beyond increasing the supply of housing. Nonetheless, expanding production must be a key strategy to preserve and improve housing affordability in Greater Philadelphia. The research conducted by UFG and others provides fresh evidence for the need to prioritize actions across all levels of government that will make building more and different types of housing possible.
In summer 2023, the Biden Administration introduced a national Housing Supply Action Plan that proposes a set of new policies the federal government could undertake to address the nation’s underproduction of residences. The policies outlined in the plan seek to ease the burden of housing costs over time by boosting the supply of quality housing in communities. Three of the opportunities identified by the administration include providing incentives for land use and zoning reform; expanding financing for affordable, energy efficient housing; and promoting commercial-to-residential conversion opportunities.
Greater Philadelphia’s housing shortage is widespread but uneven. Local governments have a variety of tools, policies, and strategies available to them to help address underproduction, but there is no one-size-fits-all solution to the problem. Before customizing their approach to housing policy, local governments must evaluate and understand the housing stock in their communities and identify barriers that limit housing choice or more affordable housing types such as missing middle housing, multifamily housing, accessory dwelling units (ADUs), and shared housing.
In addition to their analysis, UFG offers a useful framework for prioritizing housing production, entitled A Better Foundation,™ that echoes many of the themes found in DVRPC’s Long Range Plan. Most importantly from a regional perspective, A Better Foundation recommends focusing housing production in the areas with high economic mobility, access to jobs, and existing infrastructure. By strategically adding the right types and amounts of housing, communities in Greater Philadelphia can work toward increasing affordability, reducing traffic congestion, and optimizing the economic benefits of more abundant housing.