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The US needs to build 2 million houses to revive the American dream of homeownership

A construction worker
eric1513/Getty Images
  • A shortage of 2.2 million homes suggest the US housing market will remain unaffordable.

  • High labor costs, increased environmental regulations, and elevated land prices have hindered new developments.

  • An influx of immigrants in the country also isn't helping the housing affordability equation as it has in the past.

The American dream of owning a home is fading for millions of Americans due to lingering affordability issues and the country needs a massive influx of new home construction to make the homeownership attainable again, according to Ned Davis Research.

"Years of rising house prices, modest income growth, and high mortgage rates have made housing unaffordable for large swaths of Americans," NDR strategist Joseph Kalish and economist Veneta Dimitrova said a note on Wednesday.

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The 30-year fixed mortgage rate has been hovering around 7% the past year, surging to 8% briefly at the end of 2024 before dipping again.

The research firm said a shortage of 2.2 million homes is compounding the US housing market's affordability issues.

The lack of supply was driven by a long period of underbuilding in the aftermath of the 2008 US housing crash.

"Since 2015, we have been warning about a chronic housing shortage, leading to a supply/demand imbalance. Following the GFC, new residential construction effectively stopped, and we have been trying to catch up ever since," NDR said.

But even with a renewed urgency to increase the supply of homes, there are a lot of challenges.

Rising development prices across the board suggest to NDR that housing supply will remain constrained for years to come.

Higher insurance costs, higher taxes, higher costs of capital, elevated land prices, and increased environmental regulations have mixed together to create a powerful cocktail that's limiting the country's ability to build enough homes.

Another input of the housing market that makes it harder to build affordable homes is increased labor costs, and the recent surge in immigration isn't helping like it may have in the past.

"The wave of immigrants has not seemed to impact the supply/demand balance for workers, a traditional area for Latino immigrants," NDR said.

"And while Powell has touted the influx of immigrants as helping to rebalance the labor market, these immigrants will eventually need permanent housing, adding to demand, keeping rents elevated, and preventing the Fed from sustainable hitting its 2% inflation target."

All in all, the outlook for the US housing market is not looking great if you're a prospective buyer, as higher home prices appear to be the new norm with no correction in sight — and if the Federal Reserve cuts interest rates, leading to falling mortgage rates, home prices could surge even more.

Read the original article on Business Insider