A new USC study reveals that the challenges that led to a national shortage of affordable housing and soaring home prices were set in motion long ago - and could have been foreseen.
The researchers behind the study say that the problem will only worsen as more natural disasters - such as the devastating Los Angeles area wildfires and large hurricanes - flatten entire communities. Los Angeles County officials estimate that more than 10,000 homes and businesses have been lost so far to the fires that erupted across the region last week.
"A tightly constrained housing supply reduces resilience to absorb losses from unexpected disasters - fires, earthquakes, hurricanes and more. In Los Angeles, this lack of flexibility could rapidly intensify gentrification as relocations strain the existing housing stock," said Dowell Myers, professor of policy, planning and demography at the USC Sol Price School of Public Policy and the study's corresponding author.
The study, published in the Russell Sage Foundation Journal of the Social Sciences, traces the origins of the crisis back to the early 2000s. A perfect storm of policy missteps, demographic shifts and economic forces emerged that have severely constrained housing supply, disproportionately affecting millennials and people of color.
The nation now faces a shortage of 4.5 million or more homes.
A crisis decades in the making
The researchers argue that the roots of the crisis began in the early 2000s when easy access to credit for young adults fueled a historic housing bubble. When the bubble burst in 2008 and led to the Great Recession, policymakers overcorrected by tightening mortgage lending standards and limiting funds for new construction.
"These measures came at the worst possible time - just as millennials, the largest generation in 30 years, entered the housing market," said Myers, who directs the Population Dynamics Research Group at USC Price. "Young home seekers were welcomed with the lowest construction in more than 60 years."
Using data from the U.S. Census and the American Community Survey, the researchers built a housing-demographic model that tracks how people move through different life stages with housing, such as renting and buying, over time.
They found that from 1990 to 2021, laws passed in 2010 to prevent another housing bubble unintentionally created a mismatch in the market. Stricter credit rules and limited housing supply couldn't keep up with the millennial generation's demand for housing. This led to shortages in rental housing first, followed by a shortage in homeowner opportunities. Many millennials delayed buying homes until after 2015, leading to a sudden rush to catch up.
Myers and his co-authors said the factors that led to the housing crisis included:
- Severe underestimations of millennial demand: Policymakers and industry leaders miscalculated the millennial generation's future needs for housing. This oversight only became evident after 2016, when pent-up demand surged.
- Overlooked "age waves": Policymakers failed to consider how shifts in age demographics - especially the increasing number of millennials reaching home-buying age - affected housing demand.
- Forgotten lagging effects: Housing and population dynamics are shaped by past events - a fundamental concept that the authors argue has been overlooked in policy discussions. Current homeownership rates reflect decisions made in the past, and today's population trends are influenced by the characteristics of previous generations.
- Flawed demand measurements: Current methods for measuring housing demand fail to account for potential households that cannot form due to housing shortages. This contributed to the underestimates in future housing demand and misinformed policy responses.
- Misunderstood homeownership trends: The decline in homeownership rates after the 2008 recession was misinterpreted as a permanent shift in preferences, rather than a delayed response to the housing market crash.
America's housing crisis: A failure of foresight
Myers credits the work of the late Richard A. Easterlin, professor emeritus of economics at the USC Dornsife College of Letters, Arts and Sciences and a pioneer of linking size of generations to economic consequences. Easterlin's research explored how changes in fertility rates 20 years prior predict the number of young adults entering the workforce and consumer market - insights that should have informed housing policy and prepared for the millennial demand.
Between 1976 and 1990, birth rates rose by 32%, setting the stage for a surge of 20-somethings moving into cities by 2010, the study found. The 2008 recession delayed their entry into stable jobs and housing, but when millennials began seeking homes after recovery from the Great Recession, supply was scarce.
Homebuilders and local officials likely assumed millennials would stay in apartments with roommates for much longer, but as they approached age 30, this "peak millennial" effect passed and their demand for homeownership surged, Myers explained.
"Easterlin's timeless lessons were disregarded to our peril and underlie the extreme housing crisis," Myers said. "We should have seen the millennials coming and made suitable housing plans in advance. How could so fundamental a lesson be disregarded?"
Racial disparities in homeownership recovery
As the housing crisis has deepened, racial and ethnic disparities in homeownership have also widened, with recovery varying significantly across different groups. In their analysis, the researchers examined homeownership trends from 2000 to 2021, focusing on how much these groups were falling short in 2016 and how they recovered by 2021.
In 2016, homeownership among whites was 9% lower than expected. While the gap narrowed over time, by 2021, there were still 4.6% fewer homeowners than anticipated.
Black Americans faced a much larger disparity. In 2016, Black homeownership was 23.2% lower than expected. By 2021, the gap had only slightly improved, with homeownership still 16.3% lower than expected, pointing to a slower recovery in comparison to other groups.
Among Hispanics, homeownership was 12.3% lower than expected in 2016, but the group saw a substantial recovery by 2021. By the end of the study, Hispanic homeownership exceeded expected levels, with a small surplus of 0.4%.
"Our findings point to the need for targeted interventions to address systemic barriers to homeownership and ensure more equitable access to housing for all," Myers said.
Proactive housing policies in a changing climate
To address the housing crisis, the researchers offer two key solutions: first, shortening the lag time between rising demand and supply by anticipating housing needs over the next five years, and second, standardizing the practice of tracking both population growth and housing availability together, rather than in isolation.
"Housing policy needs to be better at planning for the needs of different age groups and their life stages to avoid mismatches between supply and demand," Myers said.
"Without proactive policy, we risk not only falling short of meeting demand but also being unprepared with a resilient housing supply that can accommodate victims of climate-driven disasters, like wildfires, or other emergencies that create new demand in an instant."
Additional revelations are available in the full report.
About the study: Co-authors of the study include Hyojung Lee of Seoul National University and JungHo Park of Kyung Hee University, South Korea.
