The US Court of Appeals for the Sixth Circuit last week decided that the Federal Communications Commission (FCC) lacked the legal authority to issue so-called ” net neutrality” rules.

While net neutrality sounds appealing, the actual internet experience that we have come to expect requires non-neutrality. In the early days of the internet, packets of information were basically treated alike. This was when the internet was a government-funded communications system that allowed university researchers to communicate with each other.

When the internet started to allow private internet service providers (ISPs) to connect to the government system in the 1990s, the structure of the internet became more complex. Private “backbones” supplemented the original government network, connecting through four network access points. The four access points immediately became congested with traffic, which gave the backbone operators market power over the local ISP providers. To reduce congestion and limit backbone market power, ISPs quickly developed new pathways and connections.

Thus, since the early days of the private internet there have been multiple paths for packets of information to travel. Similar packets have traveled over different pathways at different speeds and have paid differing amounts to do so. These arrangements were not anti-consumer or anti-competitive. They were simply what was required to create redundancy and overcome market power.

Despite this underlying engineering reality, “net neutrality” became a partisan issue. Democrats were in favor and Republicans opposed. And 30 years of legal maneuvering ensued. The Biden administration continued this game of regulatory ping pong by reinstating net neutrality rules in April 2024 that were repealed during the first Trump administration. The court decision blocks the reinstatement.

Net neutrality has captured the imagination of Democratic activists and the public, but its effects on the actual technical and legal evolution of the internet have been rhetorical rather than real. Repeal of the net neutrality rules will not be the death of the internet. It will simply return us to the hands-off regulatory framework that has nurtured the last three decades of the internet revolution. 

Axios reports that the Biden Administration is planning an 11th-hour move to order cigarette manufacturers to reduce the nicotine content in the tobacco cigarettes they market to consumers—possibly by as much as 95 percent. The FDA proposed the rule in 2022, and the Office of Management and Budget cleared the rule proposal on January 3, 2025.

The Food and Drug Administration has not yet issued the rule but may do so within the next two weeks.

Nicotine is the addictive component of tobacco cigarettes, but by itself is relatively harmless. The harm comes from carbon monoxide, a poisonous gas, and tobacco tar that contains carcinogens and other chemicals that harm the lungs and circulatory system. Britain’s Royal Society for Public Health claims nicotine is “no more harmful to health than caffeine.” As I have written here, what differentiates nicotine from caffeine is that it has calming as well as stimulative effects.

Tobacco cigarettes are a type of nicotine delivery system. While some smokers may enjoy the flavor of tobacco and the act of smoking, many primarily smoke for the effects of nicotine.

The rationale behind ordering cigarette makers to reduce the nicotine content of tobacco cigarettes is that it might nudge smokers to abandon smoking. In 2018, FDA researchers reported in the New England Journal of Medicine that they used a simulation model that suggested reducing the nicotine content of tobacco cigarettes by 95 percent could lower the percentage of adult smokers to 1.4 percent by 2100.

Yet one randomized controlled study of the efficacy of reducing nicotine content to such levels found:

In smokers not interested in quitting, reducing the nicotine content in cigarettes over 12 months does not appear to result in extinction of nicotine dependence, assessed by persistently reduced nicotine intake or quitting smoking over the subsequent 12 months.

Some researchers have found that reducing the nicotine content may lead to a compensatory increase in cigarette consumption or increased puff volume to attain the nicotine effect. A team of researchers at the University of Pennsylvania reported in the journal Drug and Alcohol Dependence on a novel “within-subject human laboratory study” hypothesizing “that compensatory smoking, specifically greater total puff volume, would be observed as nicotine levels decreased, thereby supporting behavioral compensation. Further, due to increased total puff volume, we hypothesized increases in CO boost as nicotine levels decreased (i.e. biochemical evidence of compensation).” They found:

As hypothesized, both total puff volume and CO boost per cigarette increased when cigarette nicotine level decreased, although the effect was modest. Subjective ratings of cigarette strength and satisfaction were significantly lower for the lower-nicotine cigarettes.

Yet, other studies, such as this 4‑day study, failed to discern any increase in the number of cigarettes smokers consumed with decreased nicotine levels. Researchers at the University of Minnesota conducted a “secondary analysis of data” from studies where cigarette nicotine content was either gradually or immediately reduced and found:

The results showed that in general, these two approaches led to minimal compensatory smoking…over the course of the experimental period, suggesting that neither of these approaches poses a major safety concern.

Policymakers also aren’t considering that mandating cigarette makers to reduce nicotine will likely stimulate a healthy black market in higher-nicotine cigarettes, benefiting drug cartels and other criminal organizations. Menthol cigarette black markets have arisen in states and countries that have banned them. Ironically, the Biden administration has delayed a decision on a federal menthol cigarette ban, yet seems poised to generate a black market in regular cigarettes.

If policymakers want more people to quit tobacco smoking, they should remove barriers to tobacco harm reduction by increasing access to e‑cigarettes, including flavored ones preferred by smokers wishing to quit, nicotine pouches, and less harmful products like heated tobacco and snus. That way, people can get the nicotine they desire without utilizing the harmful tobacco cigarette delivery system.

In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly, with the median home price increasing almost $100,000. (Figure 1.) Unsurprisingly, many potential homebuyers were—and still are—shocked and upset.

As they have in years past, many politicians have latched on to the anger surrounding the recent housing market turmoil. During the presidential debate, Vice President Kamala Harris said, “Here’s the thing: we know that we have a shortage of homes and housing. And the cost of housing is too expensive for far too many people.” Prior to the election, Donald Trump outlined his own solutions, and now federal officials want to implement a host of policies, ranging from subsidies to selling federal land.

But is the United States really facing a housing crisis? Or a shortage of homes? And should Americans really expect recent federal policy proposals to make housing more affordable?

This Cato at Liberty post is the sixth in a series that examines these questions. (Previous posts are here, here, here, here, and here.) While the series presents evidence that the United States is not facing a true housing crisis or shortage, nothing in the series suggests that local officials should refrain from relaxing zoning restrictions and other regulations. Elected officials should reduce rules and regulations to make it easier and less costly for people to live. Additionally, federal officials should end the many demand-side policies that place upward pressure on prices across the nation.

Just as important, nothing in the series ignores that many Americans have taken an economic beating these past few years—real wages have fallen, and prices have not reverted to pre-COVID-19 levels.

Although the rate of growth in the overall price level has moderated, the post-COVID-19 price spike still angers people. After remaining above 5 percent between June 2021 and February 2023, the annual inflation rate has been below 4 percent since June 2023 and below 3 percent since July 2024. Similarly, the median home price increased from $317,100 in 2020 to $442,600 by the end of 2022. Just as many consumers remained upset about high grocery prices after inflation moderated, few prospective buyers took comfort in the median home price falling to $415,000 by June 2024, a price well above the pre-pandemic level.

It is no surprise, therefore, that so many people have been calling for increased government intervention.

Yet if federal officials answer those calls, it will likely only further increase Americans’ economic burden. Evidence shows that over the long-term people have overcome the many federal roadblocks that increase the nominal cost of housing, but housing markets would function better in the absence of those policies.

Fortunately, federal officials have an excellent opportunity to improve the housing market because the lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies distort supply and demand, resulting in harmful outcomes. The housing market is just a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.

Major Changes Remain Post COVID-19

Regardless of the level of anger over these recent price spikes, the COVID-19 pandemic and the government shutdowns changed the way people live and work. The rise in remote work, for example, reduced Americans’ average commuting time and increased the utility they receive from housing. (Before anyone makes an angry X post: No, we are not endorsing government shutdowns to increase Americans’ utility.)

Before the pandemic, only about 5 percent of Americans worked from home (fully remote or hybrid), a figure that rose to 60 percent by the spring of 2020. Though the share has since fallen, it appears a fundamental shift has occurred. As of November 2024, the share was still 27 percent.

As this shift occurred, many people were able relocate to areas with less expensive housing, more amenities, and more appealing climates. Many buyers also wanted more space at home because they wanted additional workspace.

Researchers from the Federal Reserve Bank of San Francisco report that this shift to remote work led to an increase in demand even after controlling for relocating. Specifically, they estimate that increased demand from remote work caused house prices to rise approximately 15 percent from November 2019 to November 2021. This figure represents more than 60 percent of the overall increase in housing prices during the period. The Fed researchers also report that “remote work has essentially identical effects on rents as it does on house prices.”

While the longer-term effects on housing from the COVID-19 pandemic remain unclear, there are important lessons to be learned from the boom-bust experience in some metro areas.

For example, housing construction boomed in Austin between 2019 and 2023, with increases in both single family and multifamily housing. In 2019, Austin added almost double the square footage in multifamily housing compared to 2018, added roughly that same amount in both 2020 and 2021, and then added 45 percent more in 2022. In 2022 and 2023, Austin increased its number of single-family homes, condos and co-ops by 85 percent and 23 percent, respectively.

Yet, Austin is now being referred to as “ground zero” as the Texas housing market faces a downturn. Nick Gerli, CEO of real estate data platform Reventure App, claims that “Austin has the highest inventory surplus of all Texas” and the market “is now oversupplied.” According to Gerli:

Investors are having difficulty earning cash flow due to high prop taxes and stagnating rents. Builders are needing to do big markdowns to sell houses, which is hurting the resale market.

Although the median home price at the state level declined (year over year), “the average Austin house price was $553,275 as of September … up 1.5 percent from a year earlier.” Figure 2 presents single-family home values, new construction, and inventory for the Austin metro area between 2019 and 2024.

This same sort of phenomenon, where a decline in home prices hurts the resale market, is occurring in the Austin rental market. After a roughly two-year construction boom added thousands of new apartments (more than 10,000 by the end of 2023), developers are pulling back because they “can no longer make the same kind of cash.”

In both Austin and Boise, Idaho, new construction of single family homes followed similar paths between 2018 and February 2022. However, the steady increase that started in 2021 ended for Boise in February 2022, while it increased for Austin until April 2023. Yet, home price growth for both metro areas remained on a similar path in both places between 2018 and 2024, with Boise’s average home price going from $247,388 in 2018 to $472,447 by August 2024 and Austin’s rising from $296,952 to $453,130. (See Figure 2). 

Additionally, Figure 3 shows that the price-to-income ratio has been higher in Austin than in Boise for most of the last 12 years, and that it followed a very similar path—increasing and decreasing—in both places starting in 2020. Yet despite Austin’s large inventory of housing in 2023, its ratio remains higher than at any point prior to the pandemic and higher than the ratio in Boise, which had much less construction. Just as important, both Boise and Austin became more affordable at the same time, at a similar rate, even though Austin uniquely (compared to Boise) experienced a recent construction boom.

The point of this comparison is only that house prices can change at different rates in certain locations despite differences or similarities in new construction. That is, the supply of housing is not the sole determinant of house prices.

Further, this episode in Austin serves as a reminder that affordability for the buyer works against the seller. That is, while buyers (and renters) would love to get a lower price, sellers (and landlords) would prefer a higher price. As prices go down, it provides an added incentive to buy but less incentive to sell or build new housing.

This tension produces the best outcomes when builders are allowed to meet demand in their local markets, with as few regulatory obstructions as possible.

The other big lesson is that housing markets are dynamic and can change rapidly. A tight market, with rising prices and low inventory, can quickly morph into a market with an “oversupply” of available housing. The kinds of “shortages” discussed in the last post of this series can quickly and unexpectedly morph into (on those same terms) a “surplus.” Thus, federal policies based on “fixing” these kinds of “shortages” can easily distort local supply and demand conditions and make it more difficult for housing markets to provide the kinds of housing that people want.

Experience also demonstrates that the federal government should not be in the business of deciding the type and number of homes that people can build in their communities, or whether people should rent or buy. Federal policies that distort markets in such a manner will likely end badly just as previous federal efforts have ended.

Housing Availability Counters the Crisis Story

As our previous post argued, one problem with many of the so-called housing shortage metrics is that they do not measure the optimal demand or supply for housing. A more practical problem is that many of those metrics are based on household formation, and the aggregate count of households exhibits a considerable amount of volatility, some of which is due to the ability of individuals (both family and non-family members) to move in and out of households on a regular basis.

We make no judgment as to what household formation rates should be. We also maintain that federal officials are just as incapable of knowing when family and friends should either stop or start cohabitating and forming households. Federal officials should not provide incentives for people to speed up or slow down the rate at which they form new households, and federal housing policies are no exception to this rule—the government should not intervene in housing markets based on anyone’s preferred household formation rates. (Arguably, incentives like first-time buyer tax credits and downpayment grants only speed up the rate at which people become homeowners.)

Of course, this argument does not answer whether the United States is facing some kind of housing shortage, crisis, or market failure. To help answer that question, we suggest using population growth instead of household formation. Rather than try to estimate a “shortage” of some kind, we use changes in population to estimate basic housing availability. That is, we examine whether housing construction has broadly kept up with population growth. (Other studies have used similar population-based metrics, and we use this alternative in a working paper with S. Sayantani. It is currently under revision, but we stand by the original results, some of which we present here.)

We do not offer this measure as an improved method for estimating the equilibrium supply and demand of housing. We merely offer this measure as a better way to examine whether, as so many critics claim, the US housing market has been experiencing a crisis or a market failure. Simply put, if housing construction has kept up with population growth in the long run, it is very difficult to support the idea of a widespread shortage or market failure. Such a market would not be one in crisis.

It is still possible that more housing would benefit more people. But the underlying question of whether the housing market generally provides housing for people—or fails to provide it—is at the heart of whether the United States is experiencing a crisis or market failure.

Figure 4 presents a graphical look at two versions of this housing availability measure. The first is the annual change in population divided by the number of housing units started (in blue), and the second is the annual change in population divided by the number of housing units completed (in orange). In both cases, as the ratio decreases, it implies that a relatively higher volume of housing is being built compared to the demand created by population growth.

Figure 4 shows a decreasing trend in the ratio from about 2009 to 2021, suggesting that units started and completed steadily kept pace with annual population changes for this period. Before rising slightly in 2022, the 2021 ratio was lower (0.35) than at any point during the past five decades.

Of course, this simplistic national-level analysis ignores geographic differences and the possible effects of all kinds of other factors that might affect the housing market.

To capture some of these other factors and provide a more robust analysis, we use a 22-year panel of county-level data for 362 counties. Due to data accessibility, we estimate housing availability with annual building permits issued. We include permits for both single-family and multi-family buildings, consisting of those with up to 4 units and 5+ units, respectively.

Using this data set, we construct a county-level availability ratio, defined as the ratio of resident population change to units permitted. As with the national-level ratio, a higher availability ratio implies lower housing availability (a higher number of residents allotted per housing unit), while a lower ratio implies higher housing availability (a smaller number of residents per housing unit).

Based on this county-level ratio, availability has been improving almost steadily since 2010, with a ratio of less than 1 since 2020. Figure 5 demonstrates that housing availability worsened during the financial crisis and was the lowest (corresponding to the highest ratio) immediately following the crisis. Additionally, while availability slightly worsened in 2022, it has been better than average since 2016.

We also perform further analysis of this availability metric using a regression that controls for both location and time-varying characteristics.

Using this approach, our main result is that between 2000 and 2021, the average building units permitted per 100-unit change in resident population was approximately 93 housing units. These figures are hardly indicative of a major supply shortage or market failure across the United States—the amount of building has essentially matched the population change for the past two decades.

A bit more broadly, housing construction has kept up with the growing population, even as people chose to move into more densely populated areas and pay higher prices. Based on this evidence, anyone characterizing the US housing market as one in crisis is guilty of abusing that term.

While there is no doubt that many people would love to pay less for US housing, that preference alone does not indicate that there is a housing shortage. The same can be said for virtually any good or service. That is, even though people prefer to pay less for everything that they buy, this preference does not indicate the existence of market-wide shortages or market failures. This preference for cheaper goods does not justify federal intervention to regulate either supply or prices in any market, including housing.

Nonetheless, many groups blame high housing prices on a lack of construction and argue that federal intervention is necessary. Some of these groups focus on relaxing local zoning and other regulatory constraints to improve housing affordability. While we argue against federal intervention and agree that local officials should relax regulations that make building unnecessarily difficult and expensive, we caution against the idea that increasing the housing supply will single-handedly bring housing prices down.

Supply Factors are not a Panacea

It is true that an increase in supply would put downward pressure on prices, holding all other factors constant. This description applies to any basic supply and demand analysis. In real life, of course, many of these “other factors” tend to change. In some cases, these factors can outweigh the effects of added supply.

People often pay a premium to live in certain areas for all kinds of reasons. In any given area, there is only so much available land, and land cannot be created the same way other goods can be produced. As a result, many of the areas people want to live in are already so well developed that even relaxed zoning might have limited supply effects.

For decades, people have earned higher incomes and chosen to relocate to more densely populated areas. Building has generally kept up, but the increased supply of housing in those areas has not led to a decrease in prices. Our paper examines one instance where increased supply has slowed the rate of growth in prices, though it has not led to a decrease in prices.

Evidence From Reforms in Denver

While most studies of zoning changes in the US housing market find that relaxing restrictions leads to increased supply (although the effect on the supply of low-cost housing is mixed), the findings on the relationship between relaxed restrictions and prices are more ambiguous. For instance, some studies report that upzoning efforts have led to increased home prices, possibly because the upzoning creates positive “amenity effects” that attract higher-income households to the neighborhood.

Our own study of a 2010 zoning change in Denver shows that while zoning reforms moderated the rate of growth in home prices, they did not lead to a decline in prices.

Specifically, the average annual home price appreciation in Denver was about 4.5 percent before rezoning (between 2000 and 2009). The rate increased to about 6.6 percent after rezoning (between 2010 and 2018). Based on our estimates, rezoning reduced the average home price appreciation between 2010 and 2018—without the rezoning, home price appreciation would have potentially been 8.55 percent instead of the realized value of 6.6 percent. Thus, rezoning is associated with a continued rise in prices, but at a rate slower than what would have occurred in the absence of rezoning. (For context, adjusting Zillow data for inflation to 2018 dollars, the typical home price in the city of Denver increased from $267,015 in 2010 to $431,190 in 2018. It is more difficult to get a reliable rent series, but according to the Census Bureau’s American Community Survey data, real median rent in Denver was approximately 35 percent higher in 2018 than 2010.)

This reduction represents a sizeable impact from zoning reforms on price growth, one that would be very large over a long period if it is sustained. However, just as the rate of inflation slowed in 2022, but the price level did not fall, this kind of slower growth does not represent the improvement in affordability that many buyers might hope to realize. It certainly does not represent the type of affordability improvements that several of the groups mentioned in our previous posts are calling for.

Our next and final post summarizes the main points from the series and wraps things up. 

In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly, with the median home price increasing by almost $100,000. (Figure 1.) Unsurprisingly, many potential homebuyers were—and still are —shocked and upset.

As in years past, many politicians have latched on to the anger surrounding the recent housing market turmoil. During the presidential debate, Vice President Kamala Harris said, “Here’s the thing: we know that we have a shortage of homes and housing. And the cost of housing is too expensive for far too many people.” Before the election, Donald Trump outlined his solutions, and now federal officials want to implement a host of policies, ranging from subsidies to selling federal land.

But is the United States really facing a housing crisis? Or a shortage of homes? And should Americans expect recent federal policy proposals to make housing more affordable?

This Cato at Liberty post is the fifth in a series that examines these questions. (Previous posts are here, here, here, and here.) While the series presents evidence that the United States is not facing a true housing crisis or shortage, nothing in the series suggests that local officials should refrain from relaxing zoning restrictions and other regulations. Elected officials should reduce rules and regulations to make it easier and less costly for people to live. Additionally, federal officials should end the many demand-side policies that place upward pressure on prices nationwide.

Just as important, nothing in the series ignores that many Americans have taken an economic beating these past few years—real wages have fallen, and prices have not reverted to pre-COVID-19 levels. It is no surprise that so many people have been calling for increased government intervention.

As previously mentioned, though, if federal officials answer those calls, it will likely increase Americans’ economic burden. Evidence shows that over the long-term people have overcome the many federal roadblocks that increase the nominal cost of housing, but affordability would be much improved in the absence of those policies.

Fortunately, federal officials have an excellent opportunity to make it easier for Americans to afford housing because the lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies that distort both demand and supply result in harmful outcomes. The housing market is just a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.

This post examines the origins of the so-called housing shortage figures and why these figures are not indicative of a true housing supply crisis.

In July 2017, a Politico story titled Why Washington Can’t Fix the New Housing Crisis stated:

The crisis is a shortage of houses. Nationally, the inventory of homes for sale has been shrinking for 24 straight months, stoking bidding wars for even the lowliest fixer-uppers. In January, a measure of supply hit its lowest in history, according to the National Association of Realtors.

The National Association of Realtors (NAR) is a trade group for people who earn a living selling homes. Although there is absolutely nothing wrong with the NAR or similar groups advocating for its members, it should not come as a surprise that the NAR would prefer a larger inventory of homes for sale. This measure is not, strictly speaking, a formal measure of supply.

This difference is more than just technical.

First, an optimally performing market would reduce friction between buyers and sellers, shrinking the time a house needs to be listed for sale. This performance minimizes the inventory of homes for sale, so a declining inventory could be a sign that the market is working better for buyers and sellers. Put differently, if the market is working well, the “normal” inventory level should decline. Given the increased use of technology in real estate markets during the last few decades, the lower inventory could indicate market improvements, where the time and effort to find and purchase a home have fallen.

Additionally, the inventory figure says little about the unique factors that drive the supply of housing construction. That is, the inventory available for sale says very little about the factors that contribute directly to the equilibrium supply of housing.

Again, this issue is more than just technical.

Because the inventory figure ignores equilibrium supply conditions, attempts to make up a “shortage” over current levels based on this metric (or similar ones) could further constrain basic supply factors (labor, materials, land, etc.) and drive prices even higher. As became obvious in the wake of the COVID-19 pandemic, these kinds of supply constraints can easily increase the price of a new home. Indeed, these factors can even outweigh the downward pressure that increased construction might place on prices, so much so that home price growth increases despite above-normal construction. Research has also shown that increased supply can ultimately increase prices by improving a neighborhood.

The kinds of metrics that various groups, such as the NAR, use to estimate the “shortage” do not account for these factors.

Running the Numbers

Many groups, including the NAR, argue that the tight inventory of homes for sale—including both newly constructed and previously occupied homes—is a key driver of a housing crisis. They also argue that the U.S. faces “an acute shortage of available housing” after “decades of underbuilding and underinvestment.”

For years, various groups have tried to quantify this so-called shortage, and the estimates vary considerably. For example, for 2024, Freddie Mac, one of the two large housing government-sponsored enterprises (GSEs), estimated a shortage of 3.7 million units. Separately, the National Association of Home Builders (NAHB) estimated a 2024 shortage of 1.5 million units.

In 2018, Freddie Mac estimated a shortage of 2.5 million units. The NAHB estimated a shortage of “about a million units” for 2019, while Up For Growth estimated the 2019 shortage to be 3.8 million units (a figure close to Freddie Mac’s 2020 shortage estimate of 3.8 million). In 2021, the NAHB estimated a shortage of 1.5 million units, while a study for the National Association of Realtors (NAR) estimated the shortage to be between 5.5 million and 6.8 million units. In 2022, the tech-based real estate firm Zillow estimated that “despite a pandemic construction boom, the US housing shortage grew to 4.5 million homes.”

These groups use somewhat different methodologies to produce their estimates, but none of them are designed to estimate an economic shortage. That is, they are typically referring to a market where supply is less than some preferred measure, not a market where the quantity demanded exceeds the quantity supplied at the market price. Put differently, the shortages estimated by the abovementioned groups do not, as the 2024 Economic Report of the President implies, represent market failures.

Again, this difference is more than just technical.

Such metrics, by design, do not refer to a situation where buyers (or renters) cannot buy (or rent) at a given market price. That is, these metrics do not answer the key question of whether housing construction tends to keep up with demand, ensuring that people generally can find a place to live.

There is no doubt that millions of people would prefer to pay less for housing. However, the fact that every person is unable to pay as little as they prefer for the housing that they want is not a market failure. In any market, for any given demand, the only way to ensure such an outcome would be to shift the supply curve so far to the right that the additional supply pushes the market price to effectively zero.

It is just as important to note that these metrics generally do not estimate the role of specific demand factors, such as income growth, interest rates, subsidies, or consumer preferences. Consumers might prefer to live in certain locations, or in certain kinds of homes, with various amenities, but these factors are not measured in these “shortage” metrics. This omission alone is critical because these demand factors could result in higher home price growth even in the face of heightened construction.

Our point here is not that these measures are objectively wrong, and we are not criticizing the models themselves. Nor are we ignoring that some people would be better off if housing costs were lower.

We are, however, pointing out that these models typically do not provide formal estimates of the optimal housing demand and supply in an equilibrium framework. Broadly, these groups have constructed reasonable statistical models to suggest what the supply of new homes should be based on their preferred criteria. However these estimates do not represent an economic shortage, a situation where consumers are willing to pay for a product at the prevailing price but are still unable to find a unit to purchase.

Often, shortages are the result of price ceilings imposed by the government, such as rent control or price caps. Obviously, if the federal government mandated enough increased housing supply to hold housing prices (or rents) below some arbitrarily “affordable” price, many of the same critiques that apply to more straightforward price ceiling policies would apply.

To be sure, we make no judgment about which prices are “affordable” enough to end the kind of “shortage” these metrics estimate. We are merely pointing out that it is very risky to equate these figures to an economic crisis or a market failure that requires government intervention (especially on a nationwide basis).

Enacting expansionary policies based on these “shortage” figures could make housing market conditions worse than today. These kinds of federal policies could, for example, boost demand beyond optimal levels, putting upward pressure on prices by flooding the market with buyers. Alternatively, they could boost supply beyond optimal levels, putting upward pressure on prices by straining resources in the construction industry.

Breaking Down the Models

To demonstrate what these “shortage” models estimate, this post provides a brief overview of the underlying methodologies used by several groups. (This Brookings article by David Wessel also provides a good overview of the various methods.)

While the methods vary, most assume that some kind of buffer stock (or inventory) of homes is needed. Freddie Mac’s model, for instance, includes the existing vacancy rate (the share of homeowner inventory that is vacant/​for sale), and a target vacancy rate. It also includes, among other variables, a target household formation rate.

Freddie Mac’s model sets its target vacancy rate at 13 percent to “ensure that there is a well-functioning housing market, which requires some vacant properties for sale and for rent.” While Freddie Mac is free to set the model’s target vacancy rate at any value it prefers, as Figure 12 shows, the total vacancy rate was below 13 percent from the mid-1960s to the mid-2000s, and again from the mid-2010s until the present. The only time the vacancy rate was at or above 13 percent was during the period leading up to and following the housing crisis and subsequent Great Recession. Given the connection between federal housing policy and this recession, it seems odd to target a vacancy rate from this period.

Separately, the target household figure is based on 5‑year population groups and the target “headship” rate for those groups. (The headship rate is the number of heads of households as a percentage of total households.) Freddie Mac also adjusts the headship rate for factors such as “housing costs, income, and employment,” factors that can affect both household formation and the decision to buy a home.

Thus, while Freddie Mac’s model does not, strictly speaking, measure the demand for housing, it demonstrates how difficult it is to measure housing demand because many of the variables that affect household formation and housing costs are determined simultaneously. If, for example, housing costs are low and income growth is strong, young adults will be more likely to move out of their parents’ homes and form their own households. Yet, at the same time, if young adults are more likely to move and form their own households, their behavior can affect housing costs and opportunities to earn income. 

Setting these statistical problems aside, Freddie Mac’s model estimates how close construction gets to a benchmark based partly on household formation targets. We make no judgment as to what household formation rates should be, and we argue that the federal government should not intervene in housing markets based on anyone’s preferred household formation rates.

People can, for instance, move in and out of their parents’ homes, and parents can move in and out of their children’s homes, for a variety of reasons, including health or economic conditions. Federal housing policy should not “push” people to speed up or slow down the rate at which they form new households.

The group Up For Growth uses a similar approach to Freddie Mac, but its model includes a target vacancy rate of 5 percent. Additionally, instead of using target households, it uses missing households, a variable that estimates the number of people who, although they are currently living with families or non-relatives, would like to live on their own. (Zillow also uses missing holds.)

Separately, the NAHB relies on a more parsimonious comparison of the difference between the current vacancy rate and “the ‘natural,’ or long-run average” vacancy rate, while the NAR’s study relies on a comparison of the long-term construction trend to current construction. (The NAR study also provides an alternate shortage estimate of 6.8 million units based on the following calculation: Household Formation + Lost Housing Stock – New Completions.) Separately, the NAR’s online “Housing Shortage Tracker” estimates the shortage for major U.S. metro areas by comparing the number of new construction permits issued to “every new job.”

Apart from these groups, a 2022 academic paper by economists Kevin Corinth and Hugo Dante estimates that the United States had a housing shortage of 20.1 million homes in 2021. This figure may seem like an obvious outlier among the various shortage estimates discussed so far, but the methodological approach is also somewhat unique.

Unlike the other measures discussed in this post, Dante and Corinth estimate the quantity of housing that would exist in the absence of certain supply constraints, such as zoning and regulatory restrictions. Thus, their end goal is very different from the groups so far discussed. Interestingly, Dante and Corinth state, “Of course, economists do not typically use the term housing shortage to express the quantity-reducing effects of supply constraints—while prices may be artificially elevated, any buyer can generally purchase a home at the market price. We nonetheless follow popular discourse and abuse economic terminology.”

Terminology abuse aside, their model relies on a concept called land share, the portion of a home’s price that represents the land the home is built on. Using this concept, they report that 20.1 million additional homes would have been built in the absence of zoning and other regulatory constraints. Their key assumption, based on other academic research, is that the land share will fall to “about 20 percent of the value of a home” in a market without supply constraints. As Figure 3 shows, recent estimates for US land share vary considerably, but it appears that the land share was higher than 20 percent from 1931 to 1946, lower than 20 percent until 1971, and consistently higher after 1971.

The authors then rely on estimates (based on other academic research) of the price elasticity of demand for housing to calculate “the equilibrium quantity of housing in each market absent supply constraints.” The authors acknowledge that the metro areas with the least stringent regulations tend to have land shares clustered around 20 percent, and then assume that relaxing regulations would cause the land share in more strictly regulated areas to move toward 20 percent.

Using 2023 land share estimates provided by the American Enterprise Institute, the typical (median) US home price would have to fall 44 percent to reduce the land share to 20 percent. The price decline would be steeper in higher-cost areas. In San Francisco, for example, the price would have to decline almost 60 percent, from $1.4 million to less than $600,000.

We do not dispute that more housing would be built in the absence of strict zoning or regulatory restrictions, and we have consistently argued in these posts that state and local governments should reduce regulations to make it less costly for people to build the homes they want to live in. Nothing in this series implies that more construction cannot be beneficial.

However, federal housing policy should not be geared toward achieving a land share of 20 percent—or any other land share figure—for the nation’s housing markets. The results could be disastrous, much like when President Clinton’s National Partners in Homeownership, a private-public cooperative, set a goal of raising the US homeownership rate from 64 percent to 70 percent by 2000.

To whatever extent they cause lower land shares, it is doubtful that less stringent regulations are the sole cause of low land values or that high regulations are the sole cause of higher land values. The optimal share in certain areas could be higher than 20 percent because land is scarcer, and those areas are in higher demand. And additional construction could cause demand to go even higher.

As we’ve argued in this series, local housing markets experience their own unique dynamics, and there are surely many rules and regulations that could be relaxed to improve local problems. But those decisions are best left to state and local officials who live in those communities, especially because it is so difficult to objectively define a shortage or a surplus. The federal government should not be in the business of deciding the type and number of homes that people can build in their communities.

The next post in this series will be released after New Year’s Day. 

Via this Cato white paper, I submitted the following recommendations to the Department of Government Efficiency, a private-sector organization that will advise President-elect Donald Trump on how to reduce inefficiency in the federal government. The following recommendations would make health care more universal by reducing regulatory barriers to lower-cost, higher-quality health insurance and medical care. I further submitted recommendations relating to federal health spending and the federal tax treatment of health care. The three sets of recommendations operationalize reforms I propose in my latest book, Recovery: A Guide to Reforming the US Health Sector (Cato Institute, 2023). 

Individuals have a right to self-medicate, choose their health care providers, and choose whether and how to pool medical expenses with others. When the government respects these rights, health care becomes more universal as a matter of course. Prices fall, owing to market innovation and competition. Quality improves as new treatments and insurance designs make health care better and more secure. The Food and Drug Administration (FDA), the Center for Consumer Information and Insurance Oversight (CCIIO), and other federal and state agencies violate these fundamental human rights.

The results are higher prices and lower quality health care (i.e., less-universal health care). The FDA blocks access to essential medicines and requires patients to get unnecessary prescriptions. Cost–benefit analyses consistently find that, at the margin, FDA regulation on balance harms patient health. The CCIIO enforces regulations that increase insurance premiums and ration care until, as President Biden’s economic adviser Michael Geruso admits, even “currently healthy consumers cannot be adequately insured.” State licensing regulations block patients from accessing top doctors across the country.

The reforms below would cause prices to fall while improving quality—making health care progressively more universal by reducing the number of people who cannot afford the care they need. (The Medicaid/Children’s Health Insurance Program reforms in the Reduce Federal Health Spending section would give states flexibility to address the unmet medical needs that remain.)

The federal government should do the following:

• Abolish the FDA, including its powers to block new medical tests, devices, and treatments from the market; to require patients to obtain prescriptions; and to limit truthful speech.
• Regardless of the fate of the FDA, free patients to purchase medical tests, devices, and treatments that are available in other advanced nations.
• Use the Commerce Clause to free consumers to obtain health services from clinicians who hold licenses in other states and US territories.
• Use the Commerce Clause to free consumers and employers to purchase health insurance from other states and US territories.
• Repeal what’s left of the Patient Protection and Affordable Care Act of 2010 (i.e., Obamacare) and other federal laws that restrict health insurance choice.
• Free consumers and employers to purchase health insurance exempt from federal regulations, by
  • creating a new category of statutorily exempt health insurance;
  • codifying President Trump’s 2018 rule regarding “short-term” health plans; and
  • codifying President Obama’s 2014 guidance exempting US territories from Obamacare regulations (and then freeing consumers and employers to purchase insurance from US territories).

In the aftermath of the COVID-19 pandemic, the United States experienced a much higher rate of inflation than at any time during the prior few decades. Like the prices of many goods and services, the cost of housing rose rapidly, with the median home price increasing by almost $100,000. (Figure 1.) Unsurprisingly, many potential homebuyers were—and still are —shocked and upset.

As they have in years past, many politicians have latched on to the anger surrounding the recent housing market turmoil. During the presidential debate, Vice President Kamala Harris said, “Here’s the thing: we know that we have a shortage of homes and housing. And the cost of housing is too expensive for far too many people.” Prior to the election, Donald Trump outlined his own solutions, and now federal officials want to implement a host of policies, ranging from subsidies to selling federal land.

But is the United States really facing a housing crisis? Or a shortage of homes? And should Americans really expect recent federal policy proposals to make housing more affordable?

This Cato at Liberty post is the fourth in a series that examines these questions. (Previous posts are here, here, and here.) While the series presents evidence that the United States is not facing a true housing crisis or shortage, nothing in the series suggests that local officials should refrain from relaxing zoning restrictions and other regulations. Elected officials should reduce rules and regulations to make it easier and less costly for people to live. Additionally, federal officials should end the many demand-side policies that place upward pressure on prices across the nation.

Just as important, nothing in the series ignores that many Americans have taken an economic beating these past few years—real wages have fallen, and prices have not reverted to pre-COVID levels. It is no surprise that so many people have been calling for increased government intervention.

As previously, though, if federal officials answer those calls, it will likely increase Americans’ economic burden. Evidence shows that over the long term people have overcome the many federal roadblocks that increase the nominal cost of housing, but affordability would be much improved in the absence of those policies.

Fortunately, federal officials have an excellent opportunity to make it easier for Americans to afford housing because the lessons learned from the post-COVID-19 inflationary episode are directly applicable to the housing market. In both cases, federal policies that distort demand and supply result in harmful outcomes. The housing market is just a microcosm of what can go wrong—and how difficult it can be to fix—when the federal government interferes with markets.

This post begins to investigate whether there is a shortage of new homes, or a scarcity in construction. It explores the importance of demand in housing markets, an often-overlooked subject in the housing affordability debate.

As previous posts in this series have argued, it is difficult to characterize the US housing market as one in crisis. Even though the US population increased by 130 million people during the past five decades, the homeownership rate remained stable outside of the 2008 crisis. In fact, the homeownership rate rose even after prices started spiking in 2019.

It is clearly not the case that the typical American has no place to live, but some members of Congress insist on equating homelessness with problems in the broader housing market. And as a recent exchange with Rep. Maxine Waters (D‑CA) shows (watch from about 1:14:00 to 1:19:00), some members do not care to put homelessness into perspective.

Still, there is an excellent case to be made that homelessness is a serious socioeconomic problem that is much broader than just a housing problem. For instance, in self-reported data collected across 15 states, 75 percent of unsheltered homeless people claimed they had substance abuse problems. These data are consistent with other research and reports by the National Alliance to End Homelessness which show that a disproportionately large share of the homeless population experiences either mental illness or substance abuse problems.

In fact, economists studying homelessness have long incorporated these kinds of factors into their models even while recognizing that “homelessness results from an imbalance between the cost of available housing and a household’s income.” Researchers have noted, for instance, that:

“Investigation of the causes of homelessness must go beyond housing markets alone, however, because of the special characteristics of the population at risk and the public policies that address their needs. Transfer payments and policies regarding institutionalization of the mentally ill, for example, should be important determinants of the incidence of homelessness but are not part of a standard housing model.”

From 2005 to 2024, San Francisco’s homeless population rose from approximately 5,400 people to more than 8,300. Over the same period, city spending (adjusted for inflation to 2024 dollars) on its Homeless Services program went from under $77 million to over $600 million—more than $73,000 per person in 2024 (spending figures from DataSF).

As University of California, Irvine, economist Jan K. Brueckner has pointed out, it is also possible that government regulation makes housing too expensive for some people who would otherwise not be homeless. For example, building codes that prohibit the construction of dormitory-style housing with shared bathrooms and kitchens might make housing too expensive to sufficiently discourage homelessness.

Fortunately, the number of homeless people in the United States trended down from 2007 to 2019, and the number has been a small share of the population for many years. The level did spike after the COVID-19 pandemic, but it is not much higher than it was in 2007, and the rate remains lower—0.195 percent in 2023 compared to 0.215 percent in 2007—even though the total population has increased.

Still, homelessness is a problem, and most efforts to end it have failed. But to the extent that serious health and substance abuse problems are key drivers of homelessness, it is unlikely that a nationwide program of further expanding home mortgages, rent subsidies, and housing trust funds will solve the problem. Yet that policy combination is precisely what some groups promote.

The 2024 Economic Report of the President even blames “affordability constraints” on “persistent market failures in the housing market.” It then justifies both demand-side and supply-side interventions, such as grants and direct subsidies, to fix the alleged market failures. 

However, the fact that every person is unable to pay for the housing that they want is not a market failure.

In any market, for any given demand, the only way to ensure such an outcome would be to shift the supply curve so far to the right that the market price drops to effectively zero. Although we make no judgment as to how low the market price for housing or rent should be, the fact that many Americans knowingly move into higher-cost areas of the country makes it worth questioning the need for more government intervention.

Americans Regularly Move to High-Density Areas

While many policymakers argue that the typical American has become steadily more burdened by increasing housing costs, people have been consistently choosing to rent and buy in more densely populated areas. This fact suggests that they can afford to pay higher rent and housing prices. That is, people have a strong preference for certain areas—for myriad reasons—and are willing and able to pay to live in those places, as demonstrated by their actions. At the very least, many Americans are choosing to move into these higher-cost areas.

Many people have moved from higher-cost areas to lower-cost areas, such as from various places in California to Arizona, Florida, Nevada, and Texas. However, most of these people are moving from densely populated areas to other densely populated areas.

As Table 1 shows, between 2000 and 2020, when the US population increased by 18 percent, the number of people living in large metro areas increased by 32 percent. People living in the suburbs of these large metro areas increased by 48 percent, while the number of Americans living in rural areas decreased by 39 percent. (The long-term effects on this pattern from the COVID-19 pandemic on the labor market remain unclear.)

None of this should be too surprising. People tend to move from higher-cost areas to lower-cost areas, but they also tend to move where other people live rather than to the middle of nowhere. They move in this manner because, from their point of view, it allows them to lower their cost of living and improve their quality of life. The federal government should remain neutral in these decisions.

Construction Has Not Evaporated

Still, critics regularly blame a shortage in newly constructed homes for the supposed housing crisis. In fact, this view became conventional wisdom long before the recent spike in home prices. In July 2017, for example, Politico published a story titled “Why Washington Can’t Fix the New Housing Crisis.” The story stated:

“The country is in the grip of a new kind of housing crisis that Washington has virtually no power to solve. The crisis is a shortage of houses. Nationally, the inventory of homes for sale has been shrinking for 24 straight months, stoking bidding wars for even the lowliest fixer-uppers. In January, a measure of supply hit its lowest in history, according to the National Association of Realtors. That scarcity has helped push the homeownership rate to a near 50-year low.”

Oddly enough, when the article was published, the homeownership rate had already rebounded from its post-2008 financial crisis low of 62.9 percent, reached in 2016. It continued to climb, and by the third quarter of 2017 it was up to 63.9 percent. This fact alone is reason to question whether “scarcity” helped push the homeownership rate down.

Given that construction steadily increased from 2011 to 2021 (Figure 2), along with the higher ownership rates and the bidding wars, it is at least plausible that higher demand—for whatever reasons it occurred—helped drive home price increases during the period.

Finally, it is unsurprising that prices would rise as demand increases because housing supply is generally more constrained than demand. It takes time to construct new housing, and many desirable areas are already densely populated. In any given geographic area, new land cannot be produced in the same way that other goods can. Yet, people can get into the market for housing rapidly, despite those supply constraints.

The pandemic price spike provides a clear example: New construction was even more constrained during the pandemic due to supply chain disruptions, and demand was heightened. This combination helps explain the severity of the price spike that followed the pandemic.

Nothing in this post implies that more construction may not be beneficial. Local housing markets experience their own unique dynamics, and there are surely many rules and regulations that could be relaxed to boost construction that would improve local markets. But those decisions are best left to state and local officials, especially because it is so difficult to objectively define a shortage or a surplus. 

The government—especially the federal government—should not be in the business of deciding the type and number of homes that people need and want.

The next post in this series examines several specific estimates of the so-called housing shortage.