The housing shortage is probably not news to anyone who’s looked to buy a new home recently. According to the National Association of Realtors (NAR), the supply of homes for sale in the U.S. — typically measured in months of supply — reached a record low of just 1.6 months in January 2022. That number has grown since, but only slightly, and the supply is still not nearly enough to meet the demand.

While insufficient inventory may be obvious to house-hunters, it’s a complex problem with no obvious solution. Here’s what to know about the U.S. housing shortage, what factors have caused it and how it impacts the overall real estate market.

Why is there a housing shortage?

Rising materials costs, supply chain issues and labor shortages stemming from COVID have all negatively impacted housing inventory. But the problem existed long before the pandemic. Essentially, the U.S. has failed to keep up with the housing demands of a continually increasing population. (Particularly when it comes to millennials, a huge demographic who are now at prime homebuying age.)

One factor that exacerbates the shortage is the prevalence of institutional investors, who buy up a large portion of housing inventory for profit. These investors accounted for more than 13 percent of all residential real estate purchases in 2021, according to a 2022 NAR study, removing those units from the pool of availability for individual buyers.

Another factor is the Great Recession, which took place around 2007 and 2008. Data from the St. Louis Fed suggests that this had a severe impact on housing inventory: New home builds had been on the rise in 2005, peaking in January 2006 with more than 2,200 housing units started that month. They then declined very sharply, hitting a low of just 478 in April 2009. While the total number of new builds has been slowly increasing since then, totals have yet to reach pre–Great Recession levels.

The current economic environment is also complicating matters. Hopeful buyers saw their purchasing power plummet as mortgage rates and inflation increased. “When rates hit 6 percent, we saw many aspiring home buyers put their search on hold temporarily,” says Shmuel Shayowitz, president and chief lending officer of mortgage lender Approved Funding. “At 7 percent, we saw a bigger tipping point where people exited the market en masse.”

In addition, high mortgage rates are deterring homeowners from selling, for fear of giving up their locked-in low rates. “Many homeowners with mortgages are currently locked in at sub-5 percent interest rates,” says Sean Roberts, a strategic advisor at real estate website Orchard and CEO of homebuilding platform Villa. “Many who might otherwise be sellers are simply choosing to stay put, which is further limiting available-for-sale existing homes in today’s market.”

What is a normal amount of inventory?

Traditional wisdom states that the real estate market needs 5 to 6 months of housing supply to be balanced, or not leaning toward either a buyer’s market or seller’s market. NAR home-sales data shows housing supply remaining flat at 2.6 months’ worth in both February and March 2023, which is healthier than January’s record low of 1.6 months but still well below balance.

Complicating the problem further is the tendency of particularly popular markets to draw in new residents faster than they can create new housing to accommodate them. NAR’s Housing Shortage Tracker illustrates the number of new housing permits issued versus the number of new jobs created in more than 150 metro areas.

How a housing shortage affects buyers and sellers

Both buyers and sellers feel the impact of insufficient housing inventory. Many would-be sellers are unable to list their homes because they can’t afford the price of a new one at the current mortgage rates. As a result, a lot of homeowners who would prefer to downsize, or graduate out of a starter home, or simply move to a new location, are waiting it out. That keeps those homes out of the inventory pool.

Buyers are likely to bear the brunt of the problem, though. A lack of housing options creates a very competitive market, in which many buyers must compete for few available properties. This often results in bidding wars and drives up home prices. It can also leave buyers with little power and fewer protections in the transaction, as sellers have their choice of other hopefuls who might be willing to waive contingencies and accept any terms the seller wants.

How long will the shortage last?

Given the complex nature of the situation, the current housing shortage is likely to persist for some time. While lower interest rates may help, they’re unlikely to solve the problem completely. Increases in total housing builds would also help, though high materials costs and labor shortages still persist at this point in the pandemic, which means builders may still be reluctant to start new projects.

”It could take a while for the U.S. to recover from the current housing shortage,” says Roberts. “Houses take time and capital to build, plus, there are other factors at play. ​​Unfortunately, there is no short-term solution.”

Bottom line

Several issues have contributed to the country’s current housing shortage, including the pandemic, inflation and increased interest rates. Essentially, though, it’s a problem of supply and demand: New home construction dropped precipitously after the Great Recession and has yet to fully recover.