A shortage of starter homes will be one of the biggest challenges the economic recovery will face going forward, according to a new analysis from Freddie Mac. 

The long-term decline in construction of SFRs has been the main driver of the current housing shortage, even prior to COVID-19. In 2018, Freddie Mac estimated a housing shortage of about 2.5 million units measured against long-term demand; that number rose to 3.8 million units by the end of 2020, according to Freddie Mac data. That sustained increase is "extremely unusual," Freddie Mac economists say, particularly since recessions typically see demand slow and supply rise.

The answer lies in the lack of starter SFRs: in 2020, only 65,000 entry-level homes were completed while 2.38 million first-time homebuyers entered the market.  Contrast that number with figures from the late 1970s, when construction of entry-level homes averaged 418,000 units per year.