Zoning Changes Could Help Boost Housing Supply

With lumber and other materials costs rising, new home construction is expected to slow in coming years, according to a Zillow survey of economists and other real estate experts.

The Zillow panel expects new housing starts to end the year 2.5% below December 2020 levels on average. By the end of 2022, they are expected to fall another 2%. Not surprisingly, panelists cited the high cost of labor, materials and land as the biggest challenges for home builders.

Lumber, for instance, has been a huge issue. Earlier this year, the National Association of Home Builders said that lumber prices, which are triple what they were in April 2020, increased the cost of an average single-family home construction by nearly $36,000. 

While there are no silver bullets to fix these cost issues, Zillow’s panel said that relaxing zoning rules would be the top way to increase housing supply. Zillow found that a modest amount of upzoning in large metro areas could add 3.3 million homes to the US housing stock in past research. Zillow says that would create room for more than half of the missing households since The Great Recession.

Some zoning solutions could include allowing homeowners to add additional housing on their property, easing the land subdivision process, relaxing local review regulations for projects of a specific size, accelerating the adoption of new construction technologies and increasing training to build up the construction workforce.

Existing homes coming onto the market could also add inventory. As widespread vaccines make people more open to moving, panelists expect housing inventory to begin growing again this year.

Even with existing homes hitting the market, the panel’s average home value growth prediction for 2021 is the highest for any year since the inception of the quarterly survey in 2010—8.7%. Last quarter, home value growth hit 6.2%. It should fall to 5.1% in 2022, according to the panel. However, that is still above the historical average of 4%.

Another factor in housing affordability is interest rates. While the fixed 30-year mortgage currently sits near 3%, panelists expect it to rise to 3.45% by the end of the year and 3.99% at the end of 2022. Those increases would add $55 to a monthly payment on a typical home at the end of this year and $124 at the end of 2022. Zillow points out that, historically, rates are still below average.

As affordability challenges increase, the panel expects homeownership to drop among 35- to 44-year-olds over the next five years, when that group will be dominated by millennials. Fifty-four percent of experts who expect homeownership to fall among this age group by 2026 cited worsening affordability via higher mortgage rates or home prices as the top reason.

While materials increases are driving higher home prices, there are some tactics builders are trying, according to Dr. Masaki Oishi, co-founder and chairman of MarketSpace Capital.

Namely, Oishi says a good general contractor will work with their client and give them ways to save on time,  if not necessarily save money on materials. “If we can finish a project a week or two earlier, that’s a big savings in and of itself,” he says. “So there are ways in which we can help each other to keep costs under control.”