“We just need to build more” isn’t enough.

We’ve been hearing about supply chain constraints, rising inflation and an unprecedented housing market for years. 

Sorry to be the bearer of bad news, but the worst of it is far from over. 

As the co-founder of both a construction company and an affordable housing marketplace, I have a unique view of the marketplace that allows me to see the costs of resources and commodities required to build new construction housing, as well as the ability to see what’s happening, at scale, on the rental side of the market. This view, at the moment, is rather depressing. The underlying problems causing the dearth of new construction are more acute than most people realize, and there are no signs of relief that can take effect any time soon.

Of course, I was excited to hear that the Biden administration was rolling out its plan to address housing supply issues, but after reading through, all I could think to myself was: “all carrot, no stick.” Rewarding local jurisdictions for zoning reforms, when local officials already have no interest in the subject nor the political capital to expend, is not going to lead to any effective outcomes. And, while offering more federal funding and loans to construct housing like ADUs and manufactured homes is certainly admirable, doing so still doesn’t lead to any immediate solutions, nor do I know many developers who are going to jump in excitedly by this opportunity when most federal programs are quagmired in red tape. Finally, let us not forget that elections are every four years. Construction periods are slower than ever right now — any official who actually tries to enact any positive changes based on these guidelines could very well be out of office before the impacts even materialize, which is just another disincentive.

Like I said above, the outlook really isn’t very promising.

“We just need to build more”

Many policymakers have recently realized that our current housing situation is in crisis. Homelessness is on the rise, homeownership is out of reach for many, and rents are rising beyond what many people with full-time jobs can even afford. Truthfully, our housing has been in crisis for decades, but years of inaction and compounding issues stemming from the pandemic have made housing untenable to the point that’s requiring policymakers to pay attention.

While it’s good that housing policy is finally getting the attention it deserves, there’s a common misconception that the sole solution is “we just need to build more.” Unfortunately, this just isn’t sufficient, particularly if we’re focused on creating any level of affordability.

The problem, which housing developers are acutely aware of, is that the costs for building have skyrocketed over the last couple years, with no expectation of coming down soon. Three to four years ago, our construction company was quoting custom residential construction projects in Atlanta at roughly $125/sq ft. Today, for the exact same project, the quote would be over $200/sq ft. Pre-development costs for surveyors, architects, and engineers have more than doubled. Timelines are longer as well for nearly every trade, and local permit offices continue to struggle in the wake of COVID disruptions and constrained budgets.

With rising construction costs come rising prices, requiring even more subsidy dollars (that don’t exist) to make traditional housing affordable to middle and low income buyers or renters.  

And if we’re waiting for demand to slow down and remove some of the pricing pressure, it certainly looks like we’ll be waiting a long, long time. There’s still a deficit of between 3 to 7 million homes depending on the analysis, with the largest need being lower income households. 

The predictable result of the supply shortage is that institutional investors continue to park truckloads of cash in both existing and new construction housing as a safe haven from inflationary pressures and market volatility. But this influx of new capital also comes at the cost of access to homeownership for families and prospective owner occupants.

The cheapest housing is what’s already been built

If you’re trying to make housing both affordable and accessible, you have to increase supply. And yes, building more inventory absolutely has to be part of the solution. But if high construction costs and land prices preclude us from doing so, then the fastest and most cost-effective solution by far is to use the housing that’s already available. Homes built just 10 years ago were constructed at easily 50% of the cost of construction. A new home built in 1980 cost $64,900. Using an empty bedroom in that home costs $0 in construction. 

Meanwhile new home sizes have almost tripled over the last 40 years, while actual family sizes have declined. In fact, 73% of households are either single adults living alone, couples, or single adults sharing. But only 12.5% of existing housing stock are studios and 1 bedroom apartments. Put these trends together and it becomes increasingly obvious that your pre-school teacher was really on to something when she gave you that lecture about sharing. 

The concept of shared housing doesn’t require waiting months for supplies of lumber, steel, oil or appliances. Existing homes are already connected to sewers and zoned for residential living. Many of them are close to jobs and public transit. And they can easily become more efficient simply using the empty, unused bedrooms. Increase the supply further by converting underutilized space like formal dining rooms, offices, or living rooms into additional bedrooms, all while keeping costs much more affordable than traditional studio or 1-bedroom apartments. In fact, across more than 4,000 housing units at PadSplit, we continue to see shared housing costs hold at 40-50% less than the price of traditional apartments in the same market, and all without any direct subsidy. Oh, and our hosts are consistently earning 2X more on their homes, just from renting space that otherwise would have been empty (and unmonetized). 

Building supply is important. But it can’t be the only answer, especially with today’s exponential costs and slow processes. Sharing our existing supply is a no-brainer if we’re at all serious about creating supply as quickly and cost-effectively as possible. I hope that future policy guidelines acknowledge this reality.