Construction Capacity: America's Diminishing Housing Pipeline
5% Rent Growth Meets 3.5% Income Growth
Housing costs are dramatically outpacing income growth across America. New research from Nathaniel Baum-Snow and Gilles Duranton in their NBER working paper "Housing Supply and Housing Affordability" reveals how land use restrictions, declining construction productivity, and shifting consumer preferences are creating a perfect storm for housing affordability.
Why it matters
Housing costs are consuming an increasingly larger share of American incomes, creating economic pressure that limits mobility, reduces opportunities, and contributes to inequality. Understanding the supply-side constraints is crucial for developing effective solutions.
The big picture
Housing has become increasingly unaffordable since 2000, with prices and rents rising faster than household incomes across virtually all U.S. markets. This represents a troubling reversal from the 1980-2000 period when housing affordability was improving in many areas.
From 2000-2022, rental affordability gaps increased by 1.5 percentage points annually in rural areas and suburbs
Home value affordability gaps grew even faster, especially in "superstar cities"
Declining household sizes have increased housing demand despite slower population growth
Housing supply responses have fallen dramatically, particularly in high-demand areas
The data reveals four distinct housing market patterns:
Small cities and rural areas (weakest demand, most land available, least regulation)
Suburban areas (strongest demand growth, some available land, increasingly restrictive)
Central cities (moderate demand growth, high existing densities, higher costs)
"Superstar cities" (high demand growth, extreme construction costs, highly restrictive)
By the numbers
Housing costs rising faster than incomes:
In rural areas, rents increased 5.0% annually from 2000-2022, while incomes grew just 3.5%
In the suburbs, 2000 home values were 59% higher than in rural areas, with even larger gaps today
In "superstar cities" (NYC, San Francisco, Washington, Boston, Seattle, San Diego), 2022 home values were 7 times higher than in rural areas
Construction costs began rising at twice the rate of inflation after 2005
Construction slowdown:
Annual housing unit growth fell from 2.0% to 0.7% in suburban areas between 1980-2000 and 2010-2020
Housing depreciates much more slowly in expensive markets (0.2% annual teardown rate in superstar cities vs. 0.7% in rural areas)
Housing supply elasticity (response to price increases) has fallen from 2.6 in 1970-2000 to roughly 0.3-0.5 in 2010-2020
Land development elasticity is now just 0.1 (only a 0.1% increase in developed land for each 1% increase in prices)
Construction productivity problem:
Construction productivity has declined 40% since 1970
Overall economy productivity increased 290% during the same period
Building One World Trade Center took nearly 8 times longer and cost 5 times more per square foot than the Empire State Building (adjusted for inflation)
Construction firms invest little in intellectual property capital, research, or innovation
The regulatory landscape
Land use restrictions have tightened across most U.S. metro areas since 2006, particularly in already-expensive housing markets.
Minimum lot size requirements average 0.37 acres nationwide, with 75% of municipalities requiring at least one acre in some districts
Two-thirds of incorporated localities have minimum lot sizes of at least 5,000 square feet
Only 31% of land in incorporated areas is zoned for multifamily housing
Regulatory costs add between $150,000-$400,000 per half-acre in superstar cities
Urban growth boundaries in cities like Portland, Seattle, and many English cities restrict outward expansion
These restrictions increase housing costs through three mechanisms:
Own-lot effects - reducing the option value of property development
External effects - protecting against nearby developments and their potential costs
Supply effects - reducing aggregate housing supply, increasing all property values
Between the lines
The economic research reveals several important dynamics driving housing supply:
Housing construction fundamentals:
Housing production appears to follow a Cobb-Douglas function with a capital share of 0.65
This implies an intensive margin supply elasticity of about 2 (a 1% increase in housing prices should produce a 2% increase in housing per unit of land)
But actual supply responses are far lower due to land availability constraints and regulation
Real estate development dynamics:
High fixed costs and real option values create significant development delays
New housing tends to be built for the upper end of the market, then "filters down" to lower-income households over time
Filtering has slowed or stopped in many markets due to insufficient new construction
Upzoning policies show promise but face political resistance
The political economy of housing regulation:
Property owners in high-value areas are incentivized to restrict new development
Exclusionary zoning can reflect fiscal motivations (preventing "free-riding" on local services)
Restrictive zoning protects against negative density externalities (some households willing to pay 9,500+ to avoid an additional nearby dwelling)
The opportunity gap
Research suggests that restrictive housing policies in productive cities create significant economic costs:
Housing restrictions prevent an estimated 17 million Americans from moving to more productive cities
This geographic misallocation costs the economy up to 8% in lost economic output and 2.1% in aggregate consumption
Lower-income households are disproportionately excluded from high-opportunity areas
Housing constraints limit human capital accumulation by restricting access to learning opportunities in productive cities
What's working
Supply-focused interventions have shown promise in several cases:
Auckland's 2016 upzoning of 75% of residential land led to a 4% increase in housing stock
Minneapolis eliminated single-family zoning, with early evidence of more construction and slower rent growth
Accessory Dwelling Units (ADUs) policies in California and Vancouver provide a form of "gentle densification."
Sao Paolo's relaxation of density restrictions increased housing supply with a net welfare gain of 0.76%
What to watch
The construction productivity puzzle remains one of the biggest unexplained factors in housing affordability. Potential causes include:
Increasingly complex building codes and regulations
Industry fragmentation (small firms build most housing)
Increased neighborhood opposition to larger projects
Shift toward higher-end, more customized construction
Lack of innovation in construction methods and materials
Emerging research areas:
Dynamic models of housing markets and real options in development
Assignment models matching heterogeneous households to dwelling types
The welfare effects of different kinds of land use restrictions
Quantifying the economic costs of housing misallocation
The bottom line
America faces a fundamental supply problem in housing markets. While demographic shifts and demand factors matter, the evidence increasingly shows that restrictive land use policies, rising construction costs, and declining construction productivity are the key drivers of declining affordability.
Housing affordability will likely continue deteriorating without addressing these supply constraints, especially in the most productive cities. This has profound implications for economic opportunity, inequality, and long-term growth.
Thanks for compiling all this. ''
Plowing through the resesarch can result in a headache. Too many numbers, not enough on the ground observation of actual housing markets.
It is pointed out for example, that ony 31% of land in incorporated areas is zoned for multi-family. But what does that really mean? There are two reasons to wonder. First, could it be that only 31% of the land base is suitable for multi-family due to natural constraints and limited infrastructure? Ruling that out is a massive assumption that is not based on any data presented. Second, in many jurisdictions (you can read a recent newsletter from Addison dal Mastro describing this) do not, as a matter of policy, zone for more intense uses in advance. They allow higher density one map change at a time. That's not how I think it should be done, but I am in the minority. We know that rezoning for multi-family can be quite difficult in places. No argument there, but we also know that its not equally difficult (or even difficult at all) everywhere. So, how does the overall conclusion help us understand what to do in a particular market?
Its possible that I missed it, but in the write-up on the impacts of building codes, I never saw it acknowledged that there are plenty of jurisdictions - though not normally large ones - that do not have building codes. Why not compare building costs and see if there's a difference? I can tell you that there is no apparent difference in housing cost between the cities that have codes and the towns that don't in our small metro. I suspect that its true in at least some other markets, but who knows?
Those are just some observations rooted in watching all this go down for 50 years. Overall, as I plow through the all the formulae and all the numbers, I have to ask whether it is possible that the aggregation of data results in a picture that is not actually true of any specific housing market? I do not see how that possibility can be ruled out. It don't think its true. I think the research is probably at least partly right about at least some places, but as Wendell Berry points out "abstraction is the enemy of clear thinking."
Finally looking at your headline "5% Rent Growth Meets 3.5% Income Growth" makes me ask why there is such a huge investment in looking at the supply side of housing and so little discussion of the question that maybe, just maybe, the inequality in our economy has something to do with this?