The US needs to build 2 million houses to revive the American dream of homeownership

The American dream of owning a home is fading for millions of Americans due to persistent affordability issues, and the country needs a substantial increase in new home construction to make homeownership attainable again, according to Ned Davis Research.

"Years of rising house prices, modest income growth, and high mortgage rates have made housing unaffordable for large swaths of Americans," said NDR strategist Joseph Kalish and economist Veneta Dimitrova in a note on Wednesday.

The 30-year fixed mortgage rate has been hovering around 7% over the past year, briefly surging to 8% at the end of 2024 before dipping again.

The research firm reported a shortage of 2.2 million homes, compounding the US housing market's affordability issues.

The lack of supply stems from a prolonged period of underbuilding following the 2008 US housing crash.

"Since 2015, we have been warning about a chronic housing shortage, leading to a supply/demand imbalance. Following the GFC, new residential construction effectively stopped, and we have been trying to catch up ever since," NDR said.

However, even with a renewed urgency to increase the supply of homes, many challenges remain.

Rising development costs suggest to NDR that housing supply will remain constrained for years to come.

Higher insurance costs, taxes, costs of capital, elevated land prices, and increased environmental regulations have created a powerful combination limiting the country's ability to build enough homes.

Another factor making it harder to build affordable homes is increased labor costs, and the recent surge in immigration isn't helping as it might have in the past.

"The wave of immigrants has not seemed to impact the supply/demand balance for workers, a traditional area for Latino immigrants," NDR said.

"And while Powell has touted the influx of immigrants as helping to rebalance the labor market, these immigrants will eventually need permanent housing, adding to demand, keeping rents elevated, and preventing the Fed from sustainably hitting its 2% inflation target."

All in all, the outlook for the US housing market is not looking great for prospective buyers. Higher home prices appear to be the new norm with no correction in sight, and if the Federal Reserve cuts interest rates, leading to falling mortgage rates, home prices could surge even more.