‘Leaky Pipe’ of Homebuilding Woes Leaves Projects with Permits Lingering Unfinished

America's housing shortage is a key driver of the affordability crisis, and homebuilders often blame onerous local zoning and land-use policies for limiting their ability to build.

But even with building permits in place, a myriad of other challenges often leave new residential construction projects lingering unfinished, a new study finds.

The new analysis from the Federal Reserve Bank of St. Louis looks at the "leaky pipe" of incremental challenges that leave builders sitting on approved housing permits—given problems outside of the legal process.

This creates what the researchers call "inelastic housing supply," a situation in which new construction doesn't increase in response to greater housing demand, as one would expect in a property functioning market.

And it indicates that housing challenges aren't just regulatory. Even when builders have all the legal requirements squared away, they may not be breaking ground. Realtor.com® senior economist Joel Berner says economic uncertainty is the culprit.

"Inflation has had the effect of squeezing builders from both sides," Berner says. "Not only do buyers feel cash-strapped and less inclined to take on a home purchase, reducing demand for homes, but builders get their supply-side costs boosted as well."

Permits soared during pandemic, but completions lagged

By definition, a housing permit is issued some time before the home is actually complete. So looking at the difference between the two numbers gives a leading indicator of where the market is going, economist Manu Garcia and research director Carlos Garriga said.

A high number of permits are issued when builders feel confident. Those permits usually become completed homes in several months to a year. Permits can top home completions by a wide margin in good economic times. For instance, about 7.3 permits were issued per 1,000 people in 2004, and 6.5 units were completed.

But the lag in completion has narrowed in the post-pandemic construction world. Builders acquired scores of permits in 2021 and 2022 that haven't yet translated into a corresponding bump in homes.

Then in 2024, the per-capita number of completed homes hit 4.77 while the number of permits issued hit 4.33. It's the first year since 2010 that per-capita permits fell below per-capita completions.

"The COVID-19 pandemic period shows notable dynamics—permits surged to 5.2 per 1,000 in 2021 as demand spiked, but completions lagged as builders faced unprecedented supply chain disruptions and labor shortages," the researchers said.

Housing supply gap still widening

Taken together with other data points, the St. Louis Fed researchers showed how homebuilding patterns show a "cumulative gap" in homebuilding. While the nation might not appear to be overbuilt by some measures, shifts in new household formation and vacancy show lingering effects of underbuilding.

The Realtor.com economic research team estimates that the nation has a housing supply gap of more than 4 million homes, based on pent up demand from young people who are still living with roommates or parents. That supply gap increased from the prior year, showing a troubling trend of underbuilding.

Meanwhile the White House recently estimated the gap at a staggering 10 million homes, based on the level of supply that the nation would have if homebuilders had kept up the construction pace seen prior to the 2008 Global Financial crisis.

Speculative homebuilding—that is, when a developer starts construction on a new house without a secured buyer—has gone by the wayside in recent years as construction has slowed. Berner predicted that trend would continue as long as mortgage rates and slow buyer activity continue.

Builders have been more cautious by sticking to fewer homes and plots on their balance sheets amid the past few years' difficult climate for housing, Berner says.

"Labor and materials become more expensive, which cut into their profit margins at the same time that they're having to offer price reductions and incentives for buyers," Berner says. "It's easy to see why the pipeline gets leaky when the prospects for profit are so glum."