Why the U.S. housing shortage might be nearing its end

[Housing market concept - Model house bar graph]
PM Images

After years of housing demand outpacing supply, demographic trends may flip the narrative in the coming years, especially if construction remains elevated.

"Household formation is expected to slow over the next decade due to population aging, low fertility rates [https://seekingalpha.com/news/4574353-america-is-getting-older-and-will-soon-be-shrinking], smaller younger adult cohorts, and reduced immigration," a recent white paper from the Mortgage Bankers' Association stated. "Slower household formation means less demand for housing."

The projected baseline demand for new housing units during 2025–2035 is 11.3M, or about 1.1M units per year on average, according to the report. In contrast, housing supply is expected to grow 10.6M-14.6M units from 2026 to 2035.

So how did trends shift? Looking back, housing demand increased dramatically after the financial crisis and home prices rose, but homebuilding did not keep pace with this demand.

Home prices climbed even higher during the COVID-19 pandemic as demand surged on account of record low mortgage rates. National home prices rose 55% between 2020 and 2025, while annual rent growth ran in double digits over much of the same period.

This led to homebuilders ramping up construction, with the number of multifamily units under construction reaching a peak in 2023 to levels not seen since the early 1970s.

"However, the situation changed in 2025. Many of these projects began to be delivered from 2023 to 2025, coinciding with cooling demand as interest rates rose significantly and the job market softened," the white paper noted.

A key demographic trend that could impact housing demand is Gen Z approaching first-time homebuying age.

"But this generation is smaller in numbers than the Millennial cohort. Over the past decades, young adult cohorts were augmented through international migration, but this is unlikely to be the case given the abrupt changes in immigration policy in 2025," MBA noted.

Another factor is the aging of Baby Boomers. "Over the next 2-3 decades, Baby Boomers — who own more than 40% of owner‑occupied homes in the U. S.— are expected to exit the housing market," the report stated. "As these homes become available, they are likely to filter down to younger cohorts."

While aging Boomers are unlikely to flood the market with inventory, the home transfers will moderately add to supply over time.

If construction activity continues to be elevated, these trends could lead to a housing oversupply. "Construction decisions made today reflect current price signals, which we do not believe have fully accounted for the demographic shifts already visible in the data," the white paper warned.

"The demand picture may look materially different by the time those units are completed and delivered. We expect that this will lead to falling prices for both single-family and multifamily housing at the national level," it added.

The potential for oversupply and falling prices is a concern for the mortgage industry. "The most direct impact is on origination volume, as fewer households purchasing homes means fewer loans," the report warned.

"For existing homeowners, falling prices would erode equity, limiting access to cash-out refinancing and increasing the likelihood of selling at a loss. We are also concerned that falling prices would push more of today’s homebuyers underwater on their mortgages," MBA added [https://www.mba.org/docs/default-source/research-and-forecasts/research-white-papers/29244-research-housing-demand-2026-whitepaper-wb.pdf].

It would also likely impact real estate prices more than the 21st Century ROAD to Housing Act, which has already been passed in Congress. According to the latest Seeking Alpha poll [https://seekingalpha.com/community/conversations/679], subscribers are skeptical about the bill, arguing that government intervention rarely fixes the market and might make things worse.

Top homebuilder stocks: D.R. Horton (DHI [https://seekingalpha.com/symbol/DHI]), PulteGroup (PHM [https://seekingalpha.com/symbol/PHM]), Toll Brothers (TOL [https://seekingalpha.com/symbol/TOL]), KB Home (KBH [https://seekingalpha.com/symbol/KBH]), Lennar (LEN [https://seekingalpha.com/symbol/LEN]).

Notable residential REITs: Equity Residential (EQR [https://seekingalpha.com/symbol/EQR]), AvalonBay (AVB [https://seekingalpha.com/symbol/AVB]), Essex Property Trust (ESS [https://seekingalpha.com/symbol/ESS]), Camden Property Trust (CPT [https://seekingalpha.com/symbol/CPT]), Invitation Homes (INVH [https://seekingalpha.com/symbol/INVH]), AMH (AMH [https://seekingalpha.com/symbol/AMH]), Mid-America Apartment Communities (MAA [https://seekingalpha.com/symbol/MAA]).
[Mortgage Bankers Association whitepaper]
Housing market outlook (Mortgage Bankers Association)

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