Blue States Are Creating a Housing Market Crisis

In the midst of a lingering affordability crisis in the United States housing market, Red states like Texas have been successfully building or starting to build millions of new homes in the past few years, while Blue states like California and New York are struggling to replenish inventory.

A prolonged shortage of homes in the U.S., mainly due to the fact that not enough homes were built in the country following the financial crisis of 2008, has contributed to keeping prices up in the past few years, even when aspiring homebuyers started to drop out of the market because of higher mortgage rates.

While the number of homes available for sale has increased in recent months, it remains low by historical standards. "Buyers are competing for a limited pool of homes, driving up prices," Matthew Walsh, Moody's Analytics housing economist, told Newsweek.

"At the current sales rate, the housing market has only 3.5 months' supply. While this is a challenging environment for homebuyers, the restricted supply is a boon for existing homeowners. House prices have never fallen on a national basis with less than six months of supply," he said.

"Given that most potential homebuyers are also home sellers, inventories are further depressed by a coordination problem wherein owners are unwilling to list their homes for sale, given the risk they will not find a property to buy."

Texas has achieved the highest number of new homes built in the past few years. Prices have recently been dropping, which has delighted potential homebuyers.

"Texas has built many more homes than California over many years," Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors (NAR) told Newsweek.

Within the last two years, some 116,693 single-family home permits were issued in California, out of a total of 221,983. In the same period, Texas issued 293,569 single-family home permits out of a total of 477,825—more than double those issued in the Golden State.

In the past ten years, California issued a total of 1,069,096 permits, of which 555,943 were for single-family homes, while Texas issued 2,017,652, of which 1,303,555 were for single-family homes, according to data shared by NAR.

While there is no precise data on which state has built more homes in the past couple of years, Yun said that "generally, there has been more new home building in the South."

According to Walsh, Texas and Florida are the two states that, in absolute terms, have started construction on the most units in 2023. In per capita terms, he said, Idaho, North Carolina and Florida led the U.S. in new home construction over last year.

"By our estimate, there were approximately 217,000 total housing units started in Texas over 2023, 26,000 started in New York, and 106,000 started in California," Walsh told Newsweek.

Why Is Texas Building More Homes Than Other States?

In Texas, the higher number of permits issued for the construction of new homes is mostly due to the fact that the state "has less regulation for building" than states like California, Yun said.

"California has expressed over-burdensome regulations, which prevent more supply being added in California," Yun said. "REALTORS® in California have expressed frustrations about these regulations that prevent active home building."

For Walsh, the number of new homes built in Texas also reflects the fact that the state has "more construction workers, and construction and labor costs are lower than in New York or California." Additionally, he said, "Less restrictive zoning laws in Texas make starting new residential construction easier. Above all, demand fundamentals are much stronger in Texas than California or New York."

"Texas was among the four fastest growing states in the nation last year, while California and New York lost residents. Builders are sensitive to these local demographic trends when making investment decisions."

Daryl Fairweather, chief economist at Redfin, told Newsweek that "it is easier to build in Texas because of more relaxed zoning laws, less red tape, cheaper land, and cheaper construction costs. There is also strong demand for homes from out-of-state buyers."

Should Other States Do the Same?

The result of the states' different approaches to home building is that, while in Texas inventory shortages are being addressed with more supply, in California the current lack of homes "leads to economic division," Yun said, "with haves with million-dollar properties and a majority and have-nots without any housing wealth from being renters paying high rents."

According to Yun, when it comes to fixing the current affordability crisis, Texas got it right. Building more homes is the only way "to satisfy housing demand."

For Walsh, the low inventory, which has been the dominant force in the housing market in the past few years, is "a complicated problem, and there are a lot of things that need to happen to help alleviate the critical shortage of housing."

One of the best ways to unlock new housing supply "would be to alleviate zoning restrictions," Walsh said. "Because these laws are typically set by the locality it is incredibly difficult to address these issues at the state level," he added.

"Federally, immigration reform could help lessen the shortage of builders, which has been a pressing issue since the Great Financial Crisis, and has lifted construction costs."

Fairweather said that the current shortage of homes could be fixed by making it easier for multi-family homes to be built.

"California has already passed zoning reform at the state level; now those laws need to be enforced, and development needs to be supported instead of interfered with," she said.