Housing production in the Kansas City region continues to lag peer metros

Housing production in the Kansas City region has not recovered from the Great Recession that began in 2007 and ended in 2009. For 15 years, the region has been underbuilding. According to new research by the Mid-America Regional Council (MARC), this produced an actual housing gap of 12,000 to 24,000 units. Underbuilding plays a significant role in the rapid increase in housing prices and rents in the region. A lack of supply impacts families across the region whether they are looking for their dream home or just trying to find an affordable place to rent.

In prior research, MARC found a mismatch between rents and renter income. Nearly 64,000 households in the region are unable to find affordable rents at current rates. Underbuilding exacerbates the affordability gap as there are not enough housing units in the region to meet household demand. 

Current housing production levels cannot close the underbuilding gap. The region has averaged 6,700 units of new housing (single-family and multifamily combined) per year since 2008. An underbuilding gap of 12,000 units would require an additional 1,000 units per year over the next five years at a minimum. At the high end, closing a gap of 24,000 units would require building 10,000 units each year for the next decade. In either scenario, this pace of construction does not account for population growth. 

Underbuilding a Long-Term Issue
Housing production in the United States is cyclical, rising and falling with broader economic trends, but production did not recover from two major events in the last twenty years. First was the Great Recession. Housing production declined dramatically in the aftermath. In the Kansas City region, the annual production of single- and multifamily housing is about 58% pre-crisis levels. Recovery was further complicated by the pandemic. Housing production declined in 2023 as single- and multifamily permits in the region fell to their lowest levels in over a decade. 

The issue is not unique to this region. According to a 2023 report by the Congressional Research Service, economists and housing trade groups estimate the national underbuilding gap to be anywhere from 1.6 to 3.8 million units. Underbuilding is estimated by comparing how many housing units exist with how many ought to exist based on historical trends. Measuring something that does not currently exist means studies of underbuilding produce a wide range of missing units. Researchers identify the gap by utilizing historical trends to understand how conditions have changed over time and how underbuilding impacts both supply and demand in the housing market. 

The historical data accounts for a few important factors. One is the ideal vacancy rate. These are houses under renovation or being prepared for sale. All housing markets have vacancies and the ideal rate is one in which these units are in the process of coming to market to meet demand. Household formation, or how many new households are formed, is another key factor. Examples of this would be an individual or couple renting their own place instead of living with their parents or with roommates. Another would be a new family buying their first home. By examining historical data, researchers can understand the rates at which households form, as well as the ideal level of vacancy, and then compare those rates to the actual number of housing units, households and vacancies that exist today. 

The Method and Findings
MARC’s analysis of the underbuilding gap accounts for the annual change in households and unit production while subtracting second homes and properties without plumbing or kitchen facilities. The methods utilized in this analysis are found here. These methods were adapted from work by Up for Growth, a nonprofit organization looking at housing production across the country. MARC chose Up for Growth’s method for its clear methodology and replicable findings. 

Estimating underproduction relies on the two key factors outlined above. The first, household formation, is often limited by housing cost. Lack of production has a compound effect on household formation as prices rise. Regarding vacancy rates, as units being prepared for sale decline it creates upward pressures on prices. Our analysis utilized Up for Growth’s national vacancy rate of 5%. The region’s current vacancy rate is around 8% and historically between 10 to 12%. At the higher vacancy rate, the underbuilding gap is about 24,000 units. 

Housing Production Pre- and Post-2008 Financial Crisis
Housing production in the Kansas City region ranked tenth out of 11 peer metros over the past five years. Robust housing production was a key component of building the quality of life and affordability the region relied on to attract economic development and growth. Production declines following the Great Recession and post-Covid places that affordability in jeopardy. The decline in new housing supply and falling vacancy rates result in higher home prices and increasing rents. This combined with minimal wage growth impacts the quality of life of many households in the region.

Since 2008, the average number of single-family building permits has been about half of the average production in the two decades prior. In the same period, multifamily construction is about three-quarters the average prior to 2008.

Data Source: Source: Greater Kansas City Homebuilders Association

MARC tracks the economic activity of ten peer metros to benchmark the region’s performance. Between 2019 and 2023, the Kansas City region ranked second to last in housing production, both in total units and when accounting for a percentage increase in annual units built.

Data Sources: U.S. Census Bureau Building Permits Survey, 2020 Decennial Census 

Permits only provide the supply side of the housing market. Another question might be to what degree is supply keeping up with demand? A simple way to look at this is to examine what is happening to vacancy rates. If supply is not keeping up, then vacancy rates should drop. That is what is happening in Kansas City and its peer metros. Residential vacancy rates have been dropping for over a decade.

Data Source: U.S. Census Bureau American Community Survey, 1-year data

The region’s vacancy rate is higher than the average of all peer metros combined (benchmark average). This indicates it has had a more elastic system of producing housing than the benchmark average historically, enabling it to produce more housing relative to demand. This contributed to the region’s historical cost advantage. In the post-pandemic period, the gap between the region and the vacancy rate of peer metros narrowed by two-thirds.

The region’s historical vacancy rate above 10% means that MARC’s calculation of the underbuilding gap is the lowest reasonable estimate. Incorporating the region’s current or historical vacancy rate in the Up for Growth model, the underbuilding gap would increase to nearly 24,000 units. That upper bound calls for significant investment and a return to annual production levels last achieved in the late 1990s and early 2000s. Federal policies and loose lending restrictions fueled this boom and led to the housing and financial crisis and are unlikely to return.

The Implications of Underbuilding
Supply is one factor affecting housing prices and rent. But housing and rental prices are more dynamic than simple supply and demand, and several issues contribute to the region’s growing affordability crisis, such as consolidation of ownership in single- and multifamily housing. Consolidation has led to less competition while new market technologies, such as pricing algorithms, allow large landlords the ability to match market competitors and push rents higher. Recent court cases and federal actions, such as raids on corporate offices, allege companies providing these pricing services are operating as cartels and utilizing their knowledge of rents to fix prices in U.S. rental markets. 

The type and location of buildings also impact pricing for both new and existing properties. Recent research by Harvard’s Joint Center for Housing Studies found the construction of suburban and exurban homes has limited effect on urban rents and housing prices. The chain of movements set off by one household purchasing a new home and another taking their place rarely extends from the suburban periphery to the urban core. An effective strategy addressing underbuilding and affordability will need to account for both the type and location of new housing units throughout the region. It is not just how much one builds, but also what and where they build it. Most development decisions occur at a local level, but a broader affordability and market strategy will require a regional perspective.

In addition, the production of the increasingly elusive starter home (houses at 1,400 square feet or less) that many policymakers point to as needed and what many young families want has been in decline nationally for decades. Starter homes account for less than 10% of all single-family houses built in the U.S. annually. The lack of supply across housing types coupled with the scarcity of smaller, more affordable homes has resulted in rapid price increases for starter homes and an increasing affordability gap for entry level buyers. 

These dynamics are upending traditional understandings of the housing market in which filtering, the process in which smaller, older homes are available for lower income or early career buyers as households with growing families and incomes seek larger houses to meet their needs, is collapsing. There is increasing demand for older homes as wealthier families are unable to find or compete for larger and increasingly expensive homes. Further complicating matters, many households are now forced to compete in the housing market with large investors buying homes to convert to rentals or flip for higher prices. Households are at an increasing disadvantage as they compete with investors with large cash reserves, face a dwindling supply of available housing, and are grappling with rising prices in all segments of the housing market.

More Production, More Opportunity
More housing production at more price points in more places creates opportunities across the region. By bringing housing supply in line with demand it would open the opportunity for more households in the region. It would generate economic growth and allow for filtering within the housing supply providing more affordable options to families across the region. Production levels that meet demand would slow or put downward pressure on rising housing prices and rents, reducing cost burdens for families.

As recent work on vacancy chains makes clear, it is not only the volume of units, but type and location that impact pricing and affordability. Local communities across the region need housing that can accommodate working families, public employees, such as teachers and firefighters, and seniors. A multipronged strategy that adapts to local needs for a variety of households is essential. 

Increasing the volume of capital available for housing development, the building of more robust development pipelines, and attracting more builders and developers that can work at a variety of scales is necessary to meet the twinned challenges of underbuilding and the affordability crisis. States, counties and cities across the country are increasingly utilizing housing funds to incentivize and fund affordable housing projects. These funds are effective, but the scale of underbuilding requires an approach that emphasizes development of market rate and subsidized units across metro regions. These funds can be effective at attracting the capital necessary to move projects forward while being responsive to the various needs of diverse communities across the region. The current underbuilding gap and the affordability crisis will require partnerships between private industry, financial institutions and local governments to meet the scale and scope of the challenge quickly to alleviate increasing pressures and create more opportunity for households throughout the region.