A LOT OF PEOPLE IN THE HOUSING INDUSTRY are shaking their heads over the historically low percentage of households that own their homes. The U.S. Census Bureau says in the first quarter of 2015 the percentage of households that own homes dropped to just 63.8 percent, the lowest homeownership rate since 1988.

Rates have been steadily dropping since they peaked in 2005. On the surface this seems surprising since housing has been in a pretty strong recovery for a few years. It doesn’t make sense that the homeownership rate should continue to drop while in most markets buyers are competing — often fiercely — just to get their offers accepted.

There is a housing shortage in America — some might even call it a crisis, and certainly in some markets it is a crisis. I don’t tend to be an alarmist, but it is true that rents are skyrocketing and home prices are steadily increasing in almost every market. In some really hot markets like most of the San Francisco Bay Area, values have risen to what seems absurd levels, at least to anyone not living in the Bay Area. I recently had a very modest home in San Jose appraised at over a million dollars. I am working with another couple on the Peninsula and they needed to increase their qualifying amount to over $1.1 million just to qualify for a starter home.

The first thing that comes to most people’s minds when they hear of these skyrocketing values is that the market is overheated and that a crash must be imminent. The reality is that demand is so high and rents are so high that paying a million dollars for a modest bungalow makes more sense for most people than renting.

And remember, this is not 2005: the folks buying these homes have to prove they can make the payments. The Bay Area is similar to other areas in the nation with super-high demand: people want to live here and there are lots of high-paying jobs.

So why is there a shortage of homes to buy or rent? The number of households is steadily increasing, up to 116.8 million as of the fourth quarter of 2014. Despite the Great Recession, baby boomers’ kids are moving out of their parents’ homes and this is causing the rate of household formation to increase sharply. As the economy continues to slowly recover, the rate of household formation is increasing even more rapidly: over 2 million new households were formed in 2014 alone.

What’s the solution? My anti-growth friends will hate me for this, but the simple answer is that we need to build more housing — and fast. If there is any one thing that can be done that will make the biggest impact on the wealth-building ability of future generations, it is to build homes.

Local governments need to get on board with finding ways to encourage development, fast tracking building permit applications for the right kinds of development, and stop being part of the problem by discouraging growth. They need to be part of the solution by encouraging the right growth.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.

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