Understanding the size of the country’s housing shortage is harder than it looks. Estimates run from 2 million to 20 million units to meet the shortfall, according to a Washington Post story. It’s tricky when considering “how much a home should cost, how many people it should hold, and how big a footprint it should have.”
The Center for American Progress says the spread of expert opinion is more like 2 million to 5 million. Even so, that is a lot of housing that is missing and a big portion will be apartments.
However, some significant part will be apartments, not houses. It might seem like an easy problem, just build more.
There are reasons it isn’t being built, even after a record period of apartment construction. However, CAP authors Thomas Brosy and Corey Husak did an analysis and came up with an idea of changing the tax code to free up money that real estate developers could reinvest in their businesses and build more.
The Challenges Of Building Apartments
The last couple of years have seen apartments built at a record pace. Why? Because businesses were moving to new areas and people wanted jobs, which meant they had to live somewhere.
Many companies moved to the South and West, drawn by lower taxes and wages. People moved, following jobs with lower taxes. However, money has been a problem in apartment development.
The cost of constructing a building has jumped about 57.2% between January 2019 and January 2026, largely thanks to a pair of issues. One was pandemic-caused global supply chain problems. Another was the wash of cash the government made available during that time. Investors saw interest rates drop away and they wanted to see a profit on something. Many got into commercial real estate, which increased competition and drove up the price of existing buildings and land for new ones.
As the costs of building went up, developers turned to focus on wealthier consumers because the new buildings needed to command higher and higher rents to cover costs and leave profit for the developers and their investors.
A Shift In Taxes
Constructing new apartment buildings is expensive. One of the challenges in the industry is depreciation, or the process of recognizing a company’s costs when paying taxes. Unlike recognizing the immediate costs of office supplies or of employees’ wages or salaries, the company that owns the building has to deduct the cost over a period of 27.5 years. Developers, and, again, the people and institutions who invest in their work, have to wait for years to recoup the costs. It’s a long time to wait to get the money back and reinvest in building more apartments.
CAP noted that changing from depreciation to immediate expensing could generate anywhere from 706,000 to 1,062,000 new units over ten years at a price of $206 billion, or $20.6 billion annually.
As they explained, the 1981 Economic Recovery Tax Act shortened apartment depreciation from 31 to 15 years. The 1986 Tax Reform Act returned it to 27.5 years. Between 1983 and 1986, faster depreciation “was partly responsible for a large jump in multifamily construction.” After 1986, they said that “homebuilding crashed.”
Accelerating depreciation lowers new investment costs and also increases cash flow, making it easier to attract investors who don’t want to wait longer periods of time.
They also modeled different versions of changing depreciation to look at partial expensing. That would reduce the national bill but also limit effectiveness in expensive housing markets like New York, Los Angeles, Boston, Miami, and San Francisco.
Read the full article here