By Hulya Arik, PhD, Senior Economist, Tennessee Housing Development Agency
In Nashville, home prices have more than doubled in the past decade. Knoxville rents have climbed rapidly since 2020. These trends extend to smaller markets across Tennessee as well, including Chattanooga and Murfreesboro, which have experienced housing affordability challenges that were almost unheard of twenty years ago.
While families once evaluated neighborhoods based on amenities like school zones and walkability, escalating housing costs have fundamentally changed the conversation. For many households, the question is no longer “which neighborhood should we choose?” but rather “can we afford to live here at all?”
The growing affordability crisis has sparked an intense debate among housing providers and policymakers across the country and in Tennessee. Chief among them, will building more housing make housing more affordable?
A growing body of research suggests that housing supply plays a key role in improving housing affordability. Yet many scholars also emphasize that supply alone cannot meet the needs of the lowest-income households, and advocate for deep rent targeting and subsidizing housing, because no housing that can be developed is affordable to extremely low-income (ELI) renters. For policymakers, understanding both perspectives is essential.
Both sides of the debate capture essential elements of how housing markets work. Expanding housing supply can help reduce price pressures over time. But targeted housing programs remain essential for households whose incomes are far below market housing costs. For states like Tennessee where population growth and economic expansion continue to increase housing demand, the call to action is not choosing between these approaches. Rather, it is about making them work together.
Why Housing Supply Matters
Housing markets follow the same basic economic principles as any other market: the interaction of supply and demand determines the price of housing. When demand for housing increases because of population growth, increased incomes, or better job opportunities, housing prices will rise unless there is a corresponding increase in housing supply to accommodate this rise in demand. Over the past decade, Tennessee’s cities have experienced this dynamic. Cities like Nashville, Clarksville and Knoxville have attracted new residents due to strong job growth, relatively lower taxes, and a better quality of life. But housing construction has often struggled to keep up with this increased demand.
Supply-side factors such as housing supply elasticity, land availability, construction costs, and land-use regulations influence the ability of housing markets to respond to changes in demand. When supply is relatively elastic, increases in demand can be easily accommodated through new housing construction, limiting the impact on prices. In contrast, when housing supply is constrained, increases in demand result in higher housing prices rather than increased housing production.
Research shows that when housing supply cannot respond quickly enough, prices rise sharply. Glaeser, Gyuorko and Saks (2005) demonstrate that housing prices in highly regulated markets often rise substantially above construction costs, indicating that regulatory barriers limit supply responsiveness. Estimating supply elasticities of 44 US metropolitan areas, Green, Malpezzi, and Mayo (2005) show that lightly regulated fast-growth communities tend to exhibit high price elasticities, compared to slow-growth communities. Meanwhile Saiz (2010) shows that geographic and regulatory constraints limit how quickly cities can add housing. Cities with limited developable land exhibit significantly lower supply elasticity, contributing to higher housing prices when demand increases. While housing supply is quite elastic for the average metropolitan area, in land-constrained large cities, such as cities in coastal California, Miami, New York, Boston, and Chicago, estimated elasticities are low.
Some recent research also challenges the idea that supply constraints are the primary driver of housing costs. For example, Louie, Mondragon, and Wieland (2025) argue that differences in housing affordability across US metropolitan areas are driven more by housing demand dynamics than by supply constraints (e.g. zoning or regulation). If strict zoning and regulations were the main drivers, then cities with tighter rules would show less construction relative to population. But they find that construction often keeps pace with or exceeds population growth. Meanwhile, price growth tracks income growth much more closely. Therefore, they conclude that demand differences explain more of the affordability gap than supply limits do, stopping short of negating the effects of supply limits, completely
Why Some Researchers Question Supply Solutions
Despite the evidence linking housing supply to housing costs, many housing researchers and policy advocates argue that increasing housing supply alone will not solve affordability challenges. These researchers are often described as “supply skeptics,” a broad term used in the housing policy literature to describe scholars who question whether market-rate housing construction can meaningfully improve affordability for the households most affected by rising housing costs (Been, Ellen, O’Regan, 2025).
While some scholars do reject the role of supply constraints entirely, most focus their criticism of supply-driven policies on who benefits from new housing development and how quickly those benefits reach lower-income households. Three concerns appear frequently in this research.
- Most new housing is built for higher-income households
Developers frequently build higher-end apartments or homes because those projects generate the highest returns. In many fast-growing cities, including Nashville, much of the new housing development consists of high-end apartments and newly built homes priced well above the median household income. From this perspective, building more luxury apartments may not directly help households struggling with housing costs. Furthermore, some urban scholars argue that new development in desirable neighborhoods can accelerate gentrification and displacement.
Recent research has examined how the benefits of new housing development are distributed across income groups. Theoretically, “filtering,” the process by which housing affordability improves over time as new, higher-end supply is added and older units transition down the income distribution, should lead to gradual improvements in affordability. McRae, Shepperd and Roy (2026) argue that while expanding housing supply may improve overall market affordability, the gains from new development may accrue first to higher-income households. They question whether filtering is working effectively in today’s markets and show that filtering may have slowed or reversed in some places. However, their analysis relies on descriptive analysis without an adequate comparative measure. In high growth metros, where demand pressures are particularly strong, the relevant question is not whether low-income renters are worse-off, but whether they would have been worse off in the absence of new supply. Without such a counterfactual, it is difficult to attribute observed distributional outcomes to supply expansion.
Freeman (2005) highlights how redevelopment in urban neighborhoods can shift housing toward higher-income residents. If new housing primarily serves affluent neighborhoods, it may do little to help renters facing affordability challenges.
- More housing may attract even more demand
Fast-growing cities often attract workers and businesses because they offer economic opportunities and a high quality of life. Building more housing can reinforce this dynamic by making cities even more attractive. Economists sometimes refer to this as induced demand, such that when new housing makes a city more accessible, additional households move in. In regions like Middle Tennessee, where job growth has been strong and migration from higher cost states has accelerated, demand may continue to rise even as new housing is built. In such cases, supply skeptics argue that supply expansion alone may not significantly reduce housing prices.
- Housing affordability is ultimately about income
A third concern focuses on the gap between housing costs and household income. Even if housing supply increases and rents fall slightly, many low-income households still cannot afford market-rate housing. Households earning less than 30 percent of area median income often require significant assistance to access safe and stable housing. Schuetz (2022) emphasizes that addressing housing affordability requires both housing policy and income support policies, including rental assistance and subsidized housing development. From this perspective, expanding supply alone will not address the needs of the lowest-income households.
Short-Run Neighborhood Effects vs. Long-Run Housing Supply
Much of the disagreement in the housing debate reflects two perspectives about how housing markets respond to new construction. Some researchers focus on short-run neighborhoods effects, examining what happens in the areas immediately surrounding new development projects, including whether rents rise or fall and whether existing residents are displaced. In contrast, long-run housing supply research examines how housing costs respond when the overall housing stock in a metropolitan area expands.
These two perspectives analyze distinct parts of the housing market. Neighborhood studies focus on local effects in the short run, while supply studies examine how housing prices respond across entire metropolitan regions over time. Understanding this distinction helps explain why housing research appears to contradict at times.
What the Evidence Says About New Housing
While these concerns are important, recent research examining what happens when new housing is built has produced consistent findings. Across multiple cities, studies show that new housing tends to reduce rent pressures in surrounding neighborhoods.
Asquith, Mast, and Reed (2020) examine the local effect of large apartment developments in low-income communities and find that new buildings reduce nearby rents by roughly five to seven percent relative to comparable areas without new construction. The study concludes that new buildings absorb higher income households who might otherwise compete for existing housing units, thereby reducing upward pressure on rents. Similarly, Pennington (2021) shows that new housing development in San Francisco reduces displacement pressures in surrounding neighborhoods. This happens because new housing absorbs some of the demand that would otherwise compete for existing homes. Instead of raising rents, new housing typically reduces competition in the local housing market.
Another important mechanism economists highlight is housing filtering. When new housing is built, it rarely becomes affordable immediately to lower-income households, but it may affect the broader housing market through a chain of moves. For example, a higher-income household moves into a newly built apartment. Their previous apartment becomes available, and a middle-income household moves into that unit. Then, the middle-income renter vacates an older apartment, which then makes that unit available for a lower-income renter.
This process is a moving chain. Research by Rosenthal (2014) and Mast (2023) finds that one new housing unit can trigger several downstream moves across the housing market. This process gradually expands access to housing, even if the original unit was market-rate. Mast (2023) tracked the sequence of moves triggered by new apartment construction and found that new market rate housing generates multiple downstream moves across the housing market. Over time these chains expand housing availability across a wide range of income groups. Albeit higher than the filtering rate of owner-occupied homes, with just roughly two percent of rental units filtering down to lower-income households each year, new units may take many decades to become available to the lowest-income households (Rosenthal, 2014). Filtering occurs slowly, but historically it has been a major pathway through which housing becomes affordable.
What This Means
For affordable housing advocates and policy makers, the supply skepticism debate highlights an important policy reality: housing affordability requires both market supply and targeted assistance.
- Housing supply helps stabilize the market: Encouraging housing construction can reduce upward pressure on prices over time. When housing production keeps pace with population growth, markets remain more stable. In fast-growing regions of Tennessee, such as Middle Tennessee, supporting housing development can help prevent affordability challenges from worsening.
- Affordable housing programs remain essential: Supply alone will not address affordability for households with the lowest incomes. Programs such as the Low-Income Housing Tax Credit (LIHTC), tax-exempt bond financing, downpayment assistance, and housing choice vouchers remain essential tools for expanding access to housing. These programs target households the market often cannot serve.
- Supply and subsidy policies work best together: The research increasingly suggests that the most effective housing strategies combine more housing supply with targeted affordability programs. Without supply growth, subsidies must compete with rising prices. Without subsidies, the market may leave some households behind. Together, these policies can address both long-term housing shortages and immediate affordability needs.
The Bottom Line
Even when housing supply increases, it may take time for markets to rebalance after periods of rapid demand growth. For policymakers, the key question is not whether supply matters, but how supply policies interact with affordable housing programs.
Tennessee’s rapid growth has brought economic opportunities, but it has also created new housing challenges. The debate regarding housing supply often becomes polarized. Some argue that building more housing will solve affordability problems, while others argue that supply plays only a limited role. The truth is unaffordable housing has many causes and no single solution. The research consistently shows three key points:
- Housing supply plays a leading role in shaping housing costs.
- New housing tends to reduce rent pressures rather than increase them.
- Affordable housing programs remain essential for lower-income households.
The most effective path forward is not to choose between supply and subsidies, but to make both work together.
REFERENCES
Asquith, Brian J., Evan Mast, and Davin Reed. 2020. “Supply Shock versus Demand Shock: The Local Effects of New Housing in Low-Income Areas.” Employment Research 27(1): 1-4. https://doi.org/ 10.17848/1075-8445.
Been, Vicki, Ingrid G. Ellen, and Katherine O’Regan. 2025. “Supply Skepticism Revisited.” Housing Policy Debate 35 (1): 96-113. https://www.tandfonline.com/doi/epdf/10.1080/10511482.2024.2418044.
Freeman, Lance. 2005. “Displacement or Succession? Residential Mobility in Gentrifying Neighborhoods.” Urban Affairs Review 40: 463-491. https://ds4ps.org/cpp-528-spr-2020/articles/gentrification/displacement-or-succession.pdf
Glaeser, Edward L., Joseph Gyourko, and Raven E. Saks. 2005. “Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices.” Journal of Law and Economics 48(2): 331-369. https://www.journals.uchicago.edu/doi/epdf/10.1086/429979.
Green, Richard K., Stephen Malpezzi, and Stephen K. Mayo. 2005. “Metropolitan-Specific Estimates of The Price Elasticity of Supply of Housing, and Their Sources.” American Economic Review 95 (2): 334-339. https://www.jstor.org/stable/4132843.
Louie, Schuyler, John Mondragon, and Johannes Wieland. 2025. “Supply Constraints Do Not Explain House Price and Quantity Growth Across U.S. Cities.” Federal Reserve Bank of San Francisco Working Paper 2025-06. https://doi.org/10.24148/wp2025-06.
Mast, Evan. 2023. “The Effect of New Market-Rate Housing Construction on the Low-Income Housing Market.” Journal of Urban Economics 133. https://www.sciencedirect.com/science/article/abs/pii/S0094119021000656.
McRae, Zachary, Shamaal Sheppard, and Adit Roy. 2026. “Abundance for Who?: Housing Access and Affordability in High-Growth Metropolitan Areas.” Georgetown Center on Poverty and Inequality. https://www.georgetownpoverty.org/issues/abundance-for-who/.
Pennington, K. 2021. Does building new housing cause displacement? The supply and demand effects of construction in San Francisco. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3867764.
Rosenthal, Stuart S. 2014. “Are Private Markets and Filtering a Viable Source of Low-Income Housing? Estimates from a ‘Repeat Income’ Model.” American Economic Review 104 (2): 687-706. https://www.aeaweb.org/articles?id=10.1257/aer.104.2.687.
Schuetz, Jenny. 2022. “Dysfunctional policies have broken America’s housing supply chain..” Brookings. https://www.brookings.edu/articles/dysfunctional-policies-have-broken-americas-housing-supply-chain/