Myths regarding why housing is so expensive:
Builders are just greedy. Sure, some are. So are some doctors, lawyers, firemen and janitors. The fact is the pre-tax profit margins and return on equity for the largest builders in America are almost exactly the same as for the S&P 500. People see rapidly rising home prices and assume it is pure profit to the builders – and don’t know it is barely off-setting rising costs.
Builders make more money building expensive homes than less expensive ones, so they only want to build expensive homes. Typically, profit margins are somewhat higher on expensive houses. But they take longer to build and they can sell less of them, so often times those building entry-level homes have better returns on capital.
We’re building plenty of homes and apartments – they are just too expensive. If we are building too many expensive units, they will either be (a) vacant; or (b) have price reductions (good for affordability). Neither is happening. In many cases, people are confused about how much building is going on. When most new units were built in distant suburbs, they were less visible to the population. In the current cycle, the bulk of new housing has been built in downtown areas and infill communities – and so gets lots of attention. But employment growth to permit ratios are far less than we had in the past, particularly in the high-job-growth markets.
Gentrification. We should not turn a blind eye to the difficulties caused when struggling areas improve, resulting in rent increasing for existing inhabitants. But logically, do we think it would be better not to build the new units at all? To have less housing? To have more people fighting over the existing units? The tragedy isn’t that sometimes values in a neighborhood rise as they are redeveloped. The tragedy is that when it happens, we have not created enough housing to keep prices down to where those impacted have acceptable options.
The mortgage market is holding back home buyers. Mortgages are harder to obtain than they used to be. But they are available. And with FHA, VA and USDA loans, there are plenty of low- and even some no-down-payment options.
The Federal Government needs to change tax policy, etc. The Federal Government has very little impact on housing (with the exception of the mortgage market) – land use decisions are local decisions.
Institutional holdings of single-family homes for rent. Hundreds of thousands of homes were acquired in the Great Recession by institutional and private capital and turned into rentals. And there is an argument that this has reduced the supply of for-sale housing at the entry level, and therefore raised prices. But it has no impact on the total housing stock.
There is a lack of homebuilding and development capital holding back builders from meeting demand. The industry as a whole is awash in capital. The large publicly traded builders have more capital than they have good places to put it. There is more private equity in this industry than ever before. Banks are lending. Not the way they once did, but that’s a good thing. If there were an industry-wide shortage of capital, then there would be few bidders for each potential project (there are many) and profit margins would be higher than they are.
Real reasons housing is so expensive:
There is insufficient approved land because the entitlement process is incredibly long, unpredictable, random and capricious. Large-scale communities often take over ten years in the planning stage to bring their development from an idea to the construction of the first home. Even projects that have all of their zoning and land use approvals are now taking years to get through the mapping or plat process. These are supposed to be relatively short administrative processes to check and formalize engineering and systems. But with insufficient government staffs and little accountability for time and process by the government, they are anything but. It has become nearly impossible to attract capital to large-scale community development given the time uncertainties. This is not readily apparent to the general public because in many communities, projects that were started in the 1990s or the early 2000s are now finally delivering homes.
Density is a dirty word. There are no solutions to our housing shortage that don’t involve higher density, whether in multi-family or single-family configurations. We are not going to build our way out of this mess with nothing but large lots and large homes. There is not enough developable land and the prices would be too high. That is genuinely “dumb” growth.
Government-mandated design standards. Many municipalities are no longer simply the arbiters of what type of project can be built through zoning; they are the arbiters of taste. Exterior finishes/materials are often mandated in order to achieve approvals. That adds cost to the home and raises the price. Some may reply that it is justified in order to achieve a certain look for the community as a whole. Perhaps. But it is undeniable that requiring expensive finishes/design raises the price and, therefore, excludes certain potential buyers/renters. If you think a loss of affordability is worth a better “look” and acknowledge the trade-off, so be it. But it’s hypocritical to decry the lack of affordable housing while putting in place standards that make it more expensive. Millions of baby boomers grew up in the simple, small tract houses built following World War II. They weren’t embarrassed by it and were not scarred for life.
Excessively high government-mandated building standards. Who wouldn’t be for higher standards? Well, if the higher standards price out buyers, try asking them. Why do new homes have to have solar panels or other energy features that existing homes do not? Why can’t the market decide if they are desirable and worth the price? If it’s a moral imperative, why is it not an imperative for existing homeowners too?
Failure of government to fund infrastructure
Many people mistakenly believe that cities, counties or the state build water, sewer and storm water systems. But most of this work and actual cost is off-loaded to anyone developing a new project. New projects are often asked to fix problems years in the making – inadequate roads, storm water management, etc. Implicitly, this means existing homes and commercial buildings did not pay their fair share, so new homeowners or renters will have to pay for the past?
Rapidly rising costs. Vertical and horizontal building costs have skyrocketed this cycle. This is due to higher design and construction standards, rising material costs and shortages of construction labor.
In Part III we’ll look at the real reasons there is such a shortage of feasibly entitled land.
