Ive heard repeatedly when trying to learn about our housing situation that we don’t have enough homes. I don’t understand how that’s the case or if it’s even true. Who or what is stopping more homes from being built exactly? If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
In: Economics
supply and demand
if there are not a lot of “good” houses in an area, but there are a lot of buyers for the area the prices will quickly rise and people get priced out.
to quote country songs……they cant make more land, so buy dirt (or something). what people want cant match with reality. there is only so much land surrounding a city; and if each home has a decent yard then there goes a good portion of the land not directly used for the homes footprint.
>If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
If it was up to the builders and developers, yes, they would. However, building is heavily regulated. New development needs to go through various review processes and obtain approvals from various branches of local government, environmental regulators, etc. For example, you may need approval from a utility board to get water and sewer to a new subdivision, plus environmental permitting for waste water handling, plus zoning and permitting. The number of approvals required and ease of obtaining them will vary greatly depending on where exactly we’re talking about. Some states make the process relatively easy (e.g. Texas) and some make it quite hard (e.g. California), and this accounts for much of the movement of people from the Bay Area to Austin, for example.
A big part of it is also that the shortage is not necessarily for housing generally — we could build huge new developments in the Dakotas, but few people want to live there — it’s for housing in high demand urban areas, which have already been developed and have quite limited open land for building. The only good way to solve that is by replacing single family homes with multi-family, and that generally faces even bigger zoning challenges than simply building on open land. Areas are generally zoned for single family or multi-family buildings, and generally existing residents in single-family zoned neighborhoods *hate* the idea of apartment buildings going in because of concerns about appearance, additional traffic, and concern that apartments will bring in lower income people (and everything that gets coded with that).
Local zoning regulations stop new housing from being build.
Local zoning regulations are created by local politicians who are voted in by residents who own current housing.
Those current house owners do not want value of their homes to go down (which may happen if a lot of new housing is constructed).
So basically very little new housing get created (far below demand).
Some non-competitive states (like California) can take away the rights out of the hands of local politicians, going against the wishes of locals, to mandate more housing – there is no viable mechanism for those locals to punish state politicians…no way to vote them out.
However, it is not possible in a lot of other states, e.g. NY tried to force higher zoning but the protests from local communities forced the governor to back down.
There are a lot of things in the housing market that might interfere with the simple supply and demand story:
1) Houses take a long time to build. If developers anticipate that economic conditions will be different in a few years (perhaps more baby boomers downsize into apartments), they don’t want to start a project now and have to sell in that market 5 years later. This also works the other way. If something was stopping developers from building a few years ago, like a global pandemic, that hurts supply today.
2) You can’t build a house in the same place twice. Often when people are saying “there aren’t enough houses,” what they mean is “there aren’t enough houses in the location I want to live in.” We’ve already built on all the land in the city center, 15 minutes from the city center, 30 minutes from the city center, etc. We can just keep building farther and farther out, but not everyone wants to buy a house that comes with a 90 minute commute (or even if they work remotely, a 90 minute drive to anything interesting to do). That’s a fundamental physical constraint, though it can be partially solved with density and with building up newish cities.
3) Housing construction is tightly regulated. Maybe developers do want to build on an attractive piece of land, but there are zoning regulations that prevent it (or make it too expensive, or force lower-than-optimal density, etc.) In many places, housing is in a sort of death grip where local laws make it hard to build new houses, which keeps property values of current residents high, and those current residents are the people who make the local laws.
You need to also consider what kind of housing is being built.
In cities there’s been more of a push to build higher density condos. To maximize profits of these buildings, they cram as many units as possible into a building.
The consequence of this is that you end up with units of 300 sqft and sometimes less.
Most people looking for housing these days are millennials who are moving out of the apartment/condo living and into larger homes where they can settle down and start families.
Since there’s a lack of this type of housing for people, prices go up.
Building homes requires a lot of time, a lot of money, and requires land. A lot of places that have housing price crisis the land is a huge percentage of that. Around me a 1/4 acre lot with a condemned uninhabitable building on it still sells for about 1 million dollars.
There are lots of cheap houses available but they are in places people aren’t interested in living
(a) In part it’s because we’re playing catch-up. During COVID, not many new homes were built (for a lot of COVID-related) reasons, and some contractors and tradespeople got out of their businesses. COVID’s over, but it takes time to catch up to where we would have been.
(b) In part it’s because of interest rates. In the 2010s, it was possible to get a 30-year mortgage for, say, 2.5%. Mortgage rates are now ~7.5%. That’s a huge disincentive to move. So, a lot of homeowners are hanging onto homes that they otherwise would have sold.
Some things that are stopping new housing from being built in America are parking requirements, zoning policies, lack of transportation and infrastructure. Many places have laws in place which say if you build a new apartment complex, for instance, you need a minimum number of parking spaces, and that means having to buy more land or there simply being not enough land available, so the developer may decide to build less units but have the prices be higher. Cities also have very restrictive zoning laws which make building multi-family housing in certain areas illegal. So cities can’t really expand because they run into suburbs that have to remain single-family homes. And there’s only so far away from a city that you can live if you need to work there. Without public transit the vast majority of people rely on personal vehicles to navigate cities which require roads and highways. And highways are a very inefficient use of land. Not to mention people need somewhere to have their car parked while they’re in the city which is also an inefficient use of land.
The cliche in real estate is that the three most important factors are location, location, location. Home buyers are often looking for that sweet spot in location that gives them proximity to work, schools, community, etc. When a location ‘fills’ competition for any openings increases, and there’s nowhere to put extra houses in the location. They don’t care if they can get 10 acres and a mansion 100 miles away from their preferred location at half the price. Small towns don’t attract people who want the resources that a city location brings, and creating new cities is hard.
Remote work allows some burden to shift from work location, but there will always be people who want or need to be in a city or choose a specific suburb for reasons.
>If the demand is so high and the supply is so low then the suppliers would obviously ramp up production, right?
Demand/home prices is only one factor that motivates whether a builder can build. Most builders–whether they’re building single-family homes or high-rise apartments–have to acquire a substantial tract of land first. That is a huge capital expense that comes with a lot of ancillary costs and work. Your labor material, and insurance costs also can’t be so high they devour the margin. And you’re going to need several tranches of financing and sureties, the terms of which are generally subject to macro conditions that builders and developers can’t control. You need all these things to line up before you pull the trigger on building a 50+ home development or a block of condos. And of course the project isn’t going to be complete for years.
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