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
> 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?
First off, it’s not quick or cheap to build more houses. Land needs to be acquired, financing needs to be secured, planned need to be drawn up, plans need to be approved and permit acquired, then the construction takes time, construction required large quantities of materials and labor. And ups and downs of the economy, changes in interest rates, pandemics, etc. can all delay this.
And there have been severe limitations on materials and labor in recent years, driving up costs and increasing time necessary to build. Even if builders are ready to build their subdivision, 7x spikes in lumber costs, backorders on appliances due to chip shortages, overall lack of skill tradespeople to build homes have all caused costs to jump and delays to get to completion and sale.
Another big issue is cost to build vs. ability to afford. The high costs for land, for materials, for labor mean houses cost a LOT of money, and new homes are just not affordable for a large portion of those who want/need a house. And higher interest rates make this an even bigger affordability issue. There’s a problem if homes cost $500k to build and buyers can only afford $350k.
What often happens is that higher end buyers are drawn to newer, nicer construction while their older, smaller homes are then more affordable for buyers of lesser means. But the spike in interest rates mean upgrading skyrockets the expense to move, so owners are staying put unless they absolutely need to move. Even if one might like to upgrade, a home that costs 50% more than current home might mean a mortgage that’s double or triple their current one, and not many potential buyers are willing to take that on.
But another issue we need to address is people’s “need” for space… there is such limited land within an hour of a metro area’s center, and way more people who want to live there than there is space for everybody to have their 3000 sq ft home on 1/3 acre lot. We need more people to be willing to live in 1800 sq ft townhouses, more people to consider condos, etc. to create more density, which will help reduce housing costs.
Houses are being bought and RENTED out as income property.
The “owner” will never sell as long as you are making the mortgage payment for them.
“Home” not available for a home.
There’s a lot to unpack here and several people have brought up good points already, so I’ll try to cover some different aspects.
Part of it is housing based on location, part of it is affordability. There are plenty of other aspects as well, but other people have already covered those fairly well. Housing is going up left and right, but is it in every place where there’s demand? Is it going to be $150k houses or $400k houses? What ordinances are going to restrict the availability of newer housing further, like higher square footage minimums or property acreage? If all the new jobs are popping up in one city, is housing an hour commute away going to solve the housing problem in the city creating those jobs? How much of the new construction is going to be new homes to buy as opposed to rentals?
Yes, there’s regulatory issues like approvals for every little thing (that likely exists from older problems). Where I live, zoning is used to keep trailer parks away from the high-end subdivisions and keeps strip clubs from opening up. Every three years or so, they increase the minimum square footage of new homes built in new subdivisions. A place designed for sewer never got sewered, so now any new subdivision that can’t get sewer immediately needs to cover that somehow, which typically means more land per house. Depending on how many lots you’re developing, you may have to add more infrastructure like sidewalks. And those regulations are going to increase and get more complex as new issues and abuses arise over time.
So now you have developments that could take months to build out waiting (let’s say hypothetically) a year to even break ground. You have inspections of water and sewer lines before they are buried (fun fact, this is a very common delay in my area because they are supposed to be X feet apart with the water line higher to reduce risks with contamination if there’s a break but they get put in the same trench often). And if there’s a required minimum for stuff, a planned 40-house development might turn into a 30-house development. More often than not, someone tries to cut corners and gets caught by all the inspections and regulations put there to stop them, which doesn’t help. Othertimes, someone exploits a new way to skirt these things and creates a new problem (and eventually, a new rule everyone has to follow going forward) to make sure things take even longer.
I think my pastor summarized the cost part best, pre-COVID. “I’m seeing all these new subdivisions popping up around the church, but they’re asking for $400k or $500k for a three-bedroom house. Just how many new doctors, nurses, and lawyers are moving into the area to afford that? How many new, young families are going to move to this area and come to this church? How many college kids are going to graduate and be able to get into one of these new homes?”
Everyone points at zoning policies but there are *three* things that hinder housing production.
Zoning and other regulations are definitely a big point. They make it harder to build things. This is a tough pill, because if a city just let anyone build anything anywhere you’d get a chaotic mess. On the other hand, if a city isn’t diligently changing zoning policies as its needs change, it can end up with outdated policies that make it impossible to build what the city needs. So the first thing that messes with housing supply is definitely government regulation, but government regulation can also *encourage* growth if used properly.
The next is *investment*. A ton of people have a significant portion of wealth tied up in their house. Part of their retirement plan is to sell it, buy a much more modest house in a place with low/no property taxes, then use the profit as part of their retirement fund. For that to work well, they need their selling price to be higher than their buying price. Problem: if their city changes zoning and causes housing prices to fall, it interferes with this plan. So every time a city tries to change zoning, you usually see big protests from the people nearby. They don’t WANT the housing supply to go up too much because it can mess with their property value. They don’t WANT nearby places to get zoned to allow more dense housing because it ruins “the character of their neighborhood”. So they fight it.
The next is *capitalism*. The builders aren’t stupid. They know if they build too much too fast, supply will outpace demand. That affects how much they can sell their new houses for, which affects their profit. So even if zoning is perfect, they do careful market analysis and decide how much to build and still maintain their desired amount of profit. The only way to make them go against this is… more regulation. The city can make zoning policies incentivize the kinds of housing they need, and may even introduce tax advantages or subsidies to coax builders into that. But if builders decide what a city needs isn’t profitable, they’ll pack up their tools and build somewhere else. And nobody wants to saturate the market.
So zoning and regulation are how a city has to balance the needs of investors/builders vs. the city’s sustainability. It’s hard to get that right. It never makes everyone happy.
But you have to figure in a lot of markets, to build a house you need to be able to pay $200,000 or more up-front. There’s land to buy, lumber to build, plumbing to lay, electrical work to do, framing, finishing, roofing… all of those people want to be paid even if the house doesn’t sell. So it’s not like if a person thinks local builders are too profit-driven and are going too slow, they can just go get a loan and start building new houses. You have to have a TON of capital to make an impact on a city. My city built 30,000 new units one year and it *wasn’t enough*. This year 40,000 more have entered the market and it’s only had a small effect. Good luck getting a $60 million loan because you want to fix housing. The only people with that much capital are the people with an investment mindset. So it’s not the normal, simple supply/demand curve you see in a microeconomics course. It’s a much more complex system with multiple variables.
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