If home prices are going up, that means that demand exceeds supply. If home prices are going up everywhere that means demand is exceeding supply everywhere.
If homes are a good monetary investment, that means home prices are going up, which means supply is not keeping pace with demand.
If home prices are going up at a rate faster than wages, then they are becoming more expensive for our children. Not in a round-a-bout way, but in a direct causal relationship way.
Homes can either be affordable or an investment, not both. If homes are to be affordable that means more need to be built.
> If homes are to be affordable that means more need to be built.
Try pricing what it would take to buy a plot of land and build a home on it. In some places there are very expensive local regulations that must be satisfied. However, just the base value of some land with utility access, physical materials, and labor to assemble the home is "unaffordable." If the difference between the cost to produce a home and the sale value of the home was larger than there would be more home builders. If reducing the cost of housing is important to you than you should focus on ways to reduce the cost of producing homes.
In 2019 I purchased land in Mt Washington, about 15mins outside downtown Los Angeles for $200k. My father is a builder back home in Australia so we know more about building that most. Even the after 3+ years, we finally received permits. The city is making us widen the road ($75k), extend a water main 12 feet ($75k), move 3 power poles (can’t get LADWP to tell us what that’s going to cost yet as they have to design it) and install a septic system. We are going to go all electric so we don’t have to run gas lines.
The amount of bureaucracy is insane. Often times we have been the go between for different departments of city that have offices in the same building as each other. They all point the finger at each other. Can’t get answers to the power pole questions from LA DWP without Bureau of Street Lighting, Bureau of street lighting won’t do anything with out LA DWP etc… it’s madness.
House will be 3200sqft, very nice with a pool but lots of value engineering (thanks to my dad). Construction budget is $2m. Will be getting a construction loan. Requires monthly income of $35k combined. Lucky I’m doing this with my twin brother, so we might just be able to afford it, but currently can not due to interest rate rises since we started. Swinging big.
Bank appraised finished project at $3.5m.
My take away from the whole process is that LA infrastructure is terrible, and the city has effectively made it impossible for new construction by family’s. LA DWP single handedly cost us a year in permitting and its incentives are just so not aligned with home owners. My dream is we can go solar and batteries and tell them to get lost. I now have a real respect for what Starlink is doing. Down with the entrenched utilities!!!
You have to be rich to build a house in LA. Renovation is the only real option for individuals. Which just drives up house prices. New houses built is the only way out I think, and the government seems to only be making it harder.
I've looked into building in Portland OR. I don't think we're quite as bad as what you describe (except for the bureaucracy which is spot on), but I came to the conclusion that there'd be about $100k in fees. Just the fees to be allowed to hook up to the city sewer I think came out around $30k if I understand them correctly. (It's possible I'm missing something. I'm not an expert.)
For some people that's probably a bargain, but if you're not wealthy it's a lot of money just for /permission/ to do something.
In my AHJ, if the sewer line passes by your property YOU HAVE TO PAY DISPOSAL/SEWAGE FEES (based on water usage), even if you have your own functional and safe septic system.
A lot of what you are describing is regional issues for costal cities. My specific comment was pointing that {Base land + Materials + Labor} is very expensive, and while addressing these fees and red tape might be important, it's not the whole cake. I was also targeting a more modest experience.
In Texas it might be $40k land (varies by size and location), $250k for construction ($115/sqft * 2250 sqft), and maybe $50k for utilities/landscaping/driveway/permits etc (varies by taste and location). So $350k for a house in a state with a $70k median household income. With a 20% downpayment and a 6.5% interest rate this median family for a median house would spend 1 year salary on the downpayment and over a third of their gross income on the mortgage. If they had a typical amount of debt from cars, credit cards, or student loans their DTI would be too high to qualify.
EDIT: To my original point. Saying "Build more homes" is an oversimplification. Homes are largely priced such that they equal {Land + Building value}, and new homes are largely priced at { Land + Construction costs + reasonable margin for developer }. If you want to build more homes, look at how building can be cheaper. There are some clear low hanging fruit you are describing in your LA experience, but even where the regulatory environment and labor costs are more reasonable the numbers don't crunch well. Let's have conversations about how to reduce the cost of producing housing. Getting cost low enough that the median household income can afford new construction would absolutely drive up the number of homes being built.
I have built a personal house with two brothers — one my own Twin — and wow ya'll are in for an undertaking.
I've built, all-together, about similar budget (for two houses with brothers) and I don't even think I have enough energy to build my own house, now. But gonna try, on some land in a county with minimal regulations.
House Twin and I built was in a Historic District, which was the biggest nightmare of the entire construction. We literally did the rebar and formwork and roof and plumbing and electrical. And they made us re-do windows and other such bullshit to "be in conformity with the neighborhood, but without giving the impression of being historic itself." JFC, make up your minds [worse than any HOA nightmare].
> move 3 power poles
> House will be 3200sqft
> Construction budget is $2m
> impossible for new construction by family’s
Sorry, but this looks like one of the most incredibly out-of-touch rich people comments I've ever read. You're building a freaking castle in the middle of the city, moving roads around, and then you go on to say "families" can't build??
Maybe you're right and even building a modest home in the suburbs is harder than it should, but your project is definitely not proof of that.
Choosing to build a giant home in the LA hills with a budget of $2M just for construction is the out of touch rich people thing, not the additional issues with the city.
I think you missed my point. Our land is super cheap for LA (hence all the infrastructure work). Even if we built a garden shack on it, we’d have spent $600k. How could a working class family ever afford to build a house like this?
If the goal is more houses, make them faster and easier to build. Less red tape, less infrastructure requirements. Otherwise it’s only well of people like me that can (barely) afford them.
Now I’m sure you’ll say “don’t live in a coastal city then”. That where the work is. And it’s also where 40k homeless people live. Connect the dots. We need more houses. There is land to build them, it’s just insane to do that under current rules.
If home prices are going up everywhere that means demand is exceeding supply everywhere.
Only if the houses are selling at the higher price. There are a lot of empty, unsold houses where the owner is refusing to reduce the price. Property economics is weird.
> If home prices are going up, that means that demand exceeds supply. If home prices are going up everywhere that means demand is exceeding supply everywhere.
Misses the fact that homes are bought (most of the time) with borrowed money and leverage.
You can either look at that as increasing the supply of money or lowering the cost of money, and its reflection in housing prices.
Sure, asset bubbles are a known phenomena. Zero-interest rate policy made a lot of big bubbles. That doesn't mean there are enough units built, or that there's no real demand. (It means the opposite, the bubble happened because it is such a good investment.)
Another explanation is that the average new house costs more than it used to. Housebuilders have chosen to build bigger homes at a higher finish level because there's more profit in it. New affordable housing is becoming rarer.
Another factor here is the rising costs and complexity of zoning/permits. In my area it will cost you 6 figures just to put down a foundation with the paperwork. This puts a floor to how cheap a house can be and what is financially viable to build.
Demand for homes may exceed supply but ask what that demand really is.
A big chunk of that demand is for 2nd or 3rd or even 4th properties as investment rental properties. Can’t afford a house in the sf Bay Area, no problem, go buy 4 investment properties in the Midwest! I know people who’ve done that.
Also look what houses are built, they aren’t starter homes in many areas. They are “luxury” (luxury per home marketers, sq ft, and price, I won’t go down the rabbit hole of what I personally think).
That makes zero sense. Do you think those rental units disappear off the market? There isnone unified housing market, rent and buy. People can still rent if they can’t buy.
Building more will inevitably fix the housing market, even if one investor owns every single new house.
Question: Adding out of state investors to the demand pool ( that additionally can out bid locals) will likely
A. Increase house prices
B. Decrease house prices
Question 2: adding rent seeking middlemen between people and housing is likely going to
a. reduce costs for housing
B. Increase cost for housing
So there’s a finite supply of house, investors from out of state are now competing, increasing demand but also have deeper pockets. Now the locals who would hav bought are forced to rent, increasing demand for rentals. They investors aren’t going to take a loss so they’ll rent at the rate that gives them the expected return, which they get because of the high demand they helped create, with rental prices justified relative to the sales price that they themselves jacked up
When investors build with the intention of renting, they typically build at higher density. The only real barrier producing artificially high demand are policies preventing high density building. This is also the thing which makes housing an attractive investment option in the first place. Improved policy will fix both of these problems.
> If homes are to be affordable that means more need to be built.
I'm not convinced it's that simple. Houses aren't widgets that you can flood the market with an unlimited supply to drop the price as much as desired. Homes cost a lot to build and use limited resources, which means at a certain point building more increases the cost.
Picture a city that is building only 1000 homes a year and then they decide to start building 10,000 a year. Will the prices drop? If the prices were very high due to excess demand, probably not because there is enough demand to absorb those 10k units without meeting all the demand, so prices won't drop.
Ok then, let's go all out and build a million units (let's imagine that land is somehow available for that in this thought exercise). Will prices go down? No, prices will go up! Ask anyone trying to build a home in a tight market, labor prices are extremely high because there is so much demand for a limited supply of labor. If this hypotetical city tried to build a million units, labor costs will skyrocket and so will the price per unit.
There are no efficiencies of scale left in a mature industry like house builing. Building more doesn't make the per unit cost cheaper, it actually makes it higher due to labor availability.
Housing is still a very conservative industry, productivity is very low, because any transformative technology only works at scale, but the US is super big and even the population centers are low-density, in many jurisdictions, zoning basically mandated labor intensive low density housing for decades, etc.
Land is available. What's not is infrastructure, and economic surplus to maintain all the required new homes and infrastructure (roads, pipes, power grid, etc).
Housing suffers from the same curse as the transit infrastructure, or the nuclear industry, enormous economic and political inertia keeping/prefering the status quo, any new projects are small, low-efficiency, lack economies of scale, lack innovation (because copy-paste building just one more is the lowest risk thing).
Look at the recent California zoning remedy program, so few real estate developers are taking it, because it turns out that those small local markets are basically incompetitive cronyist distopias, and it makes no sense for them to get into a fight with the zoning/approval board.
> If the prices were very high due to excess demand, probably not because there is enough demand to absorb those 10k units without meeting all the demand, so prices won't drop.
Supply and demand aren't quantities, they're functions. You may be trying to say that demand is inelastic around the present point, but I suspect it actually isn't.
If homes are a good monetary investment, that means home prices are going up, which means supply is not keeping pace with demand.
If home prices are going up at a rate faster than wages, then they are becoming more expensive for our children. Not in a round-a-bout way, but in a direct causal relationship way.
Homes can either be affordable or an investment, not both. If homes are to be affordable that means more need to be built.