Why Is Housing So Expensive?
The historical price growth seen in the U.S. housing market is a result of several factors. Political, economic, and other societal changes have combined to result in consistent price increases. Below are the main factors when asking why are houses so expensive:
1 - Lower Interest Rates
2 - Increase In Local Zoning Regulations
3 - Higher Construction Cost
4 - Lower Builder Confidence
5 - Changing Demographics
6 - Increase In Land Prices
7 - Government Subsidies
8 - Lower Supply
9 - Inflation
0 - Wages
https://www.fortunebuilders.com/why-are-houses-so-expensive/
Housing Market 2024: 7 Reasons It's Too Expensive To Buy a Home Right Now
1 - Interest Rates Are Still High
2 - The Cost of Real Estate Has Skyrocketed
3 - Increased Competition Could Lead to Consistently High Prices
4 - Investors Are Also Still Driving Up Prices
5 - Renting May Be Cheaper
6 - Inventory Is Limited and It’s Still a Seller’s Market
7 - Election Year Could Bring the Unknown
Why is the Housing Market so Expensive?
Why are homes so expensive? A variety of factors have contributed to higher sale prices, including interest rates, low inventory and inflation.
Historical home values - “Homebuyers today are spending about 33 percent of their income to become homeowners,” says Clare Trapasso, executive news editor for Realtor-com. “That’s about double what they spent in 2012 and 2013, when the nation was coming out of the Great Recession.”
Supply and demand - Sean Roberts, CEO of Villa Homes, agrees. “Housing
has been materially under-built for the past 15 years, especially
entry-level homes,” he says. “New home construction has been focused
primarily on larger and higher-priced homes, with very few entry-level,
affordable residences prioritized. The lack of housing inventory has
resulted in stark competition and driven prices to an all-time high and
affordability to a multi-decade low.”
Why are homes so expensive?
House payment on 3.5% vs. 7% home loan rate - Another culprit? Mortgage interest rates, which have climbed quickly and significantly, making it harder than ever to afford a home purchase. The average rate for a 30-year mortgage was 7.36 percent as of August 23, according to Bankrate’s weekly national survey of large lenders. That’s the highest it’s been in more than 20 years. By comparison, at the end of August 2022 it was just 5.78 percent, and at the same time in 2021 it was a quaint-seeming 3.04 percent.
Wage and inflation growth vs. home-value growth - Another reason why homes are less affordable nowadays has to do with average wage growth versus home-value growth. When home prices rise faster than a buyer’s income does, homeownership gets further out of reach. High inflation makes matters even more difficult.
https://www.bankrate.com/real-estate/expensive-housing/
The Impact of Large Companies on the Housing Market
The rise of corporate real estate has fundamentally changed the landscape of the housing market. Large companies are acquiring residential properties at higher rates, sometimes purchasing entire neighborhoods or apartment complexes. These properties are then managed by corporate entities, with tenants dealing directly with property management companies rather than individual landlords. These companies and others like them have transformed the housing market by consolidating ownership and introducing a new level of corporate management.
The Good and Bad of Corporate Ownership in the Housing Market
On the positive side, large companies often bring increased efficiency to property management. They have the resources and expertise to streamline operations, ensuring that properties are well-maintained and repairs are promptly addressed. Corporate ownership can provide access to resources that individual homeowners or small landlords may not have, such as professional property management services or bulk purchasing power for maintenance supplies.
However, there are also significant drawbacks, one being reduced affordability. As large companies acquire properties, they often raise rents to maximize profits, making it increasingly difficult for individuals and families to find affordable housing options. These activities can also lead to a lack of community involvement. Unlike individual homeowners or small landlords who may have a personal stake in the well-being of their community, corporations are primarily motivated by financial gain, often leading to a disconnect between the needs of residents and the priorities of the corporate owner.
The Impact on Local Communities and Neighborhoods
The presence of large companies in the housing market can transform a neighborhood’s character and its culture. When a large corporation acquires multiple properties in a neighborhood, it can lead to a homogenization of the area as properties are renovated or redeveloped to meet corporate standards. This can result in the loss of unique architectural styles or local businesses that contribute to the character of the neighborhood.
Corporate ownership can also lead to changes in community dynamics. In some cases, long-term residents may be displaced as properties are renovated or rents increase beyond their means. This can disrupt social networks and erode the sense of community that is often associated with stable neighborhoods. Corporate owners are likely to be less invested in addressing local concerns or participating in community initiatives compared to individual homeowners who have a personal stake in the well-being of their neighborhood.
https://www.heausa.org/the-impact-of-large-companies-on-the-housing-market/
Inside the Commodification of Residential Real Estate
If they have their way, U.S. housing — one of the country’s largest asset classes with a total value of more than $36 trillion — will become the most mechanized, institutionalized asset there is.
Already, houses are being assessed algorithmically, marketed remotely, bought and sold in bulk and increasingly bypassing the individual homebuyer to land straight in the hands of institutional-scale landlords and investors.
The nation’s largest homebuilders and landlords are investing in iBuyers, sell-side startups that specialize in rapidly buying up homes, and the relationship is beginning to influence the ways homes are built, marketed and sold. These iBuyers, in turn, are teaming up with other venture-backed startups offering add-on services such as insurance, title and escrow, and mortgages.
Meanwhile, a growing pack of buy-side startups is enabling more transactions by using tactics seen in the auto industry, such as cash offers, rent-to-own and trade-in programs. Those startups are also getting love from builders and investors.
Fueled by cheap debt, venture capital and enormous potential profits, the home — the most emotionally resonant purchase the average American makes in their lifetime and for decades a largely peer-to-peer asset — is on its way to becoming a truly tradeable and transparently valued commodity. The implications for investors, homeowners and renters are immense.
https://therealdeal.com/magazine/national-september-2021/its-a-house-not-a-home/
UN Report Lays Bare the Waste of Treating Homes as Commodities
Building homes to lie empty
The report warns about a rise in “dehumanised housing”: housing built as a high-yield commodity rather than for social use. A significant portion of investor-owned homes are simply left empty. In Melbourne, Australia, for example, 82,000 (or one fifth) of investor-owned units are unoccupied. In prime locations for wealthy foreign investors, such as the affluent boroughs of Chelsea and Kensington in the city of London, the number of vacant units increased by 40% between 2013 and 2014.
In such markets, the value of housing is no longer based on its social
use. Properties are equally valuable regardless of whether they are vacant
or occupied, so there is no pressure to ensure properties are lived in.
They are built with the intention of lying empty and accumulating value,
while at the same time, homelessness remains a persistent problem.
https://www.theguardian.com/housing-network/2017/feb/28/un-report-lays-bare-the-waste-of-treating-homes-as-commoditiesactrl
Is One Company to Blame for Soaring Rental Prices in the U.S.?
The FBI recently raided a major corporate landlord while investigating a rent price-fixing scheme. Here's what we know.
The surprise search was reportedly part of a criminal antitrust investigation by the U.S. Department of Justice (DOJ) into RealPage, a $9 billion software company that recommends rent raises on millions of housing units across the U.S.
Per RealPage blog posts, Atlanta, Georgia-based Cortland, which owned
nearly 85,000 apartment units as of June 2022, used RealPage's algorithm
to "ensure consistent vendor pricing for their communities from Arizona to
Georgia."
https://www.entrepreneur.com/business-news/realpage-rent-price-fixing-probe-escalates-with-fbi-raid/475109
5 Reasons Housing is so Expensive Right Now
As inflation, gas prices and other rising costs have strained people’s wallets, housing has continued to be a challenge for buyers and renters alike.
In the past year, the median home price has jumped more than 15 percent, according to data compiled from the St. Louis Federal Reserve. And renters are feeling similar pain: On average, rents in May were up 15 percent than a year before, according to Redfin, but in some cities, like Austin, Nashville, or Seattle, the rise was more than double that.
All of this is making finding and affording shelter increasingly difficult. And while it seems this has been exacerbated in recent months, housing prices have been steadily rising for a decade, pushing homeownership and affordable rentals out of reach for many.
Here’s a look at some of the factors contributing to the difficult housing market, and who is most affected.
Inflation and Mortgage Rates - In the first quarter of 2021, the median home price in the United States was $369,800, according to the St. Louis Federal Reserve. By the first quarter of 2022, the median home price had jumped to $423,600. As inflation has been increasing, it means that anybody who’s lending money knows that they’re not going to really get the true value back unless they charge a higher [mortgage] rate because the money in the future is not going to be worth as much as money today when you have inflation.
Wages - Home prices have been rising since the bottom of the 2012 housing crash. Purchasing a home is out of reach for many people whose wages haven’t kept up with inflation and the general rise in prices. A February 2022 National Association of Realtors report found, a household earning between $75,000 and $100,000 per year could afford about half of active home listings.
Zoned Out - The best solution is for communities to build modest rental housing. But local zoning laws can pose significant barriers to that happening. There’s a phenomenon called NIMBYism, not in my backyard, where people who have already bought a home, a single family home, oftentimes don’t want their neighborhood to change”with the addition of smaller, more affordable homes.
The Big Picture - Housing in America has typically been used as way to build wealth. But in a housing crisis where some can’t find a home within their means or at all, there are generational financial and socio-economic consequences, too, experts say. If housing is the primary source of wealth and it’s passed down from generation to generation, then it really matters whether or not your grandparents were in a position to buy a home back in, say, like the 1950s or sixties before the Civil Rights Act was passed. These consequences for generational wealth can also exacerbate the racial wealth gap.
https://www.pbs.org/newshour/nation/5-reasons-housing-is-so-expensive-right-now
What Makes Housing So Expensive?
Because of the enormous costs of housing, it's worth understanding where, specifically, those costs come from, and what sort of interventions would be needed to reduce these costs. Discussions of housing policy often focus on issues of zoning, regulation, and other supply restrictions which manifest as increased land prices, but for most American housing, the largest cost comes from building the physical structure itself. However, in dense urban areas — the places where building new housing is arguably most important — this changes, and high land prices driven by regulatory restrictions become the dominant factor.
People concerned about building more housing are right to pay attention to zoning and land use rules: over 100 million Americans live in places where most of the cost of residential property comes from the land itself. But they should not neglect the physical costs of building homes, which are overall more important. Unfortunately, as we’ll see, reducing these physical costs is far from straightforward.
The costs of a single-family home
We’ll look at housing costs chiefly through the lens of single-family homes, for a few reasons. Most housing in the US consists of single-family homes, so the costs of building them largely map to US housing costs generally. There’s also a large amount of data available on single-family home construction that doesn’t exist (or is much less accessible) for other types of housing. And most multi-family apartment buildings in the US will be built using the same basic technology, light-framed wood, used to build single-family homes, so much of what we learn about single-family costs, particularly on the construction side, will apply to multi-family apartments as well.
Hard costs - Hard costs are inherent to constructing the building itself: digging and pouring the foundations, building the framing, installing the HVAC system, and so on. Hard costs make up the majority of the costs of a new home, which is why I spend so much time thinking and writing about construction productivity. ...These costs can also be difficult to reduce, because people’s preferences about how various parts of the house look or feel can be surprisingly strong, and constrain the use of new systems.
Soft Costs - Soft costs include financing, permits, inspections, design work, and other administrative tasks not directly associated with building the physical home. According to the NAHB survey, soft costs make up the second largest portion of costs of a new home. Looking at a line item breakdown shows the difficulty of reducing costs, and the lack of straightforward paths for improvement.
Land Costs - The third major cost of building a new house is the cost of the land itself. Given how prominent regulatory restrictions on housing are in online discourse (zoning, NIMBY vs YIMBY, and so on), I think many people would be surprised that land only makes up around 20% of the cost of a new home.
Conclusion - The cost of housing comes from a variety of sources. In most cases, for both new construction and existing housing, the largest line item is the cost of constructing the home itself. For new construction this is on average 80% of the cost of a home (including hard and soft costs), while for existing construction it's still in the neighborhood of 60-70%.
It’s only in dense urban areas that the cost of land begins to dominate the cost of new housing, driven by regulatory and zoning restrictions that limit how much housing can be built in a given area. Another way of looking at it is that in the areas that we need housing the most, zoning and regulatory factors are responsible for the lion’s share of housing costs.
https://www.construction-physics.com/p/what-makes-housing-so-expensive
5 Reasons It's So Expensive to Build Housing in California
It’s not just the construction industry’s unwillingness or inability to change that’s driving high housing costs. Here are some other reasons why housing is so expensive to build in California:
Land is just more expensive in California than other places. In the Golden State, the cost of land is about 12% of total construction costs, compared to about 5% in other states.
Labor is also more expensive. One reason: After the Great Recession in 2008, a lot of construction workers left the industry, creating a shortage of skilled workers. To top it off, the construction boom that followed has far outpaced the growth in the construction industry. An analysis by the Terner Center for Housing Innovation at UC Berkeley found that the number of permitted housing units grew by 430% between 2009 and 2018, while the number of workers grew only 32% during that same time period.
Density restrictions that limit how many apartments can be built on one lot also adds to the cost. As the size of a building increases, developers are able to take advantage of economies of scale, reducing the cost per apartment. But opposition to large affordable apartment buildings makes it difficult to get projects approved. Researchers at the Terner Center spoke to one developer who said, “It is impossible to overstate the continued resistance to new affordable development in most cities in California.”
The complexity of financing affordable housing projects is another big factor when it comes to developing housing for low-income people in particular. A report by the U.S. Government Accountability Office found that affordable housing projects in California had an average of six different funding sources, which contribute to a project’s “soft costs,” which includes things like legal fees, consultants, and appraisals. In California, soft costs added around 14% to the total cost of construction, compared to 7% nationwide. Another report from the Terner Center found that, on average, each additional source of funding on a project added $6,400 per unit in total development costs.
Development fees, which cities impose on developers to pay for things like street lighting, sidewalk improvements or sewage upgrades, also contribute to higher costs for housing. The same Terner Center report found that development fees on affordable housing developments added about $16,600 per unit.
https://www.kqed.org/news/11839409/5-reasons-its-so-expensive-to-build-housing-in-california
The Perfect Storm for Record-high Home Prices
With US housing costs soaring due to increased demand and limited stock, the dream of home ownership or an affordable rental is becoming unreachable for many
To understand what’s going on, we have to understand how we got here.
There is no universal rule on what you can afford based on your income, since it’s dependent on location and your financing. But historically, the average home cost about 2.6 times the median income – a ratio real estate agents often cite as a threshold for affordability. So if your annual household income is $100,000, then this simple formula says you can afford a $260,000 home.
The simple explanation for why housing prices are so high is that more people want to buy homes, but there aren’t enough on the market. There are several causes of this, according to housing experts.
Millennials – born in the 1980s through the mid-1990s – are driving up demand because they’re now entering the housing market, after years of being delayed in buying their first homes.
Investors are buying an increasing number of properties, adding to the competition. In 2010, only about 10% of homes were bought by investors; now it’s approximately 20%, according to Redfin data.
Mortgage interest rates hit a record low during the pandemic, supercharging sales. But today rates are high – nearly 6.5%, up from less than 3% a few years ago – and many sellers would rather stay put than risk entering the market for a new home themselves, meaning inventory has cratered.
Existing homes also aren’t going on the market because baby boomers – born between the mid-1940s and mid-1960s – are ageing in place rather than moving into senior living arrangements.
Despite all this demand, new home construction hasn’t kept up. There was a shortage of about 2.3m homes by the end of 2022, an increase of about 500,000 since 2012...
https://www.theguardian.com/us-news/2023/may/10/us-housing-market-prices-increasing
Packaging Your Commodities: Commodity Investing Through Residential Real Estate
The strategy that we advocate at the financial freedom report is to use the attributes of rental real estate to invest in the commodities used for home construction. By following this strategy, we gain ownership of valuable commodities such as wood, concrete, petroleum products, and other building materials with the advantage of leverage from the bank and tax advantages from the government. We affectionately refer to this phenomenon as ‘packaged commodity’ investing because the commodity products are packaged into a residential home instead of sitting in a warehouse. The culmination of this strategy lies in the fact that commodities packaged into real estate investments can be rented to tenants. As an investor, this allows you to purchase commodity products while outsourcing the interest payments to a tenant and hedge against inflation with fixed rate debt, while delaying the payment of taxes through a section 1031 exchange.
The way that this strategy ultimately plays out is that the packaged commodities produce rental income through your property while inflation pushes up the cost of materials and the cost of labor. Over time, these increases in construction costs will generate a ‘rising tide’ that drives up market values. The cost of construction for new homes is split between materials and labor roughly even, with a contractor profit margin right around eleven percent of the construction cost. As the cost of materials and the cost of labor rises, it is likely to drive increases in replacement cost since the contractors do not have the ability to absorb large cost increases into their profit margins over an extended period of time. In practice, this will result in cost increases being passed along to the consumer in the form of higher prices.
Furthermore, it is important to consider the fact that many people need to be paid from the contractor profit margin on new construction. This makes home building an inherently volatile industry, since profit margins can expand or contract very dramatically, depending on the market cycle. Because of this, we advocate a strategy of purchasing attractive rental properties from somebody else instead of moving into the homebuilding business ourselves. This strategy allows us to ‘outsource’ the risks of new construction and focus on finding attractive deals.
Packaging Your Commodities: Commodity Investing Through Residential Real
Estate
https://sites.libsyn.com/121459/june-18-2019-packaging-your-commodities-commodity-investing-through-residential-real-estate
Financialization of Housing
I believe there’s a huge difference between housing as a commodity and
gold as a commodity. Gold is not a human right. Housing is.
- Special Rapporteur Leilani Farha, in documentary PUSH.
Housing and real estate markets worldwide have been transformed by global capital markets and financial excess. Known as the financialization of housing, the phenomenon occurs when housing is treated as a commodity—a vehicle for wealth and investment—rather than a social good.
With roots in the 2008 financial crisis, the impact of the shift from housing as a place to build a home to housing as an investment has been devastating. This includes millions of evictions as a result of foreclosures in countries most affected by the Global Economic Crisis.
In developing economies, informal settlements or long existing neighborhoods located in ‘prime land’ are subject to evictions and displacement to make way for speculative investment. Residents are often rendered homeless, replaced by luxury housing that often stands vacant.
Global real estate represents nearly 60 percent of the value of all global assets or $217 trillion USD—with residential real estate comprising $163 trillion USD or 75 percent. This represents more than twice the world’s total GDP.
The vast amount of wealth has left governments accountable to investors rather than to their international human rights obligations.
https://www.ohchr.org/en/special-procedures/sr-housing/financialization-housing
How Real Estate Became a Global Commodity
A New York Times investigation is looking at the purchase of New York real estate by wealthy buyers from other countries. There’s something about citizens of other countries buying land and homes in the U.S. that can be unsettling to some Americans. That goes for both the purchase of $15 million condos and the conversion of mortgages to hugely complicated paper assets sold on international markets.9
It’s also something that can seem inevitable. People with more money tend to buy valuable things, regardless of where in the world they are. But a 2006 paper by Tulane University sociologist Kevin Fox Gotham argues that the globalization of U.S. real estate is driven more by deliberate government policies than most people realize. Gotham was writing at the height of the real estate bubble. Now that we know about the implosion of mortgage-backed securities that followed, and the disastrous consequences for the global economy, there are even more reasons to be interested in his argument.
Gotham notes that all kinds of cross-border exchange depend on “an elaborate and complex set of rules, regulations, and institutions that are established by the state.” Governments, in other words, make it possible for a home to become an impersonal asset ripe for investment by anyone with money, anywhere in the world.
Even in an economy where just about anything can be bought and sold, real
estate stands out as something different. Houses and apartment buildings
can’t be shipped overseas, of course, and they’re rarely standardized like
widgets in a factory. If you’re buying a house for yourself, you’ll
probably spend time looking around the rooms, checking the pipes for rust,
and finding out about the local schools.
https://daily.jstor.org/how-real-estate-became-a-global-commodity/
The Fair Housing Act, 42 U.S.C. 3601 et seq., prohibits discrimination by direct providers of housing, such as landlords and real estate companies as well as other entities, such as municipalities, banks or other lending institutions and homeowners insurance companies whose discriminatory practices make housing unavailable to persons because of:
race or color
religion
sex
national origin
familial status, or
disability.
The Fair Housing Act
https://www.justice.gov/crt/fair-housing-act-1
https://nationalfairhousing.org/
Why Housing Prices Are Getting More Expensive
https://awealthofcommonsense.com/2023/09/why-housing-prices-are-getting-more-expensive/
