Under-building of new homes, high construction cost perpetuate housing shortage

https://www.redfin.com/blog/2017/10/heres-the-1-reason-its-so-hard-to-find-an-affordable-home.html

by prostoalex • 9 years ago

64 68 9 years ago

taprun• 9 years ago

No, the #1 reason it's so hard to find an affordable home is that potential buyers can get huge loans at very low rates. Since buyers compete with each other, prices go up.

I guarantee that if interest rates were allowed to creep up, and the government stopped guaranteeing loans made by the banks, we'd have cheaper homes almost immediately.

mooreds2• 9 years ago

Agreed. There'd be some howling from the mortgage and real estate industries though.

I have often thought that the mortgage interest deduction is actually a subsidy to banks (because if you pay cash you get no deduction) and existing homeowners (because it supports existing prices).

tehlike7• 9 years ago

Cheaper house, sure, but does that also mean less monthly payments? Or would i still pay the same monthly, but most would go to interest.

Alternatively in the bay area there are a lot of wealthy people. I dont know how it would affect them

bradleyjg• 9 years ago

Even if the monthly payment for a 30 yr fixed were to stay the same the buyer would be better off with a lower price. American mortgages have no prepayment penalty, so the buyer has the possibility of refinancing at a lower rate sometime over the payback period or even just making extra principal payments.

Simulacra• 9 years ago

Do you have a source for this? Huge loans at very low rates? The current is about 3.85% even for an FHA loan. Even then they won't loan you huge amounts unless you have the income to justify it. Even if interest rates were allowed to "creep up" the government will not stop guaranteeing loans, and banks won't stop lending. They'll find some other way to offset. With higher interest comes higher payments which means only higher income people will be able to afford that housing. That will horribly exacerbate the problem. Now the middle and low income people don't even have a prayer of owning a home. Is that your intention?

zaroth• 9 years ago

It turns out people buy generally the most home they can afford, and this is in terms of monthly payment. As interest rates increase, demand falls for higher priced homes and the new equilibrium price ends up hitting just about the same monthly payment as you had before.

Low interest rates have the same effect in reverse. Prices adjust so that regardless of interest rate your monthly payment is about the same, but low rates do transfer huge wealth to existing homeowners.

As down payments have come down over time this is only more pronounced. From 50% down with a 5 year term in the early 1900s to peak-mortgage 5% down 50 year terms a few years ago.

closeparen• 9 years ago

Nominally cheaper, sure, but not more affordable, since ability to pay would fall proportionally.

codingdave• 9 years ago

If rates went up, the homes may be cheaper, but you'd then be paying more on your monthly mortgage, and more money would be just going to the banks. I'm not a finance expert, but this doesn't sound like a good solution.

matwood2• 9 years ago

It would not really work that way. People buy houses based on payment. If rates went up, the price would go down, but people would still compete on who can pay more each month.

sytelus2• 9 years ago

Not really... these days 20% downpayments are the norm. I know several people holding off purchases because they simply don't have downpayment. Higher home prices reduces number of potential customers but right now we have so many of them that reduction doesn't matter and margines are much higher on higher end.

planteen• 9 years ago

80-10-10 loans are quite popular right now from talking with friends.

scarface743• 9 years ago

FHA loans are easy to get and the down payment required is 3.5%. Even with mortgages that don’t qualify for FHA it’s relatively easy to get 5% down payment loans.

deadmetheny• 9 years ago

That isn't even remotely true here in the Midwest, in my experience. Nobody I know has needed 20% down - most have been 5% or so. I got a conventional with 5% down with no problems. It's even easier if you go the FHA first time home buyer route.

pfranz2• 9 years ago

Maybe in general? I don't have numbers, but over the past few years a lot of the competition I've seen seems to be all-cash buyers. At least on the west coast (Vancouver, Seattle, LA). Low interest rates elsewhere in the market could be freeing up the cash, but I don't see it being the primary driver for getting mortgages.

mooreds2• 9 years ago

Tldr: new homes cost too much due to labor. And building affordable housing doesn't make sense when the costs to build a larger, luxury home are not radically more, but the profits are.

I wish they'd talked about the problem in a more systemic manner.

They didn't address:

* Commuting

* Land prices

* Price to rent ratios

* Density

* Economic opportunity where housing is cheaper

pxeboot2• 9 years ago

We would love to build more affordable starter homes, but when high-end homes cost the same to build and are far more profitable, we lose the incentive to build smaller units

This is a major reason why prices are so out of control. Land prices aside, there is no reason somebody couldn't build a nice ~1000sqf house for under $100k. But without literally doing the work yourself, these places just don't get built.

thriftwy4• 9 years ago

Can't you contract the building part if you have a suitable piece of land?

tehlike7• 9 years ago

Or you can build larger homes and make profit.

pxeboot2• 9 years ago

Sure, but that's going to cost a lot more, as it is now a "custom home". Economies of scale apply strongly to houses.

syedkarim• 9 years ago

As a data point, a couple of months ago we bought a 1500 square foot home for $114,000. It's a modular home, but still classified as stick built/custom by the zoning authority. https://www.rochesterhomesinc.com/tiptown

The site work, however, is almost another $200,000.

jdavis7032• 9 years ago

I hear an argument a lot, "housing in the Bay Area is expensive because because labor cost is so high." According to this report in San Francisco it costs $269,000 to build a new housing unit. With the median home sale price over $1,000,000 it seems fair to say that the labor component isn't the primary driver of the high costs, it's probably related to the inability to legalize enough housing.

tehlike7• 9 years ago

Labor is definitely not the main driver.

Often quoted construction price is about 300$/sqft around where i live. If you were to build new, you would spend 750k-850k. Now, you cant buy land for less than 1.8 in mountain view that can hold 2500sqft home. And sale price would be close to 3m anyways.

maccard2• 9 years ago

Maybe one of the issues is the expected sizes of homes in the US - 2500 sq ft is about 250 sq m - which is pretty darn big. The average home in the uk is about 85 sq m...

chiefalchemist3• 9 years ago

"We would love to build more affordable starter homes, but when high-end homes cost the same to build and are far more profitable, we lose the incentive to build smaller units,” said Isaac Stocks of Azure Northwest Homes, a Seattle-area home builder.

That sums it up.

Plus, more expensive homes means more property tax revenue, so there's little incentive for state/local gov to encourage lower end housing.

Finally, it would help to know about financing. How willing are banks to issue loans at the lower end?

The whole system is "tuned" for larger more expensive houses. It works for those it works for, and doesn't for those with little to none socio-political clout.

WalterBright• 9 years ago

This is one reason why the per-square-foot cost metric is lousy. Making a house bigger with the same quality level reduces the square-foot cost substantially. This is because the cost of walls goes up linearly while the square footage goes up as the square (!), and most of the cost is in the walls.

tehlike7• 9 years ago

Construction price, yes, but i think it kind of scales semi-linearly with the sale price. When average sqft price is 1000$, a 2500sqft house goes for 2.5M even though construction was much much smaller.

tehlike7• 9 years ago

I am not sure if banks care about lower loan balance vs high. Sure, high is more lucrative, but there are a number of government-backed loan programs that could make up for it.

As for cities, yes. They like the house pricing go up. It helps with school budgets, particularly. Then it goes into positive feedback loop with better schools raising house prices, too.

For cities like seattle, it's not hard to see houses in different price bands (single tech earner, couple tech earner) and so on. Hard to find a solution, unless the big employers diversify their locations.

theseus7• 9 years ago

The first part of the solution is to completely eliminate mortgage subsidies and mortgage interest deductions. These do not increase the supply of housing, they only subsidize demand for more expensive houses and increase indebtedness, and increase the flow of capital into non-productive areas of the economy such as mortgage lending and mortgage backed assets.

The second part of the solution is to convert all property taxes into Land Value Taxes, so that idle and vacant land is taxed at exactly the same rate as land containing well maintained houses. Local governments would no longer get higher payouts for zoning for high end housing, they would only get higher payouts if they raised the net desirability of all land within the borders of their city as a whole.

The land value tax would also free up vacant, idle and underutilized land for actual use and improvement, by making land unattractive as an asset for investment or speculation. This would greatly increase the competitiveness of the housing market, because if it is no longer profitable to hold onto a vacant building, a parking lot, or a strip mall in a high demand area after the carrying cost applied by the land value tax, the vacant lot might be split up and sold to smaller owner-operators, the parking lot might be replaced by several smaller town houses, and the strip mall might be replaced by a mixed used development with additional housing units builtin above the shops, increasing average quantity of housing units per city block or per area unit measure.

How willing are banks to issue loans at the lower end?

Focusing on banks and subsidizing loans is what is fueling this problem. The solution is not to make loans easier to get, it is to drastically lower the price of land and increase the efficiency at which land is used. When the price for land is cheaper and closer to a market price rather than a monopoly price, far fewer people will have to bother with loans or mortgages in the first place. Lower end housing can be made substantially more affordable even if all mortgage assistance schemes are eliminated.

thinkloop• 9 years ago

Another issue is the labor. I haven't personally looked into what the underlying reasons might be, but in Quebec, construction workers have all the power. If they don't show up, come late, under-deliver or do sloppy work, there's not much recourse, there's no one else. Given that these jobs are some of the highest paying relative to education level, there must be some artificial constraint that perpetuates this. If you are a general contractor, it's nearly impossible to provide consistent, high quality service, because they simply have little control over their workers.

freeloop3• 9 years ago

You're putting the poor in an awfully tight position there. Between no tax deduction for a mortgage and paying the same property tax (what you call land value tax) for their trailer as the mansion next door, they're kind of getting screwed.

And what about old people that have owned their own house for decades? If the local economy goes up, increasing the land value tax, they either leave or go bankrupt. And the kicker is that their investment into their home is now worth a lot less.

chiefalchemist3• 9 years ago

Agreed. The subsidies(tax breaks) help drive up prices (just as student loans have inflated higher edu cost). Unfortunately, in the case of housing, as mentioned, property taxes come into play. It seem unlikely gov is going to cut off its own revenue stream.

My point about the banks was, we can't expect low end houses to be built if they can't be sold (because banks are less likely to finance them.) I'm not suggesting artficial support. I'm curious to know if the void in this segment in housing is fed by a void in bank support.

amigoingtodie• 9 years ago

How would this affect farmland?

nathanvanfleet• 9 years ago

Finally, it would help to know about financing. How willing are banks to issue loans at the lower end? Which kind of reveals that you think this is a conversation about people below the poverty line buying homes. Which it isn't. It's people not affording homes starting at $1 mil.

clairity• 9 years ago

the article has some nice graphs, but doesn't really string it's central tenet together very well: that high construction costs is the #1 reason we don't have starter homes being built.

"That sums it up."

i'm sure one of a bunch of secondary reasons is that construction cost is high (while also sub-linear relative to sales price), so it's more profitable to build larger homes, as the quote alludes to and you pinpoint here. (regulatory distortions, e.g., mortgage interest deduction and zoning laws, are other secondary issues exacerbating the problem, which i'd suggest have more direct culpability than higher construction cost.)

and the other side of that circular argument (or vicious/virtuous cycle, if you prefer) is that construction cost is high because sales prices are high, and general contractors see an opportunity to take more of the profit pie. combine that with construction labor being tight, and you get a seller's market (for contractors). thus leading developers to seek out more profitable, higher-end homes to overcome the higher construction cost.

but because development costs (e.g., construction cost and cost to acquire) are relatively predictable parts of real estate development, i don't buy the argument that it's the driver of the shift to higher-priced homes. my back-of-the-napkin intuition tells me that develoeprs are simply taking bigger risks, probably because money is cheap and plentiful. so they're going after the big fish and ignoring the small fry, especially since tight housing markets mean that higher prices are more likely to get choked down the throats of buyers who have no better alternatives. that seems much more likely as the "#1 reason why it's so hard to find an affordable home", rather than construction costs.

eikenberry• 9 years ago

Building high end units does help the housing market for low incomes. This article explains it pretty well.

http://cityobservatory.org/urban-myth-busting-new-rental-hou...

pfranz2• 9 years ago

The quote in that linked article, "As new housing ages, it depreciates, and prices and rents decline, relative to newer houses" links to another article they wrote[1]. That article just shows a graph showing rental price vs age of a home. Its already established now housing is typically built for mid/upper class--where else would everyone else go? It doesn't show that lower class housing is being properly addressed, it's just using circular logic to prove itself right.

[1] http://cityobservatory.org/what-filtering-can-and-cant-do/

ilaksh• 9 years ago

My belief is that radical changes are needed. Much smaller plots, truly mixed use areas, for starters. The tiny villages concept I have shown at http://tinyvillages.org takes it to an extreme, but even 2 or 3 uses for the old plot size would make a dramatic difference.

I think that this idea will be better in many cases than building condos everywhere.

madengr• 9 years ago

Here in the Kansas City area, it seems most of the new housing is mixed use; commercial on the bottom and apartments on top. Not many single family homes. Maybe it is because millennial not wanting/affording a house, and prefer dense urban living.

Though that is beginning to change as they have kids, and are now moving to suburbs. So they now build little cities within the suburbs.

ashark• 9 years ago

In the northland, at least, there are tons of new boring ol’ suburban houses going up. Construction slowed for a couple years after the crash, but came back fast and now they’re putting up new houses and plotting new neighborhoods as fast as they can.

purplezooey2• 9 years ago

Construction pricing is definitely out of control. Part of the problem is that the entire industry is funded with low interest purchase and equity loans and not cash. Another problem seems to be that a lot of construction entities went offline in during the crisis and never came back. Any construction quote easily runs into the $100,000s for even a tiny addition to a house. It's way out of control.

If there would exist a construction company that would have upfront pricing, not insanely expensive, and can get most jobs done within several weeks, they would get a huge amount of business. Instead it's always months out, pricing 5x what it should be, and often just impossible to find anybody.

ikiris• 9 years ago

You don't seem to understand what you're talking about. The reason for those months out is because everyone is overbooked, and the pricing reflects demand vs supply.

purplezooey2• 9 years ago

Exactly. It is a market out of whack.

EGreg• 9 years ago

Funny to read this after all the articles about China's "ghost cities" and the follies of central planning.

crdoconnor• 9 years ago

There seems to be a lot of articles posted on HN purporting to explain the housing crisis from companies that profit from it.

Bearing that in mind, it's not so surprising to see "labor shortages" get the blame while untaxed land, low interest rates and wealth inequality/property hoarding go unmentioned.

bgitarts3• 9 years ago

Why isn't there a tech company trying to disrupt home construction?

People speak of Uber being worth so much because of the giant market it's going after and transportation is big being the second largest consumer expenditure at 17% of wallet share. However housing is first at nearly 30% of wallet share and the biggest dent you can make in that figure is lowering the upfront cost which is several years of income for the average buyer.

Analemma_• 9 years ago

Because the cost is labor, materials, land acquisition and permits, none of which can really be “disrupted”.

bgitarts3• 9 years ago

labor has been disrupted through automation. materials can be disrupted through better manufacturing and or new materials. permits can be disrupted by removing or streamlining the process through regulatory changes or personal changes/increases at the Department Of Building(s).

maxerickson• 9 years ago

There are plenty of companies bringing technology to building.

It just doesn't speed it up all that much. But there are all sorts of new building techniques (new foundation systems, new wall systems, new roofing systems, modular, etc).

Or just things like nail guns.

sytelus2• 9 years ago

This is also because of mass migration to urban centers in recent times. Every major urban center in US is currently facing massive number of incoming people. When everybody wants to live in same little place, prices are obviously going to shoot up. This should also explain why there are no too many new homes being built - because urban centers have little room to expand. This is current phenomenon in much of the world. Even if you go to 3rd world countries and look at prices in core urban centers, you will see exact same trend as in 1st world countries. This always had been a trend through out history but in recent times curves have crossed the knee and has taken a vertical leap.

wbl• 9 years ago

Urban centers can grow vertically. 80% of SF is single story construction.

Under-building of new homes, high construction cost perpetuate housing shortage

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