The Folk Economics of Housing

https://www.aeaweb.org/articles?id=10.1257/jep.20241428

by kareemm • 11 months ago

113 246 11 months ago

SilverElfin2• 11 months ago

Is it that they truly don’t believe it or they don’t want more supply (since that changes their quality of life, neighborhoods, traffic, etc) but still do want lower prices in other ways (like by price caps or other things).

One legitimate reason to not think supply reduces prices is because of big financial companies buying up lots of houses and having effectively free rein to price how they want. It removes the competitive piece. In many areas the new houses are built by a few large home builders doing a few large developments, and the new apartments are owned by a few large corporate owners. That can slow down prices reaching their market value.

potato37328423• 11 months ago

In many areas the new houses are built by a few large home builders doing a few large developments, and the new apartments are owned by a few large corporate owners. That can slow down prices reaching their market value.

Because all the same voters (demographically, if not also frequently literally the same individuals) voted for a bunch of red tape that's only passable for the big vertically integrated businesses and even then it's only profitable when they're doing cookie cutter single family on .25ac or 5 over one apartments.

lokar8• 11 months ago

Yep. You need deep pockets to eat the carrying cost of a property while waiting years to get approvals.

keeganjw• 11 months ago

This is another huge myth in the US housing market, that big companies own lots of the housing and are jacking the prices up. It's simply not true. Large corporations own a tiny fraction of the market while the vast majority is owned by individuals and small landlords.

pphysch• 11 months ago

There's a lot of synergy and overlap between small landlords, property management companies, rent-fixing companies, and Wall St. It doesn't matter to the renter that their slum is owned by a tiny LLC that is nevertheless part of the broader constellation of anti-social rent-seeking behavior that is bringing down this republic.

ruined2• 11 months ago

investor market share of homes is down from its peak of 20% a few years ago, but i wouldn’t call it a “tiny fraction”

https://www.redfin.com/news/investor-home-purchases-stabiliz...

pantalaimon2• 11 months ago

That is not limited to the US, in Berlin there was a popular vote to expropriate housing companies with more than 3000 units.

Yet those large housing companies charge on average between 7-8 €/m² and are nowhere near to holding a majority of the housing share.

SilverElfin2• 11 months ago

Is it different in different places though? Like some places have more of this ownership problem and so it looks worse locally?

msgodel2• 11 months ago

I think what people want is less migration (both domestic and international) but that's not an option. Since it's the primary thing they want they're doing anything they can to get it including essentially destroying their own neighborhoods.

lokar8• 11 months ago

And then they complain (a lot) that their kids have to move away to afford housing.

supertrope8• 11 months ago

They want to keep freedom of movement for themselves and restrict other people. Be careful what you vote for: a border keeping “those people” out sounds good until the day you are denied passage!

TulliusCicero9• 11 months ago

One legitimate reason to not think supply reduces prices is because of big financial companies buying up lots of houses and having effectively free rein to price how they want.

Big corporations don't have unlimited money to do this kind of thing.

And in practice, the expensive areas they do it in, are usually very limited in how much new housing goes up, they're still very much supply constrained markets.

If what you're suggesting was really happening, then what you'd expect to see is an area with a relatively high vacancy rate (due to all the new supply), like 8% or even higher, but stubbornly high prices in spite of that. And I can't think of any examples where that happened. Can you?

jimbob45• 11 months ago

This is the propaganda they were pushing about RealPage too until it turned out that it was happening and the market was being distorted.

At any rate, if a buyer notices it happening in their area, then "it's not happening that much" is not only not going to make them feel better, it's going to also make them feel like you don't want to fix it.

ruined2• 11 months ago

investors actually tend to purchase cheaper homes

https://www.redfin.com/news/investor-home-purchases-stabiliz...

segphault• 11 months ago

One legitimate reason to not think supply reduces prices is because of big financial companies buying up lots of houses

This just isn't true and isn't supported by the data. https://www.noahpinion.blog/p/corporations-arent-the-reason-...

dragonwriter• 11 months ago

One legitimate reason to not think supply reduces prices is because of big financial companies buying up lots of houses and having effectively free rein to price how they want.

No, its not. If only one big company was allowed to do that in each locality, and they had the ability to buy up all the supply no matter how much new housing was built, that would be a reason; absent monopoly power, they don't have free reign to price how they want, and can price higher the less supply there is, even if you assume all of it is owned by similar big firms and used as rentals.

k2enemy• 11 months ago

Is it that they truly don’t believe it or they don’t want more supply

If this comment section is anything to go by, there seem to be plenty of people that firmly believe that increasing housing supply doesn't actually increase housing supply, let alone the bigger leap that increasing housing supply decreases prices.

kube-system7• 11 months ago

Colloquially you can see this in sentiments such as:

"All these developers are building is just expensive new luxury apartments"

And as the study mentions:

To the extent that ordinary people form loose mental associations between “housing development” and “housing affordability,” they may well associate more development with higher prices rather than greater affordability. New housing, being new, tends to be more expensive than existing, depreciated housing.

It is just a perception bias thing. You don't really "see" everything around you aging because it happens slowly.

stego-tech13• 11 months ago

Yup, and the kneejerk response from economists is that the housing cycle suggests that new luxury stock would be inhabited by buyers who own existing stock, and what they sell would be more affordable to those buyers, and what those buyers sell would become more affordable to the next rung down, etc.

Except that’s not the reality. The reality is that a large chunk of the market (as much as 25% in some areas) is speculative in the form of PE-owned inventory and rentals. It’s not used as shelter, it’s used as a vehicle of growing capital. When that’s pointed out, suddenly economists blame the very same people who can’t get onto the “property ladder” for failing to “compete in the free market”.

In a vacuum, their original idea makes sense. In reality, it’s heavily exploited for the gains of those already on the ladder at the ongoing expense of those they actively prohibit from joining them. It’s societal exploitation leveraging the singular most basic human need after food and clean water: shelter.

whall66• 11 months ago

Curious for the source on the 25% figure if you wouldn’t mind sharing.

lokar8• 11 months ago

But (the sound) financial models that lead PE and others to this investment are built around the assumption that supply will be artificially limited. If you build enough they will see reduced returns and back off.

tempestn3• 11 months ago

Vacancy taxes seem like a reasonable solution to this problem.

kube-system7• 11 months ago

Those speculative investments only make sense in a world where it is expected that supply will not keep up with demand.

AnimalMuppet2• 11 months ago

If I build 4 houses, and someone speculatively buys 1 house, I've still added 3 to the housing supply.

As a solution to the housing shortage, building new is 25% inefficient? Great, it's 75% efficient. That's not bad for a solution. So let's do it, in volume, and actually make a dent in the problem.

And for the builders, they don't care. A speculator bought that house? It payed me just the same. But even better, the demand is still there, so I should build another one.

amanaplanacanal4• 11 months ago

Even if 25% are sucked up by speculators and not rented out, just left empty (which I don't believe), that still gets you 75% as increase to the housing supply.

crazygringo• 11 months ago

The reality is that a large chunk of the market (as much as 25% in some areas) is speculative in the form of PE-owned inventory and rentals. It’s not used as shelter

This is false.

It is absolutely used as shelter. It's used for renting. Investors don't generate just sit on housing and leave it empty (unless they're remodeling it or something).

Also it's not mostly private equity -- that's a tiny percentage. It's mostly small investors, like a mom and pop who own and rent two other homes to help fund their retirement.

Investors are not taking away living space. And many areas don't have enough rental properties (remember, not everyone wants to own, especially people on a short-term job or relocation), so conversion to rental helps here and brings down rental rates (as happens whenever supply increases).

gorfian_robot• 11 months ago

I see those going up all over the US West. I know people who live in a few. Always feels like they live in a mid-range hotel. IDK why anyone would want that.

kube-system7• 11 months ago

Yeah, the point is that new apartments are ... new apartments. "luxury apartment" is meaningless marketing copy that every developer uses for every apartment building. What is marketed as a "luxury apartment" today will just be a "regular apartment" in 20 years.

energy123• 11 months ago

  > "All these developers are building is just expensive new luxury apartments"

I've recently realized that any argument that contains the word "just" can be discarded.

idontwantthis• 11 months ago

You hear this shit all the time from politicians and activists. Somehow high density housing is built for corporate greed and won’t lower prices. It’s self contradictory at it’s base level but is driving the narrative. It’s maddening.

Edit: Here I am getting downvoted by people who don’t have the bravery to confront their own contradictions and realize that their own beliefs are being manipulated to ruin their own lives.

LargeWu4• 11 months ago

It seems to be driving largely by anti-capitalist sentiment rather than understanding of economic fundamentals.

loeg3• 11 months ago

Anti-capitalist sentiment is a misunderstanding of economic fundamentals.

mensetmanusman• 11 months ago

People don’t believe that snacking after dinner right before bed everyday is bad.

MBCook2• 11 months ago

I can sort of understand that.

They’ve been building houses in my area non-stop since 2010 or so. Prices haven’t gone down.

There are other factors than supply. But most of the new supply is large houses. If you don’t want 4+ bedrooms and a 2000+ sq. ft. house the supply hasn’t changed much at all.

mattmaroon2• 11 months ago

Well, you would have to compare it to an imaginary world in which they didn’t build those homes since 2010. Prices may not have gone down, but in the imaginary world, they might have gone up markedly so it has still reduced housing costs compared to if they did not build that much.

kube-system7• 11 months ago

They’ve been building houses in my area non-stop since 2010 or so. Prices haven’t gone down.

Real or nominal?

There are other factors than supply.

It is not uncommon for places with a lot of housing development to also be places with rising housing demand because it is a growing area.

If you don’t want 4+ bedrooms and a 2000+ sq. ft. house the supply hasn’t changed much at all.

And many of the people buying large new home are moving out of a smaller existing home.

AnimalMuppet2• 11 months ago

OK, that's an interesting point. There's not "the housing market". There are several markets, with some overlap. The market for starter homes is not filled by building 4+ bedrooms, still less the market for studio apartments.

And my impression is that, when we talk about the housing shortage, we're talking about apartments to starter homes, not about 4+ bedrooms. So what we seem to have is a disconnect between what the market needs and what builders are building.

But maybe that's only "seem". I'd bet that a 4+ bedroom house sits on the market a lot longer than a starter house. Maybe starter houses are being built, but not enough to satisfy the market, and so they're going almost immediately?

MBCook2• 11 months ago

I’m sure it’s not zero that are being built. But it doesn’t seem like a very high number, at least compared to the number of large homes being built in new subdivisions.

supertrope8• 11 months ago

Single family houses are a premium product and continue to move upmarket. Cheap new construction house has become an oxymoron. Residential construction costs were rising at 5.5% per year before Covid (faster than inflation). If it were legal to build more condos, duplexes, townhomes, and apartments there would be less bidding up of SFHs. More people could live closer in meaning less traffic congestion.

stego-tech13• 11 months ago

It’s not that I don’t believe adding supply will reduce prices, rather that adding supply alone won’t reduce prices. As the paper gets into, it’s a combination of supply, and homeowner entrenchment, and government policies barring construction or teardowns, of zoning restrictions, but also of Private Equity acquisitions of housing stock and builders, of artificially manipulating supply to keep prices high and promote higher returns for builders or sellers at the expense of buyers.

The problem is that demand for housing is relatively fixed, in that every human needs a shelter, and every human wants a home. That doesn’t change outside of population statistics: in a vacuum, all things being equal, every human would buy a home.

The issue is that the supply side is so heavily gamed by existing players that the entire market is deliberately engineered for maximum extraction of wealth from new buyers to prop up valuations of existing owners and builder/landlord margins.

Relatedly, this is why I’ve stopped fighting each niche front individually and instead focused on the “nuclear option” of mandating affordable housing as a human right. That would open the floodgates to lawsuits against communities, states, and companies that hoard existing stock and bar newer, denser construction. It would add a sorely needed lever of pain to deter hostile housing practices, by threatening things like rent/price controls or forced divestitures unless the supply problem was meaningfully addressed post-haste.

mattmaroon2• 11 months ago

If arguing about this on Facebook has taught me anything, it is that most people definitely do not believe it. They always make the same argument, which is that new housing stock tends to be high priced homes, so if what we need is low price homes why are we building high priced homes? Anybody who understands economics knows why this argument is wrong, but most people don’t.

Nonetheless, I don’t think this has much to do with the public policy as it stands because the people who make the policy do understand this. So while I think the assertion is correct, people do not believe it, I do not think that is a large factor and why the policies restrict housing.

SoftTalker4• 11 months ago

I think that what contributes to this view is that new construction always seems to be at the high end of the market. This makes sense, it doesn't cost the builder a lot more to build a $500k house than to build a $250k house, and building two $250k houses will take twice the time and close to twice the costs. So builders/developers are going to build what is most profitable, which is the most expensive houses that they think they can sell in the local market.

What is less obvious is that this still increase housing supply. It's not new affordable housing, but the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

entropicdrifter2• 11 months ago

This makes sense in a world where the market adjusts rationally and there's an unbroken chain of people from different levels of wealth who can afford to buy houses. Unfortunately in the US right now, that is not reflective of the present scenario due to the immense generational wealth gap and housing bubble.

pwarner• 11 months ago

But that's a supply problem. Create the supply, prices will drop and that bubble and generational wealth challenge begins to heal.

morkalork• 11 months ago

And in Canada there is a huge amount of backlogged demand. There are areas where rental listings for roommates show two beds to a room and 10 people crammed into a house. Unwinding that is going to take a long time.

TulliusCicero9• 11 months ago

Also, they can only address the luxury market so much.

If you're only legally or practically able to build and sell so many cars, then you're gonna focus on Lexuses more than Toyotas. But if you can build and sell as much as you want, that's when you start seriously addressing the mainstream market.

SoftTalker4• 11 months ago

Yes, but you'll only do this once the luxury market is saturated. As long as you can sell more luxury homes that is what you are going to build.

loeg3• 11 months ago

the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

This effect, in this context, is called "filtering."

greenie_beans4• 11 months ago

so you are suggesting that one house is better than two to alleviate supply? this is exactly why market incentives isn't the cure. we would have more housing if we built more housing. if we built double the housing, then we would be in an even better place.

this logic makes zero sense to me.

SoftTalker4• 11 months ago

It's better than none, which is what you'll get if you start mandating what developers can build. They'll just go somewhere else where they can make more money.

tempestn3• 11 months ago

As your sibling comment says, there is only so much market for luxury housing. If the land, permitting, etc. exists to build two houses, then two will get built. And if there's only sufficient demand for one of them to be high-end, then only one will be. (In aggregate on larger scales of course, not literally any given two houses.) It's not necessary to force a given developer to build two houses instead of one; if the economics make sense, and are predictable, the developers will come.

lcnPylGDnU4H9OF5• 11 months ago

so you are suggesting that one house is better than two to alleviate supply?

No, they are saying that building one high-end house still has the slightly unintuitive effect of increasing the supply of low-end homes. They also give their reasons for believing this.

starkparker3• 11 months ago

It's not new affordable housing, but the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

I keep seeing this, but if the housing being vacated is in a different, less-desirable market, it's a bit tree-falling-in-the-woods for locals.

If a $450,000 house in a Chicago suburb is freed up by its owners moving to a $700,000 condo in Seattle, the people who can't afford a house in Seattle don't see the benefit of the condo building and aren't going to buy the house in Chicago, and the people who can't afford a house in Chicago don't recognize the Seattle development as the cause of the house hitting the market.

whall66• 11 months ago

There doesn’t need to be a connection between the purchase and sale events. Any marginal unit of inventory added to a market will place downward pressure on the price of that inventory (i.e., make it more affordable). The reverse is true for a marginal bid for inventory.

The effect is so minimal when you zoom into a single sale of one home and purchase of one condo, but in aggregate this causes real noticeable price movement.

ASinclair• 11 months ago

If a $450,000 house in a Chicago suburb is freed up by its owners moving to a $700,000 condo in Seattle, the people who can't afford a house in Seattle don't see the benefit of the condo building and aren't going to buy the house in Chicago

Is the existence of the $700,000 condo the limiting factor for those people moving? If it isn't built would they instead bid up an existing unit in Seattle and put it more out of reach of existing Seattle residents?

mediaman3• 11 months ago

This analogy seems confused.

If someone in Chicago moves to Seattle, then our policy options are (1) no new condo in Seattle or (2) new condo in Seattle.

Under policy 1, the new buyer from Chicago must outbid locals for the fixed housing supply; they will wind up buying older housing stock, which otherwise would have gone to existing local residents. Prices go up.

With policy 2, the new entrant buys the new condo and does not compete for pre-existing housing stock.

In this scenario, whatever house is freed up in Chicago is irrelevant to the housing stock in Seattle. I'm not sure why you included it.

The entire question can be contained by the assumption that "there is someone new coming to Seattle" and whether it would be better to have a new condo unit to sell to them or have them compete for existing fixed stock. The whole bit about the Chicago housing market is a distractor, because it stays the same under either policy.

DevX101• 11 months ago

Increasing the supply of the high end market often occurs while simultaneously reducing the supply of the low end market. This happens when landlords renovate their buildings. So it's very possible that adding supply can limit price inflation on the high end, while increasing costs on the low end.

bondarchuk• 11 months ago

I wouldn't count renovation as "adding supply", though.

supertrope8• 11 months ago

Yes that’s gentrification of a neighborhood. Neighborhoods evolve over time. Displacement is bad but measures to fight it can be even worse. If no new construction can be approved over it being a gentrification signal, rents will zoom up even more. In the most competitive metro areas there are no cheap rent areas left within an hour commute.

lcnPylGDnU4H9OF5• 11 months ago

people who buy those are leaving their old houses

I do not believe this is accurate, at least not in the last ~10 years or so. The houses are purchased by hedge funds and other smaller investors.

SoftTalker4• 11 months ago

Only because they are scarce enough to be worth doing that.

With greater supply, there comes a point where you can make better investments than buying up empty houses. And so they will stop buying them.

connicpu• 11 months ago

If you reach a point where housing supply out paces demand plus the vacancy rate those investors are willing to tolerate, that's when rent prices will finally start to drop as the big landlords need to generate more revenue to keep up the capital and operational expenses. And if rent prices drop far enough then it will no longer be profitable to spend all that capital snapping up starter homes, and eventually may even be placed back on the market.

whall66• 11 months ago

What data do you have to support that only hedge funds and smaller investors are purchasing new builds?

legitster4• 11 months ago

The houses are purchased by hedge funds and other smaller investors.

The hedge fund thing is way overblown. Even if they buy up homes in hot markets, their incentive is still going to be to sell them if/when the market cools. Corporations do not enjoy the same tax incentives as homeowners in this country, and the risks/costs to rent out older homes just doesn't pen out for non-local investors. If PE wants to get into housing, it's such a better deal for them to just build apartments.

Currently less than a percent of homes are owned by private equity. And the majority of those are owned for the purpose of turning around and selling them, like Home Partners.

(Zillow also tried buying up homes for the purpose of arbitrage and it ended up blowing up in their face).

jeremyjh4• 11 months ago

They purchase them, and rent them out, and that is still a net increase in housing supply.

stego-tech13• 11 months ago

It's not new affordable housing, but the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

As I commented elsewhere, that’s the paper math version that doesn’t resemble reality for those of us living in it. Buyers of new luxury stock are increasingly just leveraging prior housing equity to fund the new purchase and renting out old stock at “market rates”, which doesn’t actually increase supply or decrease pricing. Laws have made short-term rentals and long-term landlording immensely profitable for those who got into the game early, especially in major metros that lack regulations on rent control or have preferential property taxation schemes. When actually affordable housing is built (i.e. starter homes), they’re frequently snapped up by PE firms and investors rather than being sold to first-time homebuyers.

The “property cycle” you mention does not exist anymore, and that’s by design. It’s why meaningful legislation and taxation policies are needed to deter landlording of SFH properties and prevent exploitation of renters by implementing rent controls.

bryanlarsen2• 11 months ago

how does renting out old stock not increase supply? Renting and buying are relatively fungible. People buy fewer houses when renting is cheaper.

jeremyjh4• 11 months ago

Building a new house and renting the old one absolutely does increase the supply of housing.

colonCapitalDee2• 11 months ago

In every single reputable empirical study of housing, adding supply really does bring down prices. Your preferred policy solution would decrease housing affordability, hurting the very cause you profess to champion. If this truly is something you feel strongly about, you have a duty to yourself to investigate the evidence, otherwise you are shooting both yourself and your movement in the foot.

BobaFloutist3• 11 months ago

Buyers of new luxury stock are increasingly just leveraging prior housing equity to fund the new purchase and renting out old stock at “market rates”, which doesn’t actually increase supply or decrease pricing

Ok, but they have finite leverage and financing. The market can easily overwhelm their access to capital, no investor class has anywhere near enough access to capital to fully corner the behemoth that would be a healthy housing market.

nine_k3• 11 months ago

Doing similar things in Berlin (regulations instead of building more) put the housing market there to a crazy state. Yes, the rents are mostly affordable, but demand seriously outstrips supply, and it becomes a game of chance, personal connections, waiting for a year or two until a particular unit frees up, etc.

dkarl2• 11 months ago

NIMBYs actively target this misconception. "New housing is luxury housing."

eventually the price drops happen on the older, smaller homes at the bottom end of the market

I'd be interested in how long "eventually" takes for single-family homes. I think for rental units it happens very quickly.

bluGill3• 11 months ago

depends, it takes decades and often people remodle their old houst thus bringing up the value.

majormajor3• 11 months ago

The land value gives a strong floor. And nearby development increases the land value even if it makes the state of the house itself look worse and worse.

Ekaros• 11 months ago

In such market fixation on inefficient single-family homes is very weird. In desirable and growing markets those might not ever go down. Population in such market should just accept more dense configurations.

bilsbie• 11 months ago

I think we should start using hermit crab analogies. Everyone understands that you need more of the biggest shells to free up shells for the little guys.

seanmcdirmid7• 11 months ago

What is less obvious is that this still increase housing supply. It's not new affordable housing, but the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

Two things to think about when making this argument:

* Older housing could have been torn down to build new housing. So before, you had a rooming house with 10 or so low cost tenants, and now you have three town homes with three very rich families moving in. Life just became a lot harder for people in the lower end of the market. Gentrification of entire neighborhoods is an extreme example of this: a blighted neighborhood is great for cheap housing options, but then people start coming in and redeveloping it and...it is no longer blighted, the neighborhood is better, and the cheap housing is gone replaced by much more expensive housing.

* Demand is induced by new supply. We accept this as a fact for highway construction, but it is somewhat also true for housing in a hot market where everyone wants to live. So building a bunch of new housing in Seattle could attract new resident, causing the population to grow, rather than adding supply to deal with fixed demand. Yes, adding housing in Buffalo isn't going to run into that, and yes, overall the situation becomes better for the country (or world if you are inducing demand from other countries), but locally you feel like you are going nowhere with the problem. A more extreme example of this is handing out housing to your unhoused population (you'll almost certainly wind up with more unhoused than when you started even though you've given some housing).

wahern• 11 months ago

Demand is induced by new supply. We accept this as a fact for highway construction.

Induced demand is only a thing with highways because use of the highways is free; there's no counterveiling cost pressure unless and until traffic jams start forming. By definition induced demand doesn't exist where the market can set prices for using newly created resources.

Closer to your point (if we stretch really hard) would be something like lowering crime. If Seattle successfully lowers crime without, say, increasing taxes, then Seattle becomes a nicer place to live, and people can (and will) move there to enjoy lower crime without having to directly incur the cost of lowering that crime. One of the externalities of that "induced demand" would be an increase in housing prices. So obviously Seattleites who oppose residential development should just promote more crime.

The fundamental issue here is that people don't like being subject to market forces and the insecurity that engenders, particularly when it comes to housing and labor. That's understandable. They do like market forces when they get to enjoy lower prices, though. But the feeling of insecurity is particularly acute when it comes to housing and the issue of new development. That's also understandable, notwithstanding that it's simply irrational and empirically disproven that NIMBYism makes for lower prices than the alternative of allowing market development. You get higher prices with NIMBYism than YIMBYism, period; though there's simply no guaranteeing that absolute prices will come down, especially for a city that permits development where others don't. That's a collective action/free-rider problem, where the positive externalities of good public policies of one community are captured in part by other, cheating groups.

Dig1t• 11 months ago

and building two $250k houses will take twice the time and close to twice the costs

Building densely is actually more profitable, there’s already incentive to build as densely as possible for developers. Adding an extra story and creating a duplex, triplex, etc doesn’t cost much more and means you can sell multiple more units. Building as tall as possible and getting more units into the same footprint is almost always more profitable than just building one single family house.

The problem is that zoning limits what type of building is allowed to be built on a site. Who controls zoning? Existing homeowners that already live in the area, so of course they are going to make sure that new builds are low-density, as it impacts them less (parking, traffic) and keeps their home values high.

Source: I tried to build dense housing myself and was stymied by zoning.

PaulHoule• 11 months ago

My take on it as a small landlord (have two houses on my farm, one has two rental units) is:

I don’t think a lot about the pricing of my rental units and I’m not quick to raise them but when some new development comes into town and puts up billboards with their eye-popping prices and runs ads in the paper and on web sites and on the radio I think “Gee…. I must be leaving money on the table because I could raise my rates 50% and it would still undercut what they’re advertising a lot”

Of course the money they are spending on advertising indicates that their pricing is aspirational and they may very well next year be telling the city that they can’t afford their property taxes because they can’t fill the units and might be telling their lenders the same in a few years.

In Ithaca we got “luxury housing for seniors” that was nuclear reactor late and they can’t fill

https://ithacavoice.org/2025/03/library-place-to-sell-at-a-l...

(Don’t seniors with money go to Florida?)

A few market rate projects had an affordable component which has been part of a surge which has taken a bite out of our homeless colony but it is now like that talking heads song where they’re “burning down the house”

https://ithacavoice.org/2025/08/inside-asteri/

My understanding is many “luxury” developments are shoddily built and not a good place to live

https://www.nytimes.com/2022/04/15/realestate/condo-defects-...

m463• 11 months ago

I think you might be right, and I think people who buy new care less about price.

appreciatorBus• 11 months ago

There is also the recursive nature of a shortage 1. housing becomes a bit scarce for any reason, even a temporarily transient reason 2. prices go up 3. people point to high prices a reason new housing is bad, enact laws to limit it 4. housing becomes more scarce 5. goto 2

supportengineer• 11 months ago

In other words, housing capacity is created and "trickles down" to the bottom.

If there was such as thing as a $250k house within a few hours drive, I would buy all of them and just sit on them, maybe rent them out.

crooked-v2• 11 months ago

What you're missing here is that housing is only a good investment because it's in such short supply. If plenty of $250K houses were available, they wouldn't be doubling in price every few years, and "sitting on them" and eating the maintenance costs would just lose money compared to other investments.

amelius• 11 months ago

What if a Chinese real estate investor buys US property just for the sake of it? Just one of many scenarios this doesn't take into account.

WalterBright2• 11 months ago

Why would he leave it vacant?

rayiner• 11 months ago

Supply and demand requires thinking about equilibria and intersecting curves and is out of the reach of a largely innumerate population. Most Americans don’t even really have a strong grasp on millions versus billions versus trillions.

Americans also think in terms of stories with actors, and supply and demand doesn’t have any obvious actors. “Prices are high because bad people are choosing to keep them high” is an easy narrative for people to understand. There’s an obvious villain, and the success simply requires the hero to defeat the villain. This leads to a funny meme: https://www.reddit.com/r/neoliberal/comments/13l1lmn/present...

supertrope8• 11 months ago

People prefer a teleological explanation. It has the allure of a simplistic solution. Having a direct and complete solution out there is emotionally satisfying. Just like how subduing the villain saves the day, why not tax/ban landlords/immigrants/Wall Street/your favorite outgroup here? If there’s no simple solution available that’s not nearly as hopeful of a message. Politicians and marketers peddle simplistic “solutions” to a willing audience.

jillesvangurp• 11 months ago

New construction is kept expensive mostly through complex rules that often exist to protect the interests of those doing the construction work, those owning existing houses and property, etc. It's a form of artificial scarcity. This scarcity is crucial to justifying real estate prices, propping up mortgages and the banks that provide them, etc.

There's no technical reason why building some shelter that keeps the rain out and the heat/cold where it should be is not something that could not be done cheaply at large scale using affordable materials. People have been building shelter for tens of thousands of years and it's easier than ever with modern materials. It's not rocket science to keep people dry and comfortable.

People routinely buy recreational vehicles that, because they have wheels, are not considered houses. So, suddenly there are much less rules and you can just produce those efficiently in factories. Except getting permission to park those and live in them is really hard to come by in many places. It's OK for recreational use. But not for living permanently. Which of course some people do anyway. But it's highly stigmatized.

Recreational vehicles come out of factories. Houses are built artisanally at great cost. The only functional difference that matters is mobility and wheels. Why should people not be able to get a nice second hand RV for a few thousand dollars and park it in a nice spot and live there?

Answer: it would immediately devalue the notion of owning brick and mortar.

nine_k3• 11 months ago

Doesn't the price of land play a role? If the developer pays $100k for a parcel of land and builds a $500k house on it, they may have their margin on the $400k, but if they build a $250k house, it's only $150k, a more dramatic drop.

The minimum lot size requirements don't help the situation either.

It likely would be more efficient and profitable to build a townhouse, or even a mid-rise, and let more people live on the same parcel of land, but zoning restrictions often prevent that.

rootusrootus2• 11 months ago

I would not use RVs as a good benchmark. They are super cheap for a reason. The biggest reason not to live in one full time is that they quickly degrade under that kind of use. They are not built for anything other than occasional use. That is on top of their steep operating expenses, even if you can keep it held together.

A better benchmark would be a manufactured home. Transported on wheels, built in a factory, but intended to be used full time indefinitely.

IIRC, stick-built homes are only like 15% more expensive than the equivalent manufactured home, and you have a lot more flexibility in the design. Probably this is most of why manufactured homes are only popular in particular niches.

supertrope8• 11 months ago

Part of it is maintaining current real estate valuations, level of density and aesthetics.

Crime and social class segregation is another aspect. Who lives in a neighborhood matters as much as the physical assets. Bans on MDUs (multiple dwelling units), permanently parked RVs, and manufactured homes serve as a barrier to entry. It’s not explicitly stated but the effect is the same as saying “If you can’t afford a $410,000 house we don’t want you as a neighbor.”

BrenBarn2• 11 months ago

Maybe, but for people currently living who need housing, all that is academic. It's another case of "the market can remain irrational longer than you can remain solvent".

HPsquared• 11 months ago

People don't understand economics, generally.

dazc2• 11 months ago

I remember when house prices doubled in the space of 3 years and it wasn't a supply shortage that caused this.

LargeWu4• 11 months ago

Sure, because demand went through the roof. And demand is currently high again. So either we need fewer people, or more dwellings.

jmyeet• 11 months ago

Private developers aren’t in the business of lowering property prices. And homeowners don’t want that either.

You need to also consider what is being built. NYC has built a lot of ultra-luxury property that really amounts to money laundering and will never increase the supply to ordinary residents.

The private sector will never solve this problem on their own.

9rx8• 11 months ago

If you could build houses for free then obviously adding supply would eventually reduce the price.

But I have been looking at the cost to build a home, it costs even more to build than to buy a used one. Who, exactly, is going to be able to afford to buy the new houses while selling their current home at a lower price than it would currently fetch?

Maybe if AI replaces all the software developers they can flood the home construction market in their quest to find new work and push the price of labor down, thus reducing the cost to build a house, but otherwise...

TulliusCicero9• 11 months ago

Presumably it's cheaper to build a home when a developer is building a whole bunch at once in a neighborhood, as opposed to a single person or family ordering something custom built.

9rx8• 11 months ago

Cheaper, sure, but not cheap enough to satisfy anyone who already cannot afford a home. Like cars, the used market is always going to be a reflection of the new market. Used houses are expensive because new ones are even more expensive.

potato37328423• 11 months ago

Developer is also a professional with experience/refinement so he knows the magic specs to make things, magic things to say in the emails to the bureaucrats, magic words to put on the applications to avoid getting fucked by a bunch of "you need a survey for this" and "you need an engineer for that" and "akshually since you've done this you need a new septic" type landmines that cost $1-20k individually the little guy is gonna run right into.

tempestn3• 11 months ago

The cost of building is one reason why supply is constrained. It doesn't follow from there that increased supply wouldn't reduce prices.

9rx8• 11 months ago

It doesn't follow from there that increased supply wouldn't reduce prices.

Increasing the supply of labor, thus reducing the cost to build the home, was spoken to.

The average construction worker makes $30/hr. Get that down to minimum wage and the cost of a house will come down pretty quickly. You still might not be able to afford one on a minimum wage salary, perhaps, but the goal of reducing housing prices is met.

Lord-Jobo2• 11 months ago

I genuinely want to see a breakdown on what is increasing building costs so much. Houses are not more complicated than they were 15 years ago.

Normally if you make essentially the same product for 15 years, production costs fall.

9rx8• 11 months ago

I genuinely want to see a breakdown on what is increasing building costs so much.

It is just general demand, really. Every step of the way can charge more, as compared to 15 years ago, because people are willing to pay more for their services.

Like the headline suggest, the solution is to increase supply. Except, not of houses, but the inputs that go into houses (materials, labor, etc.). Until supply is met there, the cost to build cannot come down, and until the cost to build can come down used homes cannot come down either. Alternatively, we could stop wanting so many houses, but that is likely less practical.

As mentioned, if you get all the software developers building houses instead the price would drop pretty quickly. But... good luck convincing them to do that. That is what has to be overcome.

supertrope8• 11 months ago

Factories lower unit costs. Construction is not automated. You can’t outsource an electrician or plumber. https://www.costtobuild.net/

jonplackett3• 11 months ago

While housing remains a great investment for rich people, I doubt anything else will make any difference.

If you build houses, they’ll just buy them and rent them out for profit.

jeffbee3• 11 months ago

"They will just buy them and rent them out" you have described investment. Funding the construction of houses using your capital and then letting them out to people without as much capital is how housing gets created. Just let it work! Let a guy build a house and rent it to someone.

jonplackett3• 11 months ago

You know it is also possible to build houses people buy and then live in, right?

House prices are so high because some people own too many of them. A home shouldn’t be an investment strategy

cloverich3• 11 months ago

Its also how wealth is transferred up. Because the investor pays gains rates, can do like for like transactions, etc, and effectively grows their wealth faster than the non investor. This means non investors need to continuously compete with investors but where investors are capturing an ever larger share of the wealth.

Eventually if supply keeps up that will change, and longer still the wealth may trickle back down. But imho it would be faster to focus on avoiding the concentration in the first place through SFH as investments, via simple tax policy that discourages mom and pop investors from purchasing extra homes.

legitster4• 11 months ago

One thing few people take into account is that demand housing is much, much more elastic than people realize - per capita people are consuming far more square footage than they used to. Houses that were built to be house multiple generations under one roof now only hold one generation. Usually elderly empty nesters. In our area we also see people buying up lots of older duplexes or triplexes and converting them into single-family homes.

So even areas where population is stable, and housing supply increases, it can result in very few tangible gains at the margin.

clausecker• 11 months ago

In the US, isn't this partially the cause of zoning laws banning anything that is not single-family homes from being built?

pantalaimon2• 11 months ago

This is not limited to the US in the slightest

whall66• 11 months ago

Curious for a source on the sq footage per capita if you wouldn’t mind sharing. That’s very interesting.

Could that also be explained perhaps by the fact that people are willing to live farther away from cities (where land / homes are cheaper and larger) because they only have to work 3 days a week from the office? Or because commuting is less painful with newer cars?

wyre• 11 months ago

I dont have sources, but the trend for larger houses was happening much earlier than the WfH trend.

It's a mix of car culture, proprty value being lower farther away from cities so develops can create a high margin on building neighborhoods marketed on big, new houses.

legitster4• 11 months ago

https://css.umich.edu/publications/factsheets/built-environm...

https://newsletter.humanprogress.org/p/housing-abundance-has...

bluGill3• 11 months ago

Adam smith observed in his book that as people get more money they typically spend is on nicer housing.

myhf• 11 months ago

Square footage per capita can be misleading because it goes up as an area moves from low density to medium density, but goes down as the same area moves to high density.

starkparker3• 11 months ago

There was a brief time 15 or so years ago where the $200-500k homes in the six or so blocks I live in were being snapped up by young upper-middle-class families on long 3-4% mortgages.

Those families' kids have now grown up, and the houses have appreciated, sometimes as much as 2-3x, due to a nearby light rail development connecting the neighborhood to the city at large on cheap transit. So those families are cashing out their housing by selling primarily to out-of-market elderly wealthy downsizers, typically from California, Arizona, Nevada, Colorado, and Texas.

The result is a neighborhood of 3- and 4-bedroom homes that once housed families of 4 or more people now mostly inhabitated by 2 or fewer people (many left vacant more than half the year as these wealthy retirees frequently travel). They also refit these former starter or second homes to accommodate these elderly inhabitants' reduced mobility and/or increase the home's luxury.

When these residents die in 10 or so years, even if the market corrects prices downward, these homes will now be even less suitable for anything but wealthy elderly inhabitants. The intelligent thing for the city to do would be to tear them down and replace them with accessible and affordable density; the reality is that the wealthy elderly who haven't died yet will spend the rest of their lives blocking such efforts out of spite.

brandonmenc• 11 months ago

out of spite

Or, they're just protecting their property value and neighborhood composition, like anyone else would do.

danaris2• 11 months ago

per capita people are consuming far more square footage than they used to

^ This...

demand housing is much, much more elastic than people realize

^ ...does not imply this.

If the only housing that is available is 3000sq.ft. for a family of 3, that family doesn't have the option to split it up and only buy 1500sq.ft. of it. They need to be able to afford the whole thing.

(Also, I question the extent to which this premise is true, at least in cities. Everything else I've been seeing is that people are living in much less space than they used to, due to the rising prices. Taking a studio apartment rather than a 1-bedroom, living with roommates, etc. But even if the premise is true, it doesn't imply your conclusion.)

JohnCClarke• 11 months ago

Thing is: people are correct.

Central London monthly rent for a 3-bed house is around £3500, but a 1-bed flat rents for £2100. So split the house into two flats and the landlord makes more money.

Hence relaxing zoning restrictions will push prices up.

lokar8• 11 months ago

None of these models work at such a small scale. The economics are regional. It’s likely that highly desirable locations like central London and manhattan will always be expensive. That’s fine.

khalic• 11 months ago

This is not what the study says, it’s more nuanced. People do not believe that liberalising demand will solve the issue more efficiently than other measures.

spy888• 11 months ago

Developers build new housing when prices go up generally. Therefore when people see new housing they see higher prices in their regional market. So although folks may mix up causality, the observation is quite rationale.

gamechangr• 11 months ago

interest rates effect housing affordabiltiy more than inflation. This video implies high interest rates might actually help real estate prices

interesting video :

https://www.youtube.com/watch?v=lH8_4AiIxeo

stephc_int13• 11 months ago

The housing market is different than most markets in many ways.

- Building cost is often marginal compared to land.

- Land value is highly correlated to economic opportunities around it.

- Economic opportunities are following a power law around economic centers (highly non-linear).

- There is a density ceiling, with some variations depending on cultural traditions but still constrained by transportation technologies and psychological factors.

- The location of economic centers is not randomly distributed but constrained by geography, especially access to water transportation routes.

Financial speculation and building restrictions are second orders effects of the inherent housing scarcity, amplifying it, but not a root cause.

majormajor3• 11 months ago

Nowhere in the US does it at the scale to make a serious long-term dent in prices.

Nobody with enough money and exposure to large amounts of real-estate wants to kill the golden goose. Look at the post-Covid-migration build stories. Rents start to soften and development dramatically slows.

Like Austin - https://austinmonitor.com/stories/2024/08/as-construction-sl...

Or Denver - https://www.denverpost.com/2025/07/24/apartments-housing-rea...

You would need continued serious government investment to make sure focus continues to be on total units and consumer price instead of investor ROI.

Because even adding four fancy town-houses or condos helps if what used to be there was single-family or duplex. But it doesn't help NEARLY as much as adding 100 units by converting an old shopping center or 30-unit apartment. But there are strong incentives against developers doing "too much" of the latter if they know they can make the same ROI by selling fewer, nicer units.

Individual residential property owners take a lot of blame here but they're not even benefiting THAT much - every crazy price increase is putting any upgrade to their own situation further out of reach. And fighting low-density residential NIMBY-ism is a slow process if you still only can buy one lot as a time as it becomes available. So focus on underutilized commercial and industrial near major hubs or transit corridors where most of what you're displacing is ugly parking lots and empty storefronts that contribute to crime as well.

taeric2• 11 months ago

This seems to be claiming something different, though? You are pointing at that development slows as prices go down. Which seems somewhat expected?

That is, adding supply lowers prices. And lowering price reduces potential profit such that fewer people will build. With fewer people building, prices should go up again.

Stated differently, thin margins reduce the number of people offering products in a market. Ironically, the main way to get more building is with bigger builders in that scenario.

majormajor3• 11 months ago

Well I'm saying that in practice adding supply hasn't lowered practice it has merely slowed the increase in prices. And that's mathematically essentially the same thing, but it's importantly different in two big ways:

1) If people see their costs going up while they also see new construction, the correlation machine's gonna jump to the wrong conclusions

2) If costs are still going up people are still going to be unhappy and worse off

Supply can increase AND price can still go up, and so for people to be won over and convinced you need to crack the second part, not just the first part. In a libertarian "just reduce regulation" approach that's often pitched, the natural equilibrium will be closer to "supply increase and price go up slowly", and people skeptical of "just reduce regulation" as a solution are more accurate than they're given credit for. Gotta actively intervene to make supply increase enough for any sustained period of time - we only see it in cases of macro shocks. Like the 2008 recession, or the post-Covid-bullwhip.

whall66• 11 months ago

Is it a crazy mental leap to think that maybe housing was historically mispriced and now we have reached equilibrium?

kypro• 11 months ago

Immigration is a similar debate where supply and demand goes out the window for political reasons.

Here in the UK it's really hard to convince people that it's really hard to address our housing shortage through building alone when we bring in about a million people every year. Even a lot of economists seem to think supply/demand doesn't apply when it comes to wages and house prices if you introduce immigration as a variable.

Unless it's undeniable I find people will just believe whatever suites them personally. Which is fair enough. I guess I'm just surprised at how unconscious this bias is for most people. Or at the very least they seem to truly believe that the housing market is an exception to supply/demand dynamics.

amanaplanacanal4• 11 months ago

The problem is an aging population. If you don't have immigration who is going to support all the retirees?

w10-1• 11 months ago

Adding supply would only reduce prices if it was added at the average or below.

Even if the number of units increase, the price can actually go up.

The relative market power matters most. A developer with cheap bridge financing and a large portfolio of unsold units has every incentive to hold prices to set expectations, while buyers who are occupiers generally are compelled to buy in a certain time frame and location.

lokar8• 11 months ago

In the cost to build vs what would be affordable I think people on both sides over generalize.

Liberal land use and other rules would eventually bring down prices to affordable levels for most families. But not all of them. Every country has to have some strategy to provide housing for the bottom of the income range, since they typically won't be able to afford "dignified" housing based purely on the Capex/depreciation/opex value of the housing (they will always be renters).

So you need something like liberal land use to provide for 80%, and then some kind of government intervention for the bottom 20% (numbers will vary based on the location/nation/etc)

intalentive• 11 months ago

Why is housing supply so severely restricted in US cities and suburbs? Urban economists offer two primary hypotheses: homeowner self-interest and political fragmentation. Homeowners, who outnumber and have organizational advantages over renters, are said to lobby against development to protect their property values. The fragmentation hypothesis emphasizes that development's negative externalities are borne locally while most of the benefits accrue regionally or nationally, leading localities to block housing.

These two hypotheses sound like the same thing to me. Homeowners organize to protect themselves from negative externalities that affect their property values (and quality of life).

watwut• 11 months ago

The discussion under this article proves the title to be correct. Nice meta.

lossolo• 11 months ago

Housing costs mostly boil down to this stack:

price of land + price of materials + cost of labor + margin + other (marketing, admin, fees, financing, etc.)

When you try to boost the number of homes, you also boost demand for construction labor, materials, and buildable land. Those inputs tend to rise or at least not fall much, so there isn’t a big, easy savings there. That leaves soft "other" costs or developer margin. Other is a relatively small slice, and typical margins aren’t huge push them too low and projects stop penciling, so fewer homes get built.

Even if margins were squeezed, the price drop would usually be too small to bridge the affordability gap for most households.

The bigger issue is that household incomes haven’t kept pace with housing prices over the last few decades.

nis0s• 11 months ago

One problem that’s unaddressed is that there isn’t a house building, pricing and mortgage model for people making 50K or less.

One piece of data I’ve found is that 65% of Americans are homeowners (meaning American families, not rentals or investments), which is also about the percentage of Americans who make $50K or more per year (~68%).

For people with a middle class networth (not income, I mean networth, which is about ~1M-9M when compared with the top of US society), homeownership currently works as a wealth-building mechanism because of scarcity. There’s also the desire to live close to certain areas, but why not make more neighborhoods or areas worth living in?

Regardless, if the goal is to maintain scarcity for wealth building, then I think the scarcity mechanism will remain intact if homeownership is increased to a high rate while balancing the cost of materials and labor, and building houses specially for certain income levels, as mentioned already in other posts.

But no one seems to be doing materials innovation, or construction innovation. I don’t think 3D printing is there quite yet, and might be more expensive. Where’s the push on automating construction? Why not build with a genetically engineered bamboo that’s cheaper and more sustainable than wood? Seems materials innovation will help with both housing and sustainability goals.

yupitsme123• 11 months ago

In the past, people were able to buy a small piece of land and develop it themselves. Literally build the house themselves. Over a long period time if necessary to spread out the cost. They also built 2-4 family homes so they could bring in some rent or house a family member.

None of this is really allowed anymore and it's very hard to find a piece of land to do it with. Enabling this sort of construction and forcing or incentiving small plots of land might open up options for people on the lower end.

cloverich3• 11 months ago

People believe what they can see. New development happens in desireable areas and price goes up all around them. Meanwhile (mom and pop) investors buy and own significant chunks of the market. Together they tell a story.

Disincentivize investor ownership, and it will be harder to tell the story of investors buying up all the property, and the rest may fall into place at best, and at worst you get marginally lower prices and less validation of the investor price inflation stories.

nathan_compton• 11 months ago

Wow, I'm totally owned. A few weeks ago here I argued that no one blames landlords and developers for this. I was specifically arguing that "the left" doesn't, but I'm actually really surprised to see anyone does.

crooked-v2• 11 months ago

A huge amount of people on the left blame "greedy developers" for making housing too expensive.

dc1144• 11 months ago

No matter, it’s still a demand and supply issue. It just depends on where on the equilibrium point we are. This takes time. And yes, based on pure economics, supply will fill in the most profitable sections first.

lif• 11 months ago

hmm.

What would happen if real estate investors/developers by law also had to dwell in the most dense type of housing they built?

Hypothesis: Humans by and large are all looking for a bit more breathing room, privacy, and quality of life in their choice of home. (In other words, qualities diametrically opposed to the black hole compression cubicle end game of 'efficient housing for the masses').

barchar2• 11 months ago

I'm sorta convinced we need to strongly discourage homeownership (of homes you live in) if we want to fix our housing issues. It just seems like once ~50% of the electorate are owner occupiers homes are treated like collectibles instead of normal productive assets.

BrenBarn2• 11 months ago

I think another reason people think this is that people often do not notice there is a problem until rents have risen enough that they're noticeable less affordable. And when that happens, a small reduction due to supply increase is not really enough. It's not enough for rents to "go down", they actually need to become affordable.

In places where a third of renters are spending half their income on rent (as some stats have shown for CA), it is implausible to believe that nibbling around the edges of the problem is going to result in enough of a reduction to make a difference. I haven't seen any estimates of how many market-rate units would need to be built to, say, reduce the number of rent-burdened households to 10% or 5%, but presumably it would need to be in the millions. I haven't seen any studies of supply/price issues that contemplate anything like that scale.

Just as important, such studies generally ignore the issue of inequality. It doesn't really matter what rents are; if there is someone who can afford to own multiple vacation homes that sit empty most of the year, rents should be lower.

The Folk Economics of Housing

Related Stories