After the recent house price boom, home ownership has become unaffordable for millions of Americans. Low-income families have been hit particularly hard, as the proportion of new homes selling for less than $300,000 has fallen from 35% to 10% in just two years.
A number of factors including more than a decade of limited housing construction, a sudden and sharp increase in demand related to demographics, seriously low mortgage rates and lifestyle changes, and rising housing costs driven by pandemic disruption are in part fault.
There are also four key structural issues related to land, labor, regulation and NIMBYism that are making it increasingly difficult to build entry-level homes today, compounding the affordability problem.
Land prices have gone up
Land is a finite resource. Over time, the availability of land in desirable areas decreases, driving up prices. This is critical as land accounts for between 20% and 30% of home prices in more affordable and development friendly markets and 40% to 50% in land constrained and coastal markets.
In the past two years, land prices have skyrocketed in response to increased demand. Home builders for sale rushing to secure land competed with other buyers who were also in a hurry.
In response, builders have expanded their search radius to less central locations, but creating housing at more affordable prices is not a surefire plan. Not only have these plots of land increased in price, in some cases the land also lacks permits (the legal permit required for development) and/or infrastructure (water, sewerage, roads and the like), both of which are time consuming and expensive to add .
Land prices can adjust downwards during a protracted real estate market correction or recession. However, the finite nature of the resource means that pricing will remain a hurdle when trying to build cheaper homes in the future.
Labor is scarce
It was over a million workers in housing construction during the real estate boom of the mid-2000s. Total employment fell to just 550,000 in 2011 during the housing crisis as the industry struggled with weak demand and limited job opportunities. Many skilled workers left the housing industry permanently as part of their retraining and found jobs in other sectors that were perceived as more stable.
Homebuilder employment has gradually increased to about 900,000 today, but 62% of homebuilders report they still face labor shortages, according to Zonda data. Retirements and alternative employment opportunities at places like Amazon also play a role.
Skilled workers in the construction industry enjoyed it a decade of rising wages, with June earnings up 5.6% year-on-year. Higher wages are good for workers, but they also contribute to higher housing costs. There are less labor-intensive building options such as 3D house printing, modular building, and other alternative building methods, but none have reached a sufficient scale in the market.
Regulation takes time and costs
State and local governments play a large role in the housing industry by setting rules and regulations related to labor, the environment, community integrity, building codes and more. The National Association of Homebuilders estimates that regulations imposed by governments at all levels are to blame about 24% of the final price of a new family home.
Pandemic-related disruptions only made matters worse. The most striking is a labor shortage similar to that in the construction industry. Local municipalities were understaffed, leading to extended deadlines for claims, permits, inspections and other government services. This in turn increased costs for builders and developers. These problems have yet to be resolved.
Resistance from local NIMBYs
NIMBY, or “not in my backyard,” stands for resistance to new developments for fear of increased traffic, a drain on local resources like schools, pollution, and unease about who the new residents might be. The spread of local NIMBYism is stifling new construction as existing residents try to maintain the quality of life to which they have become accustomed. Without further construction, today’s large pool of buyers is competing for the limited housing supply available.
Further opinion: Restrictive zoning is the main factor depressing housing supply
Real estate prices have generally increased over the past 50 years, with a few exceptions during slower economic times. Both the development community and policy makers recognize the need for cheaper housing, but market conditions and structural factors pose challenges.
Many builders are trying to adapt to denser communities, smaller homes, and add-on developments, although many solutions have met with opposition from residents and local leaders.
Consumers also need to reconsider their expectations. Homeownership allows for stability and wealth-building, but desired bells and whistles like upgraded countertops and high ceilings are becoming increasingly restricted in entry-level homes.
In order to achieve really achievable living space in the future, everyone has to do their part. Consumers should plan for compromises, builders should continue to seek innovative ways to provide more affordable housing, government agencies should strive for improved efficiencies, and NIMBY advocates should consider the negative impact of a constrained housing stock.
Ali Wolf is Chief Economist for Zonda, the largest database of new homes in North America.
https://www.marketwatch.com/story/only-10-of-new-homes-now-sell-for-less-than-300-000-two-years-ago-a-third-did-its-not-just-because-of-the-pandemic-11657916266?rss=1&siteid=rss Opinion: Only 10% of new homes are now selling for less than $300,000. Two years ago, a third did. It’s not just because of the pandemic.