What Makes Housing So Expensive?
7th April 2024
Buying a home is by far the largest purchase most of us will make, and paying the rent or mortgage will be our largest monthly expense. In the post-pandemic home-buying boom, the median sale price of a new home peaked at almost $500,000 dollars, just under seven times the median household annual income that year (though it has since fallen). Most new homebuyers will pay around 30% of their income on their mortgage, and the median renter in the bottom quintile of income spends 60% of their income on rent.
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.