Why Is Housing So Expensive? When We Look At The Numbers

‍The median home price in the United States is now above $200,000 in 99 of the 100 largest cities. There are many reasons for this high cost of housing. New construction has not kept pace with demand, zoning laws inhibit the ability to build more housing, and regulations make it expensive to build new houses. Most important, however, has been resistance to new development and restrictive land-use regulations that have made housing less affordable. When you combine those factors with a growing population and a weak job market in many places (which is why people cannot afford to move somewhere where jobs are more plentiful), housing has become unaffordable for many people. High costs force many young adults to postpone marriage and create an artificial shortage of homes available for rent. Renters face pressures that force them into smaller apartments or units without washers and dryers or garages. So why is housing so expensive?

Why is housing so expensive?

The main reason why housing is so expensive is because of the demand. More and more people are looking to buy homes, but there is a limited supply. This creates a situation where prices are driven up. Another reason why housing is expensive is because of the cost of materials and land. The cost of building a home has gone up significantly over the years, and the price of land continues to increase as well.

Zoning And Land-Use Restrictions

• Zoning and land-use restrictions make it more expensive to build new housing.
• Zoning laws restrict the number of stories buildings can have, limit the number of units that can be built on a lot, and constrain the size of homes, making it more expensive to build new housing.
• The high cost of land is not a sufficient explanation for high housing prices because nearly all cities are far below the density at which land costs would disappear as a significant factor in housing prices. In San Francisco, for example, half of the cost of an average home is due to zoning and land-use restrictions. The same is true in New York City, where 40 percent of the cost of an average home is due to zoning and land-use restrictions. In Los Angeles, land accounts for 25 percent or less of the cost of an average home; in Washington D.C., only 10 percent; in Boston, 8 percent; in Miami, 7 percent; and in Denver, 2 percent—the least among major cities.
• Zoning laws also limit housing supply by increasing its price: some cities like New York City require developers to obtain “very restrictive” use permits from the local government before building anything new on vacant lots or unused property. That requirement makes it more difficult for developers to acquire land than if there were no zoning laws at all because they have to spend time navigating through bureaucracy rather than simply buying empty lots and building on them.
• Zoning laws also limit the number of housing units that can be built on a lot: some cities like New York City require developers to build a minimum number of parking spaces for each apartment or condo unit, which increases the costs of development and reduces the number of units that can be built on a lot.

Limited New Construction

1. Land-use regulations and restrictive zoning laws have limited the construction of new housing. As a result, new housing is expensive because the supply of land is fixed. When the supply of a good is fixed but demand increases, prices rise. Housing has become more expensive in areas where land-use regulations are more restrictive.
2. Zoning laws often prohibit multi-family buildings in single-family neighborhoods. In many places, it is illegal to build a duplex or an apartment building in a neighborhood where people want to live because of concerns about parking and traffic congestion. These restrictions make it impossible to build enough new housing to meet demand when there are not enough homes for sale or rent in these neighborhoods.
3. Land-use regulations also limit the ability to build apartments where people want them most—near jobs and transit lines—making it difficult for people who do not own cars or cannot afford cars to live near jobs and transportation options that save them time and money each day.
4. Restrictive land-use policies have also made it illegal to build apartments on small lots that are too small for single-family homes but large enough for multi-family structures (like duplexes). This makes it impossible for developers to profitably build many units without being able to sell or rent each unit at a high price per square foot (which translates into high rents). As a result, developers only construct very large buildings that require more capital investment per unit than smaller buildings like duplexes or triplexes. These large buildings are often constructed in the wrong location, meaning that they are too far away from jobs and transportation options or in places with poor access to transit, increasing driving and traffic.
5. In many places, it is illegal to build a duplex or an apartment building in a neighborhood where people want to live because of concerns about parking and traffic congestion. These restrictions make it impossible to build enough new housing to meet demand when there are not enough homes for sale or rent in these neighborhoods.
6. Land-use regulations also limit the ability to build apartments where people want them most—near jobs and transit lines—making it difficult for people who do not own cars or cannot afford cars to live near jobs and transportation options that save them time and money each day.
7. Restrictive land-use policies have also made it illegal to build apartments on small lots that are too small for single-family homes but large enough for multi-family structures. This makes it impossible for developers to profitably build many units without being able to sell or rent each unit at a high price per square foot (which translates into high rents). As a result, developers only construct very large buildings that require more capital investment per unit than smaller buildings like duplexes or triplexes.

Taxes And Fees

• Property taxes and fees are a major factor in the high cost of housing. The average homeowner pays over $3,000 per year in property taxes—a number that has risen by more than 45 percent since 2000. Property taxes tend to be higher where land is more expensive (the average tax rate is 3.3 percent of home value in New York City, but only 0.6 percent in Las Vegas) and where there has been less development.
• Fees are another large component of housing costs, particularly for multifamily homes, which are often subject to additional charges for things like garbage collection and community centers. In New York City, for example, the average apartment dweller pays an additional $1,500 per year in fees on top of their property taxes.
• Other hidden costs of homeownership include maintenance and repair expenses. Maintenance is a big issue in older cities like New York, where apartments are often very old, and landlords are not required to make upgrades such as installing new appliances. (The same is true of many rental properties, too.)

Supply And Demand

• Supply and demand is a basic economic principle that, in simple terms, states that the higher the price of a good or service, the fewer people will demand it. In other words, when something costs more—think of diamonds or New York City apartments—people want less of it.
• The housing market works on supply and demand just like any other market. When there is a shortage of houses available for purchase or rent, prices rise until the supply increases enough to meet demand. This is how prices are supposed to work in a free-market economy.
• Yet many cities and towns have restricted new buildings through zoning laws and other regulations, making it difficult or impossible to build new houses where people want them most—near jobs (and away from pollution). The result is shortages in many communities, which drive up prices for both rentals and sales homes.
• In addition to restrictions on new buildings, regulations also raise the price of housing by restricting land use further than necessary to protect public safety or the environment (a process known as “over-regulation”). Some zoning rules make sense: they prohibit building homes directly above toxic waste dumps or next door to noisy highways that would disturb residents’ sleep at night; they protect neighborhoods from ugly billboards and junkyards; they preserve open spaces for recreation; they prevent homes from being built so close together that residents can’t enjoy their own yards; they require developers who tear down old buildings to replace them with new ones that look better than the old ones. But many zoning rules go too far.
• Over-regulation raises housing prices by limiting the number of homes that can be built on any particular piece of land and by dictating the size and style of those homes. It also limits where people can live, which has a particularly big impact on young people who are just starting out in life. In many communities, only single-family detached houses can be built on large lots, while apartments or townhouses are illegal, and even small houses must be set back so far from the street that they are hard to reach without a car.

Conclusion

The demand for housing has increased as the population has grown and people have moved from other parts of the country to areas where there are more jobs. At the same time, resistance to the new development has reduced the supply of housing. As a result, the price of existing structures and new construction has increased. As the economy improves and more people are able to afford these high-cost areas, the demand for housing is likely to increase further and put even more upward pressure on prices. Repealing or relaxing zoning laws and other land-use restrictions that prevent the construction of new housing would help reduce the high cost of housing and make the available units more affordable for many people.