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Some others have mentioned a couple of key points such as zoning and parking requirements, but it's not just that. Other factors include a real estate developme

Some others have mentioned a couple of key points such as zoning and parking requirements, but it's not just that. Other factors include a real estate development company's rate of return. If they buy a plot of land, let's say a quarter acre, they can fit let's say one $250,000 house on it, though likely that leaves them with too much space for the one house so let's say they go and build two $250,000 houses on it. Awesome right? But if you're the real estate company that's a lot of overhead and duplication. Maybe you need to get twice the permits. You need twice the customers to buy. You have to bring your construction crews out to build two sets of crappy counter tops and kitchen cabinets. How do you solve that problem? You build one $500,000 house (or more). You say the counters are "granite" and the floors are "hardwood". It's a forever home! Now the two families that can afford the $250,000 houses each can't afford the $500,000 house of course or else they would be looking for a $500,000 house. So now they're out and the builder can sell the $500,000 house and make extra money. There's nothing wrong with this, but it clashes with a problem that we face as a society which is not enough housing at prices that the public deems affordable. The market can theoretically solve this, but sometimes markets get caught in local minimums that are misaligned with what the public wants. This could be an area where the government can step in and provide contracts to smaller builders, or just contract to build larger housing units (think of the now very expensive housing in NYC) and sell them at little to no gain or just give them away on a lottery system. The money that would be needed to be spent is rather minuscule in comparison to the money we spend on other things. I'm unsure why we don't pursue a policy where we allocate, say, $100 billion toward building smaller and mixed-use housing. We have plenty of money to do so and it's really great for the whole country economically - I don't think anyone loses out. Congress needs to act.

bluGill 2y ago
Your example fails if there is nobody who can afford a $500k house. So long as there is demand for the $500k houses it makes sense for the developers to build than and not 2 $250k houses, but if developers can sell all the $500k houses they can build it means they are not building enough and that is a problem you need to fix (by enabling them to build more)
- ericmay 2y ago
  You're right - the example does fail if nobody can afford a $500,000 home. I think the challenge is that for the foreseeable future enough people can afford those homes, which leaves us with the other two probably not having a great housing situation until we've saturated the market with the $500,000 homes (or equivalent given an inflation rate or whatnot). Certainly my example is an oversimplification, but I just wanted to highlight that it's more than just zoning code or parking minimums (parking minimums in particular are very nasty) and that there are other economic incentives or factors. Some real estate companies may prefer to just sit on cash given the 4% interest rates we're seeing today. It depends on their IRR target. Unlike, perhaps, software services, it seems to me that it's difficult for new entrants to enter the market and scale quickly to lower prices, and when they do enter the market they wind up with the same calculation that the other home builders do and just build the same thing. The factors that would enable home builders to build more include changing economic incentives. I'm not sure how we change those incentives. I've seen various programs and policy ideas floated around, I believe Harris wants to provide a $25,000 downpayment assistance, for example. But in my mind all of these programs and policies are just treating the symptoms instead of the disease. The disease is society wants more housing and at a lower price. The market is failing to address this. We could try to come up with incentives and plans, or we can go back to basics: supply and demand. The government can increase the supply directly - and just provide contracts to build more housing at a lower price point, particularly in cities where there exists more economic opportunity. Incentives and other policies seem like a middleman ready to be taken advantage of.
  - bluGill 2y ago
    The market does very well where it is allowed to work. However that tends to be out in the new suburbs which are far enough from the city center that it forces unreasonably long drives if you have something to do in the center.
    - ericmay 2y ago
      I generally agree, but for "products" like housing there are too many interfering influences to really sit back and say well the market will take care of it. The government gives enormous subsidizes to road and highway construction, for example, think about lending regulations, zoning rules, hook ups for city utilities, etc.. That's not much of "allowing the market to work". I don't think it's fair to say when housing is built in one way it is the free market at work but when it's built in a different way it's all government regulations. We often times think of zoning being restricted in cities, but it's arguably more restrictive outside of cities. Notice how everything that is built is the exact same spread out suburban lots, with no mixed use development, giant highways, giant parking lots, Wal-Marts, Starbucks, and other developments? Is there a single developer in the United States that's building differently en masse? My wife and I live in a historic neighborhood close to downtown Columbus. There are bars and restaurants and shops nearby, a park in the middle, etc. The home prices here are quite substantial because it's a nice, charming village within an urban environment. Though it's not the only one. People move here and pay large sums of money to live here. Clearly it's worth a lot right? So why don't developers build more developments like this when there's such high demand and prices command such a premium? One could build the homes a little closer together, make the streets a little more narrow, add buildings and churches and market stalls within. The economic value is clearly demonstrated. What's the barrier? Where you are concerned about letting market forces go to work I agree, one way to do that is to stop subsidizing a specific development pattern.

bluGill 2y ago

Your example fails if there is nobody who can afford a $500k house. So long as there is demand for the $500k houses it makes sense for the developers to build than and not 2 $250k houses, but if developers can sell all the $500k houses they can build it means they are not building enough and that is a problem you need to fix (by enabling them to build more)

ericmay 2y ago
You're right - the example does fail if nobody can afford a $500,000 home. I think the challenge is that for the foreseeable future enough people can afford those homes, which leaves us with the other two probably not having a great housing situation until we've saturated the market with the $500,000 homes (or equivalent given an inflation rate or whatnot). Certainly my example is an oversimplification, but I just wanted to highlight that it's more than just zoning code or parking minimums (parking minimums in particular are very nasty) and that there are other economic incentives or factors. Some real estate companies may prefer to just sit on cash given the 4% interest rates we're seeing today. It depends on their IRR target. Unlike, perhaps, software services, it seems to me that it's difficult for new entrants to enter the market and scale quickly to lower prices, and when they do enter the market they wind up with the same calculation that the other home builders do and just build the same thing. The factors that would enable home builders to build more include changing economic incentives. I'm not sure how we change those incentives. I've seen various programs and policy ideas floated around, I believe Harris wants to provide a $25,000 downpayment assistance, for example. But in my mind all of these programs and policies are just treating the symptoms instead of the disease. The disease is society wants more housing and at a lower price. The market is failing to address this. We could try to come up with incentives and plans, or we can go back to basics: supply and demand. The government can increase the supply directly - and just provide contracts to build more housing at a lower price point, particularly in cities where there exists more economic opportunity. Incentives and other policies seem like a middleman ready to be taken advantage of.
- bluGill 2y ago
  The market does very well where it is allowed to work. However that tends to be out in the new suburbs which are far enough from the city center that it forces unreasonably long drives if you have something to do in the center.
  - ericmay 2y ago
    I generally agree, but for "products" like housing there are too many interfering influences to really sit back and say well the market will take care of it. The government gives enormous subsidizes to road and highway construction, for example, think about lending regulations, zoning rules, hook ups for city utilities, etc.. That's not much of "allowing the market to work". I don't think it's fair to say when housing is built in one way it is the free market at work but when it's built in a different way it's all government regulations. We often times think of zoning being restricted in cities, but it's arguably more restrictive outside of cities. Notice how everything that is built is the exact same spread out suburban lots, with no mixed use development, giant highways, giant parking lots, Wal-Marts, Starbucks, and other developments? Is there a single developer in the United States that's building differently en masse? My wife and I live in a historic neighborhood close to downtown Columbus. There are bars and restaurants and shops nearby, a park in the middle, etc. The home prices here are quite substantial because it's a nice, charming village within an urban environment. Though it's not the only one. People move here and pay large sums of money to live here. Clearly it's worth a lot right? So why don't developers build more developments like this when there's such high demand and prices command such a premium? One could build the homes a little closer together, make the streets a little more narrow, add buildings and churches and market stalls within. The economic value is clearly demonstrated. What's the barrier? Where you are concerned about letting market forces go to work I agree, one way to do that is to stop subsidizing a specific development pattern.