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Philo's avatar

I think one way you could summarize this is that the less distorted the housing market becomes, the more housing prices will converge on construction costs, and therefore the more construction costs will matter. For example, I think falling airfares over time have a lot to do with Boeing and Airbus coming out with cheaper and more fuel efficient planes, and that filters through to airfares because the airline industry is so competitive. I would bet that this was less true pre-deregulation, when the government set prices and supply.

I think the focus on loosening supply restrictions in the high priced / supply-restricted market is because high prices indicate that's where the unmet demand really is and so that's where you can get the most impact from any intervention (policy or technological). It's true that there isn't much construction there today but it's hard to do a static analysis because everything is so distorted. Like if you ramped up construction in bigger cities, that would have to reduce construction in the Sunbelt exurbs, or cause people to move out of the cheapest cities, or cause new household formation, or a combination, because you have a fixed number of people to house.

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Peter Gerdes's avatar

I think this analysis underrates the role that land price plays in overall cost. If the land was cheaper than people would spend less on construction.

After all, you don't build a 150k prefab structure on a 2 million dollar lot in SF. You build a million dollar house.

Yes, labor costs do vary to some degree across the US but it's clear that the construction cost is varying by far more than that between rural Indiana (where you can get a plot of land for like 40k or less) and LA. That shows it's the underlying expense of the land which determines the optimal construction investment not a limitation that construction prices prevent us from housing people as cheaply in the CA as in rural IN.

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