Feb 17, 2022Liked by Brian Potter

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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Thank you.

Which comes first?

The land value before construction or the size of the construction?

Urban development would typically build smaller homes because of the high cost of land. Yet we dont build these smaller homes on lower cost land, we build homes to the maximum size on lower cost land.

If we were to happy in smaller homes on lower cost land we could reduce housing costs.

But the factors that may drive housing cost is not housing costs but external factors such as families and mobility. example, do I have kids that need a school or do I need to commute an hour to my job.

However external factors dictate the cost of construction. Salary and banks. I would guess most people max out their lending, not right size the home they need.

As long as incomes go up, and the bank lending % stays the same then housing prices will go up because this is the limiting factor

Ref: https://www.ratehub.ca/mortgage-affordability-calculator

The rule of thumb is you can afford a mortgage where your monthly housing costs are no more than 32% of your gross household income, and where your total debt load (including housing costs) is no more than 40% of your gross household income. This rule is based on your debt service ratios

Total Income USA:


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Additional variables I would submit to the conversation: durability affecting useful life (real-economic depreciation cost) and residual maintenance cost of the dwelling, and energy efficiency affecting utility costs. Both contribute to total lifecycle "cost" of the housing unit affecting affordability.

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Picking up on the "bomber with red dots" line of thought, i.e. housing not constructed, something not examined here is bank lending practices. Where I live (not the USA) it is very difficult to get finance for anything other than a suburban single-household detached house that will be (or was) constructed on the lot. This is due to banks' internal systems, incentives, and cultures, not regulation.

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This really reads like you're laying the groundwork for Georgism/Land Value Tax.

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Sorry, maybe my math is ancient, but what does this even mean: "the fraction of income spent on housing is inversely proportional to income." By the way I see it, If I make $50,000 per year, I might afford $600-$1000 per month for housing. If I make $150,000 per year, I can afford $1000-$2000 per month on housing. Seems proportional to me (not inversely proportional). More income, more can be spent on housing, whether rent or mortgage.

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Excellent post. I think one other factor biasing down the land share of new homes' cost is this: when new homes are built on high-price urban land, they're much more likely to be luxury housing (maximizing the square footage per lot and quality), which is quite rational for both buyer and developer.

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There are lots of supply restrictions in the United States that aren't necessarily mediated through land costs. These include onerous building code requirements, aesthetic requirements, impact fees, and things like CEQA that increase the cost of obtaining building permits and other approvals. I'm curious how you treat factors like this in your analysis, since they seem kind of in the middle between pure hard construction costs and pure FAR restrictions.

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