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
One thing that I think people sometimes have trouble with intuitively is that a "permission slip" system renders every other input meaningless when it comes to housing supply (assuming demand outstrips supply). The permission slip is the binding constraint, and nothing else matters. If you made it so that buildings were constructed with a wave of a magic wand, with no input cost, housing supply would still be a function of the number of permission slips issued each year, and the value of this technological advance would be fully captured by the people that own undeveloped/underdeveloped land + permission slips.
In practice, the other players in the game don't let the landowners capture all of the spoils from the permission slip system -- the union extracts a certain wage, the government imposes taxes (including stuff like inclusionary zoning, which functions as a tax), the consultants and lawyers impose rules so that they get a cut.
When people then do a bottom-up analysis of the cost of a home, it looks like all of the costs are really high and therefore the problem is multi-faceted, but the costs themselves are a function of the permission slip system. For example, the value of "land" (as you note, really land + permission slip) is by definition a residual calculation, the difference between the cost of building and the value of the finished asset. If you lower the cost of the other inputs, the cost of "land" will go up to fill the difference. But in real life, the other inputs are almost certainly also distorted by the process above.
We don't really encounter quota systems in the wild very much, so we never have the chance to develop very good intuitions around them. We are used to lower costs leading to lower prices to the consumer, but we don't usually consciously think about the transmission mechanism (competing firms lower prices to maintain share so that the consumer eventually captures all the benefits). The quota system disables the usual transmission mechanism.
I think this is also why people intuitively reject the idea that solving something as complex as the housing crisis is something as simple as zoning reform. But, the quota system is the bottleneck, and the *only* way to improve a system is to fix the bottleneck. That is, by definition, what a bottleneck is! It's like saying you can't fix a complicated supercomputer by simply plugging it in.
Sorry for spamming but I think there’s also a very fundamental flaw in the way that we consider land prices in this: the entire sample is biased to the point of uselessness by the selection effects of where *new* *single-family* housing is built.
If (even quite dense) SFH were being built in quantity deep within major metros that figure would be wildly different. But in addition to making in-fill development within cities very difficult, we’ve also made development of green space within existing suburbs very difficult.
So the entire sample is deeply skewed towards exurban land development, which elides the depths of the problem: not just what it costs to get houses built, but the impact on where and to what extent they *don't* get built.
Your discussion of land prices here wandered into contested terrain in economics.
Broadly there are two views about land prices.
Classical economists such as Smith, Ricardo, J.S. Mill, and Marshall thought that physical realities gave land a monopolistic character, which caused land prices to equal the full value of using land, including specific locational advantages (e.g. proximity to markets). The idea was that competition for land would drive up its price to that level because labour/capital could move to that location to compete for land, but no more land could be moved to that location to compete for labour/capital.
That view was taken for granted for a very long time.
The alternative view is the new Chicago-school view that you cite. In this worldview, physical scarcity in many places is less important than regulatory scarcity, land prices can be meaningfully decomposed into the value of "permission slips" vis-a-vis value of location, and deregulating land use until permission slips are worthless would leave location value unchanged and therefore cause land prices (and house prices) to fall.
There are certain interesting arguments in the Chicago view, but the method to decompose the value of land into the value of "permission slips" and value of location is fundamentally flawed.
It rests on the idea that in a free/unregulated market there will be arbitrage wherein land is moved from low-value locations to high-value locations to create new plots of land, with this process continuing until all land has an average price equal to the current price of low-value slivers of land (the "marginal" land price as identified by hedonic pricing regressions).
From a "construction physics" point of view you might want to comment on the Chicago-school premise that land can be moved vs the classical premise that land cannot be moved...
(There's an alternative claim about why marginal land prices could become the new average price, which is that since all existing buildings have zero value as capital goods, we can continuously demolish them, redraw site boundaries, and rebuild them to optimal economic density, and thus in effect be continuously recompiling marginal slivers of land into useful-sized plots. The premise is equally flawed. In reality cities have a built form history and those buildings are uneconomic to remove.)
You can read about the problem with "permission slip" numbers here:
Murray, C. K. (2020). Marginal and average prices of land lots should not be equal: A critique of Glaeser and Gyourko’s method for identifying residential price effects of town planning regulations. Environment and Planning A: Economy and Space, 0308518X2094287. doi:10.1177/0308518x20942874
Another implication of the Chicago-school view of land and housing is that since "freeing up the supply side" by deregulating land use will cause land prices to fall via competition, rather than rise due to landowners gaining new rights of use for free, the many landowners who lobby for these policy changes are actually engaging in a catastrophic failure to know their own financial interest.
From a housing affordability perspective I wish this were true!
From a political economy perspective I think it more likely that the classical economists were correct and that vested interests are doing a great job promoting their own interests.
“An electrician that costs $78 per hour to hire in Houston might cost almost $170 to hire in New York City.”
There’s a whole line of microeconomics papers waiting to be written on the feedback loop between land costs and labor costs in construction. It seems extraordinarily obvious that in locales with high housing cost pressures, hard costs are structurally significantly higher too. Vendors price rent into materials prices, labor costs more because they’re buying or renting locally, timelines stretch due to staging, delivery seats, inspection and feedback times.
Which begs the question: to what extent? What fraction of hard costs are themselves due to land use challenges?
Phenomenal work, thanks for breaking this down! I found the part about developers gambling on being allowed to build more units than the land is initially zoned for interesting. How often is it the case that governing bodies are flexible in that way?
This is really interesting! I love your all of your analyses.
One thing I'm curious about - apparently 35% of people in America live in apartments. Apartments seem like a place where efficiency gains can really come into play (many repeated units) and where zoning causes huge issues. Do you have any thoughts on the spillover effects of zoning laws on apartments?
Another thing I'm curious about is the cost of labor with relation to density. Tokyo housing is much cheaper than NYC and this partially decreases labor costs. Do you think labor costs would go down if places became much denser?
The US really needs to get over single family detached housing. It is simply the most expensive way to house people period, in terms of hard, soft, and land costs. One of beefs with the NAHB study is that it is more or less exclusively about SFD.
I’d like to see some data that looks at the differences in automotive dependent SFD and whatever examples of walkable multi family can be found in the US. I noticed driveways in the pie chart, but the cost of a garage is lumped in a lot of those homes, as is all the site preparation and utilities for getting to each individual home.
It’s also interesting (at least in my neck of the woods) single family and multi family are almost like two entirely separate construction industries. The inability to flex between these styles seems relevant.
Lastly, the lack of detailed design in residential is what is holding it back. The sector will struggle to progress until it learns to do this.
Based on some of those pricing tables, do you think that buildings with more units could help reduce costs to effectively help scale some of that. For example driving down stucco or roofing costs since you need far fewer roofs in apartment buildings (1) than many stand alone buildings (many)
"As we’ve noted previously, modern buildings are fairly materially efficient, and there’s no obvious path for using substantially fewer materials that doesn’t come with significant tradeoffs."
It's important to note that there is a big difference between the amount of material that is in the building as designed, and the amount of material required to construct that building. Often a large amount of the material purchased is thrown out as scrap or is used to correct errors during construction, and it isn't required in theory for the building itself.
This is best seen in shipbuilding. Your previous post about shipbuilding:
showed a chart where a Japanese shipyard (IHI Aioi) using 65% as many materials to build the same ship as a US shipyard (Levingston- it had licensed the exact same ship design from them). Obviously the US ship did not contain many more materials, but the extra 35% of materials came from scrap and less efficient use. The practices of US shipyards during this period are very similar to the practices used in modern building construction, while the practices of Japanese shipyards (and other modern shipyards) are much different.
For electrical cables, this difference in shipbuilding methods can be seen on this site:
The traditional way is shown on the very last image (OC4f). The different types of cables are stored on a large rack and used as needed by the workers. But in the more efficient modern Japanese shipyards of the day, there was a second set of blueprints for construction, where everything was planned and controlled to the last millimeter. This included the length of every single cable required, with the extra required to cover the likely margin of error (this was reduced as techniques got better). They had computerized machines which received data on each cable required, cut each cable to the correct length, and coiled them to a specified diameter before labeling them. They were then organized into pallets to be placed in the room where the workers would need them, with the components that would be used first placed on top. This resulted in cable remnants on the order of 2 meters. For a traditionally built ship, or indeed any building as large as such a ship (since housing construction is similar to traditional methods), that would be unheard of. The cable length usage (and other aspects of construction) is not controlled to that level of accuracy- some material usage isn't controlled to any level of accuracy, as long as the finished component meets the requirements. I doubt we'll ever know how much cable is thrown out as remnants during construction, since it's not easy to measure, but it's likely a large fraction of cable used during construction.
The other part where this can be seen is in line heating, in these 2 posts:
There were 2 main benefits to line heating: mainly that the steel curved plates were much more controllable, and would not warp out of shape when they were welded. So the manufacturers could eliminate things like excess margins of material on each side, knowing there wouldn't be unexpected gaps between plates that would have to be bridged. They could also paint most of the plates before assembly knowing they wouldn't have to be bent back into shape later, cracking the paint and forcing them to paint it again. The traditional methods had this problem, and a large amount of excess material was needed to cover unexpected gaps, and more labor was also required to rework and paint plates after assembly. This is described in the NSRP Line Heating document as "redundant, corrective, or inherently unsafe and inefficient" work. The best analogy for this rework would be drywall mud: more than 1 coat of mud is not required to seal the wall; it's just required to smooth out any non-flat sections of wall. In other words, it is only corrective, meant to undo the inaccuracy in the initial installation of the drywall panels rather than add a new component to the house. If there was a way to mount drywall plates and apply just one coat of mud on the edges in a way that was guaranteed to be smooth and flat, there would be no need for more than 1 coat of mud on drywall. In fact, if the design were detailed enough that each drywall panel was specified with its locations for screws, holes for electrical outlets, etc., then the drywall could be primed and painted before installation except in those areas and on the edges. Of course today there is no way I know of to install drywall this accurately from the start, but that represents the material going towards corrective work rather than directly contributing towards the construction.
The other way that line heating helped was to eliminate the need for the large plate-forming jigs that were built for each type of plate and then thrown away as scrap. It also eliminated the wedges and clamps that were welded onto plates to bend them into shape, and then cut off afterward to be thrown out as scrap. The jigs remind me of frames for concrete pouring, and that probably is their best analogy for construction material use. Depending on the concrete form used, a lot of wood (or other material) can be used for frames which are thrown out after construction is finished. And there are other parts that may require temporary supports or jigs that are thrown out when a building is done.
In short, the amount of materials used in construction (and in shipbuilding prior to the 1980s) can be much larger than the materials actually required in the design of a building. Shipbuilding after WW2 seems to have gained an obsession towards accurate control over every aspect of manufacture, so that excess materials (and labor) can be almost eliminated. But construction uses methods similar to older methods of shipbuilding, so their material usage can be much higher.
This is such a well written article!! I’m a real estate investor in Cleveland Ohio who focuses on buying distressed properties to renovate and rent. In lower priced markets it’s not economically feasible to build houses, you’re better off just buying a distressed house and bringing it back to life. I think the biggest challenges I’ve seen/heard from developers and builders is all the red tape that most cities make you go through just to build something. There’s a big stigma around real estate investors being greedy and although that may not be entirely untrue the fact still remains that the reason why housing prices have remained high is because the supply is low and cities making the planning and permitting process difficult doesn’t help anyone.
While it would be good to reduce the costs of housing everywhere, aren't the real problems with housing affordability concentrated in metro areas where the price of land dominates the cost?
There's room for cost savings in single family homes through simplification of design and components: fewer corners, simplified rooflines, reduced ornamentation (baseboards and quarter-round), fewer kitchen and bath built-ins (oven/microwave/vanity), and simplified electrical (wireless switches). Some of these are customer preference which could be changed with the right price and marketing and some are required by code.
Interesting piece, thanks.
One thing that I think people sometimes have trouble with intuitively is that a "permission slip" system renders every other input meaningless when it comes to housing supply (assuming demand outstrips supply). The permission slip is the binding constraint, and nothing else matters. If you made it so that buildings were constructed with a wave of a magic wand, with no input cost, housing supply would still be a function of the number of permission slips issued each year, and the value of this technological advance would be fully captured by the people that own undeveloped/underdeveloped land + permission slips.
In practice, the other players in the game don't let the landowners capture all of the spoils from the permission slip system -- the union extracts a certain wage, the government imposes taxes (including stuff like inclusionary zoning, which functions as a tax), the consultants and lawyers impose rules so that they get a cut.
When people then do a bottom-up analysis of the cost of a home, it looks like all of the costs are really high and therefore the problem is multi-faceted, but the costs themselves are a function of the permission slip system. For example, the value of "land" (as you note, really land + permission slip) is by definition a residual calculation, the difference between the cost of building and the value of the finished asset. If you lower the cost of the other inputs, the cost of "land" will go up to fill the difference. But in real life, the other inputs are almost certainly also distorted by the process above.
We don't really encounter quota systems in the wild very much, so we never have the chance to develop very good intuitions around them. We are used to lower costs leading to lower prices to the consumer, but we don't usually consciously think about the transmission mechanism (competing firms lower prices to maintain share so that the consumer eventually captures all the benefits). The quota system disables the usual transmission mechanism.
I think this is also why people intuitively reject the idea that solving something as complex as the housing crisis is something as simple as zoning reform. But, the quota system is the bottleneck, and the *only* way to improve a system is to fix the bottleneck. That is, by definition, what a bottleneck is! It's like saying you can't fix a complicated supercomputer by simply plugging it in.
Sorry for spamming but I think there’s also a very fundamental flaw in the way that we consider land prices in this: the entire sample is biased to the point of uselessness by the selection effects of where *new* *single-family* housing is built.
If (even quite dense) SFH were being built in quantity deep within major metros that figure would be wildly different. But in addition to making in-fill development within cities very difficult, we’ve also made development of green space within existing suburbs very difficult.
So the entire sample is deeply skewed towards exurban land development, which elides the depths of the problem: not just what it costs to get houses built, but the impact on where and to what extent they *don't* get built.
I enjoy your detailed analysis.
Your discussion of land prices here wandered into contested terrain in economics.
Broadly there are two views about land prices.
Classical economists such as Smith, Ricardo, J.S. Mill, and Marshall thought that physical realities gave land a monopolistic character, which caused land prices to equal the full value of using land, including specific locational advantages (e.g. proximity to markets). The idea was that competition for land would drive up its price to that level because labour/capital could move to that location to compete for land, but no more land could be moved to that location to compete for labour/capital.
That view was taken for granted for a very long time.
The alternative view is the new Chicago-school view that you cite. In this worldview, physical scarcity in many places is less important than regulatory scarcity, land prices can be meaningfully decomposed into the value of "permission slips" vis-a-vis value of location, and deregulating land use until permission slips are worthless would leave location value unchanged and therefore cause land prices (and house prices) to fall.
There are certain interesting arguments in the Chicago view, but the method to decompose the value of land into the value of "permission slips" and value of location is fundamentally flawed.
It rests on the idea that in a free/unregulated market there will be arbitrage wherein land is moved from low-value locations to high-value locations to create new plots of land, with this process continuing until all land has an average price equal to the current price of low-value slivers of land (the "marginal" land price as identified by hedonic pricing regressions).
From a "construction physics" point of view you might want to comment on the Chicago-school premise that land can be moved vs the classical premise that land cannot be moved...
(There's an alternative claim about why marginal land prices could become the new average price, which is that since all existing buildings have zero value as capital goods, we can continuously demolish them, redraw site boundaries, and rebuild them to optimal economic density, and thus in effect be continuously recompiling marginal slivers of land into useful-sized plots. The premise is equally flawed. In reality cities have a built form history and those buildings are uneconomic to remove.)
You can read about the problem with "permission slip" numbers here:
Murray, C. K. (2020). Marginal and average prices of land lots should not be equal: A critique of Glaeser and Gyourko’s method for identifying residential price effects of town planning regulations. Environment and Planning A: Economy and Space, 0308518X2094287. doi:10.1177/0308518x20942874
Another implication of the Chicago-school view of land and housing is that since "freeing up the supply side" by deregulating land use will cause land prices to fall via competition, rather than rise due to landowners gaining new rights of use for free, the many landowners who lobby for these policy changes are actually engaging in a catastrophic failure to know their own financial interest.
From a housing affordability perspective I wish this were true!
From a political economy perspective I think it more likely that the classical economists were correct and that vested interests are doing a great job promoting their own interests.
“An electrician that costs $78 per hour to hire in Houston might cost almost $170 to hire in New York City.”
There’s a whole line of microeconomics papers waiting to be written on the feedback loop between land costs and labor costs in construction. It seems extraordinarily obvious that in locales with high housing cost pressures, hard costs are structurally significantly higher too. Vendors price rent into materials prices, labor costs more because they’re buying or renting locally, timelines stretch due to staging, delivery seats, inspection and feedback times.
Which begs the question: to what extent? What fraction of hard costs are themselves due to land use challenges?
Phenomenal work, thanks for breaking this down! I found the part about developers gambling on being allowed to build more units than the land is initially zoned for interesting. How often is it the case that governing bodies are flexible in that way?
This is really interesting! I love your all of your analyses.
One thing I'm curious about - apparently 35% of people in America live in apartments. Apartments seem like a place where efficiency gains can really come into play (many repeated units) and where zoning causes huge issues. Do you have any thoughts on the spillover effects of zoning laws on apartments?
Another thing I'm curious about is the cost of labor with relation to density. Tokyo housing is much cheaper than NYC and this partially decreases labor costs. Do you think labor costs would go down if places became much denser?
The US really needs to get over single family detached housing. It is simply the most expensive way to house people period, in terms of hard, soft, and land costs. One of beefs with the NAHB study is that it is more or less exclusively about SFD.
I’d like to see some data that looks at the differences in automotive dependent SFD and whatever examples of walkable multi family can be found in the US. I noticed driveways in the pie chart, but the cost of a garage is lumped in a lot of those homes, as is all the site preparation and utilities for getting to each individual home.
It’s also interesting (at least in my neck of the woods) single family and multi family are almost like two entirely separate construction industries. The inability to flex between these styles seems relevant.
Lastly, the lack of detailed design in residential is what is holding it back. The sector will struggle to progress until it learns to do this.
Take a look at this paper "No Price Like Home: Global House Prices, 1870-2012".
https://www.aeaweb.org/articles?id=10.1257/aer.20150501
The authors show that 80 per cent of the rise in prices in real esate prices in the last more than 100 years is due to the rise of land prices.
Excellent analysis as always.
Based on some of those pricing tables, do you think that buildings with more units could help reduce costs to effectively help scale some of that. For example driving down stucco or roofing costs since you need far fewer roofs in apartment buildings (1) than many stand alone buildings (many)
"As we’ve noted previously, modern buildings are fairly materially efficient, and there’s no obvious path for using substantially fewer materials that doesn’t come with significant tradeoffs."
It's important to note that there is a big difference between the amount of material that is in the building as designed, and the amount of material required to construct that building. Often a large amount of the material purchased is thrown out as scrap or is used to correct errors during construction, and it isn't required in theory for the building itself.
This is best seen in shipbuilding. Your previous post about shipbuilding:
https://www.construction-physics.com/p/lessons-from-shipbuilding-productivity-4b9
showed a chart where a Japanese shipyard (IHI Aioi) using 65% as many materials to build the same ship as a US shipyard (Levingston- it had licensed the exact same ship design from them). Obviously the US ship did not contain many more materials, but the extra 35% of materials came from scrap and less efficient use. The practices of US shipyards during this period are very similar to the practices used in modern building construction, while the practices of Japanese shipyards (and other modern shipyards) are much different.
For electrical cables, this difference in shipbuilding methods can be seen on this site:
https://lou.chirillo.com/shipbuilding-database/outfit-components/
The traditional way is shown on the very last image (OC4f). The different types of cables are stored on a large rack and used as needed by the workers. But in the more efficient modern Japanese shipyards of the day, there was a second set of blueprints for construction, where everything was planned and controlled to the last millimeter. This included the length of every single cable required, with the extra required to cover the likely margin of error (this was reduced as techniques got better). They had computerized machines which received data on each cable required, cut each cable to the correct length, and coiled them to a specified diameter before labeling them. They were then organized into pallets to be placed in the room where the workers would need them, with the components that would be used first placed on top. This resulted in cable remnants on the order of 2 meters. For a traditionally built ship, or indeed any building as large as such a ship (since housing construction is similar to traditional methods), that would be unheard of. The cable length usage (and other aspects of construction) is not controlled to that level of accuracy- some material usage isn't controlled to any level of accuracy, as long as the finished component meets the requirements. I doubt we'll ever know how much cable is thrown out as remnants during construction, since it's not easy to measure, but it's likely a large fraction of cable used during construction.
The other part where this can be seen is in line heating, in these 2 posts:
https://www.alternatehistory.com/forum/threads/alternate-warships-of-nations.326948/page-367#post-23354483
https://www.alternatehistory.com/forum/threads/alternate-warships-of-nations.326948/page-367#post-23356384
There were 2 main benefits to line heating: mainly that the steel curved plates were much more controllable, and would not warp out of shape when they were welded. So the manufacturers could eliminate things like excess margins of material on each side, knowing there wouldn't be unexpected gaps between plates that would have to be bridged. They could also paint most of the plates before assembly knowing they wouldn't have to be bent back into shape later, cracking the paint and forcing them to paint it again. The traditional methods had this problem, and a large amount of excess material was needed to cover unexpected gaps, and more labor was also required to rework and paint plates after assembly. This is described in the NSRP Line Heating document as "redundant, corrective, or inherently unsafe and inefficient" work. The best analogy for this rework would be drywall mud: more than 1 coat of mud is not required to seal the wall; it's just required to smooth out any non-flat sections of wall. In other words, it is only corrective, meant to undo the inaccuracy in the initial installation of the drywall panels rather than add a new component to the house. If there was a way to mount drywall plates and apply just one coat of mud on the edges in a way that was guaranteed to be smooth and flat, there would be no need for more than 1 coat of mud on drywall. In fact, if the design were detailed enough that each drywall panel was specified with its locations for screws, holes for electrical outlets, etc., then the drywall could be primed and painted before installation except in those areas and on the edges. Of course today there is no way I know of to install drywall this accurately from the start, but that represents the material going towards corrective work rather than directly contributing towards the construction.
The other way that line heating helped was to eliminate the need for the large plate-forming jigs that were built for each type of plate and then thrown away as scrap. It also eliminated the wedges and clamps that were welded onto plates to bend them into shape, and then cut off afterward to be thrown out as scrap. The jigs remind me of frames for concrete pouring, and that probably is their best analogy for construction material use. Depending on the concrete form used, a lot of wood (or other material) can be used for frames which are thrown out after construction is finished. And there are other parts that may require temporary supports or jigs that are thrown out when a building is done.
In short, the amount of materials used in construction (and in shipbuilding prior to the 1980s) can be much larger than the materials actually required in the design of a building. Shipbuilding after WW2 seems to have gained an obsession towards accurate control over every aspect of manufacture, so that excess materials (and labor) can be almost eliminated. But construction uses methods similar to older methods of shipbuilding, so their material usage can be much higher.
This is such a well written article!! I’m a real estate investor in Cleveland Ohio who focuses on buying distressed properties to renovate and rent. In lower priced markets it’s not economically feasible to build houses, you’re better off just buying a distressed house and bringing it back to life. I think the biggest challenges I’ve seen/heard from developers and builders is all the red tape that most cities make you go through just to build something. There’s a big stigma around real estate investors being greedy and although that may not be entirely untrue the fact still remains that the reason why housing prices have remained high is because the supply is low and cities making the planning and permitting process difficult doesn’t help anyone.
While it would be good to reduce the costs of housing everywhere, aren't the real problems with housing affordability concentrated in metro areas where the price of land dominates the cost?
There's room for cost savings in single family homes through simplification of design and components: fewer corners, simplified rooflines, reduced ornamentation (baseboards and quarter-round), fewer kitchen and bath built-ins (oven/microwave/vanity), and simplified electrical (wireless switches). Some of these are customer preference which could be changed with the right price and marketing and some are required by code.
An excellent analysis. I like how you deal with both geographical variation and the difference between new housing construction and existing homes.
So it really does all come back to NIMBY-ism. :)