Is Housing Too Expensive?

Roller-Coaster Housing Prices

I read a post the other day that said the reason for the flat rate of housing sales is that they are too expensive. According to the article by Frank Anton, only 1 in 6 homes sold is a new home. Currently the percentage is even lower. One of the reasons is the national average has new homes costing 45% more than an existing home. I’m shocked that it took this long to figure out what has been the norm for more than fifty years—new homes almost always cost more than existing homes.

It is this relationship between the new home and the existing home that has provided the base line for affordable housing—the existing older home is the affordable home market. The twisted belief that we can build new affordable housing is the mantra pushed by agencies, charities, and cities. And the only way it happens is by subsidies, fees tacked on new housing, and grants. In other words new affordable housing exists because someone other than the homebuyer is contributing to the bottom line cost of the house. Which brings me back to home prices.

Outside of those few who believe that all homebuilders are carpetbaggers, speculators, and opportunists, almost every builder I know won’t build unless he has a confirmed market. There is little if any speculative building today, this is a lesson they learned in 2008 when it all when to hell in a lender’s basket. To believe that builders just throw out product like they were chumming for tuna is just plain silly—the forces of the marketplace would kill them.

At any time in any market housing will be too expensive—until it's not. What controls housing costs are five things: land cost, entitlements, materials, labor, and profit. Working backwards the builder makes choices through these five factors to set his price. He narrows his profit, he finds cheaper or non-union labor, he buys materials in bulk, he begs for fee reductions (building the park may be cheaper than paying the park fees), and lastly maybe he can renegotiate the land cost. It is a complex dance played to the tune of the band—the marketplace—that has its own balancing act of interest rates, debt, and income.

The difficulty today, especially in dense urban markets, is the newest player in the game—the non-profit affordable home builder (the non-profit thing is a ruse, they make a lot of money, it’s just called something different). They compete directly and unfairly with the for-profit builder at the first-time-buyer market. Why would a builder go through all the sturm and drang of the entitlement process to compete at the lowest cost/profit level when, with government assistance, he can and will be undercut? They won’t, they will just build to a different price point.

So, the real reason for the rising cost of housing is that we are not building enough housing—period. The only way that housing costs can go down is to noticeably modify one of the five factors. I don’t see this happening in the near future. Land costs are dramatically rising in urban areas, my experience recently is that cities are not interested in reducing their fees (some are raising or expanding their fees), materials costs are holding steady but this is a result of more supply than demand, labor is flat (but the push on the minimum wage may have an effect), and profit is what it is, except when there is competition which can noticeably affect the price.

It’s my opinion the biggest problem right now is the first time homebuyer market. They are unsure about the future and will bide their time. If they can settle into a good apartment, get their student debt managed, and maybe even find a willing partner to share the burden, the market will change. But right now I think they are marking their time—which is not good for the merchant homebuilder.

Stay Tuned . . . . . . . .

Traffic To Die For

When I listen to the latest on traffic in the Bay Area and San Francisco (Galaxy Base for Cogito Urbanus) you would think we were in a free fire zone of automotive chaos and collisions. Here are a few videos that make you wish for those future days of robot cars.

The above is in Addis Ababa, Ethiopia (I bet some of you thought is was Columbus Circle in New York City). Makes you kind of dream about stoplights and left turn arrows. What is most fascinating are the pedestrians dancing in and amongst the cars. I hate to think of the number of accidents, though libertarians might think this all normal which proves that we don’t need the heavy hand of government over-management.

Note the seven lanes demarcated in the upper left lanes (Traffic Engineers of Africa) with appropriate turn and directional arrows. Watch how they are stringently followed. And I also note the lack of bicycles, I guess they are not as useful in a third world country as I was led to believe.

Now Ho Chi Minh City, Vietnam is an entirely different matter. One difference is the dominant use of motorcycles and mini-bikes. The intersection also has a traffic signal, one I believe, that hangs over the center. As with Ethiopia, pedestrians must fend for themselves.

Mumbai, India looks like any intersection in New York (mostly taxis and pedestrians) or Columbus Street in San Francisco.

Driving in China – Linyi City style. Lanes? I don't need no stinking lanes.

Pedestrian crossing Japanese style. This near the Shibuya train station in Tokyo.

And you thought Los Angeles traffic was bad.

What more can you say when you mix vodka and traffic. This is near St. Petersburg, Russia.

And you can always bet on the Japanese to solve the problem – Nagoya, Japan

Stay Tuned . . . . . . . . .

HAPPY 4th OF JULY

The flag of our Greatest Generation

Have a wonderful and safe 4th of July,  just a reminder of why we are here.

IN CONGRESS, July 4, 1776

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. . . . .

. . . We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Stay tuned . . . . . . . . .