Why US Housing Prices are still High and Ways to Help Address it

Why US Housing Prices are still High and Ways to Help Address it…

The U.S. housing market continues to grapple with soaring prices, leaving millions of Americans struggling to achieve the dream of homeownership. Despite cooling demand in some areas, home prices remain stubbornly high, driven by a combination of factors including a three-part primary issue causing the high housing prices:

1. A decade of reduction in home building after the global financial crisis, plus

2. Current higher interest rates causing “lock-in effect”, and

3. The drastic increased inflation driving the US$ buying power down.

Now, let’s break it all down and look at the problem and ways to address it…

The three primary factors causing increase in housing costs.

First, there was a drastic Reduction in Building in the U.S between 2010 and the end of 2019 after the Global financial crisis at the end of the previous decade. During this decade there were only 6.8 million single-family housing starts in the US, the lowest of any decade in over 50 years:

1960s: 9.3 million starts

1970s: 11.4 million starts

1980s: 9.9 million starts

1990s: 11.0 million starts

2000s: 12.3 million starts

2010s: 6.8 million starts

Next, we have Lock-In Effect caused by so many homeowners having locked in a lower 2-4% fixed rate mortgage and they cannot afford to sell because their mortgage payments would drastically increase, or even double, to replace the home due to current 6-8% higher interest rates, or they’d have to buy less home to get the same payment they can afford! So, the only people selling right now are those who have to due to relocation or other motivating circumstance; or those with a majority equity to where they can pay cash or a large portion down for their replacement home.

Finally, Increased Inflation under the Biden administration, has significantly increased the cost of building homes due to various factors, including inflation, supply chain disruptions, and policy decisions. Several key expenses during this time have been effected and contributed to the increased cost of home construction:

• Materials: The prices of essential building materials, such as lumber, steel, and aluminum, have escalated. For instance, the cost of a sheet of OSB plywood, which was around $9 four years ago, surged to nearly $50 during the Biden administration.

• Energy Efficiency Standards: The Biden administration’s implementation of stringent energy efficiency standards for federally financed housing has added to construction costs. These standards can increase the cost of building homes for federally assisted buyers by up to $30,000, potentially making homeownership less attainable for many.

So, it all results in basic “supply and demand”. We have more buyers than inventory. As long as that shortage continues the housing market will continue to appreciate at an increased rate.

Ways to Help Resolve Housing Issues

Addressing the Building Shortage: The current housing shortage can be alleviated by reducing regulatory barriers and streamlining the approval process for builders and developers. Lengthy permitting processes, restrictive zoning laws, and excessive red tape often discourage or delay new housing projects. Simplifying these regulations, particularly in areas with acute housing needs, would make it easier for developers to bring new homes to market.

Additionally, governments and local authorities can introduce creative funding mechanisms to incentivize the construction of affordable housing. These could include grants, low-interest loans, or public-private partnerships that support the development of cost-effective housing units. Tax incentives, such as credits for projects targeting low-income or underserved communities, can further encourage developers to focus on building in areas most in need. Creating “affordable housing zones” with reduced fees, expedited approvals, and other benefits could also foster growth in key regions.

Mitigating the Lock-In Effect: The “lock-in effect,” where homeowners are hesitant to sell due to losing their existing low mortgage rates, can be mitigated by implementing an exchangeable mortgage system. This innovative approach would allow homeowners to transfer their current mortgage interest rate to their next home, up to the unpaid balance of the original loan, provided they are purchasing a new primary residence.

Such a system would reduce the financial disincentive of moving in a high-interest rate environment, enabling more homeowners to sell their properties and unlock housing inventory. To ensure widespread adoption, policymakers could work with lenders to create standard guidelines for portability, ensuring the process is simple and equitable. This policy would also help boost housing market mobility, reduce inventory shortages, and create a healthier balance between supply and demand.

Addressing the Inflationary Effect on housing: Inflation effecting housing could be improved by doing things to address cost of materials and labor such as subsidizing key materials, investing in domestic production of construction supplies, and incentivizing workforce training programs to increase the number of skilled laborers in the construction industry. Additional measures might include:

• Streamlining Supply Chains: Improving infrastructure and logistics to reduce delays and costs associated with transporting building materials.

• Supporting Innovation: Encouraging the use of new technologies, such as modular construction and 3D printing, which can lower building costs and shorten project timelines.

• Stabilizing Monetary Policy: Advocating for fiscal policies that aim to control inflation while promoting economic growth, ensuring wages keep pace with housing affordability needs.

• Promoting Localized Solutions: Working with municipalities to prioritize affordable housing development and allow zoning flexibility, such as enabling more multi-family units or accessory dwelling units (ADUs) in high-demand areas.

These efforts, combined with long-term investments in affordable housing, can help address the root causes of rising housing prices and improve affordability for a wider range of people. 🎯

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