How has the cost of land and the cost to build affected the affordability of homes in the US?
Cost of acquiring land is astronomically higher than it was in the 70s, 80s, 90s or early 2000s. The cost of constructing new housing is 30–40% higher than it was in 2019. Nationwide median home prices have increased 47% since 2020. In 2021, Moody analytics estimated that land costs alone consumed an estimated 55% of the price of median priced homes nationwide and upwards of 70% of median priced homes in large metros like Seattle and San Francisco. Moody Analytics July 2024 report on Housing notes for land costs in particular:
The most significant impediment to building more affordable housing is the availability and cost of land. There simply is not enough build able land to meet the demand in many areas, and the costs associated with securing and developing the land that is available too often push builders’ total costs above what they could get from the sale of an affordable property. The cost of land has soared to an estimated over half of the total price of the median-priced home nationwide and to more than two-thirds of the house price in high-opportunity areas such as Seattle and San Francisco.
This was based on estimated residential land values across thousands of counties provided by the Federal Housing Finance Agency. Until 1994, the Federal Reserve published aggregate land value data as part of its Balance sheets for the US Economy. Although the federal reserve no longer publishes aggregate land values, they still collect and publish the total estimated market value of all residential and commercial real estate as well as replacement costs of the structures owned on the same lots minus the broker’s commission. A 100% capital gains tax on realty site value is very doable if and when the political will to eliminate the root cause of unafforable housing and environmentally destructive suburban sprawl (i.e. real estate speculation) emerges.
As I mentioned in a previous post, housing costs rose in an almost 1:1 ratio with construction costs between the 1950s and 1970s as the average home size nearly doubled from 950 square feet to about 1750 square feet with higher quality building materials. Thereafter, housing prices continued to rise dramatically even as construction costs plateaued with falling rates of new construction.
Between 1950 and 1970 rising home costs mostly reflected improvements in construction quality; new home prices rose in an almost one to one ratio with physical construction costs (Glaeser et al., 2005). However, after 1970, housing prices continued to rise even as the cost of physical construction leveled off (Glaeser et al., 2005). For instance, construction costs in San Francisco only rose 4.6% and construction costs in Boston only rose 6.6% between 1970 and 2000. Over the same period, average house prices in San Francisco rose 270% while average home prices in Boston rose 120% (Glaeser et al., 2005). Rising land values and artificial restrictions on construction represented 75% of inflation in house prices (Glaeser et al., 2005).
Between the 1950s and 1990s, the median rate of new construction in metro areas also dropped from 40% to 14%. As I noted in a previous post, between 1975 and 2005 property values (both commercial and residential) increased 10x while land values increased 14x. Between 1975 and 2005 the value of developed residential and commercial property increased from $3.7 trillion to 34.7 trillion (a 10x increase) while the land value of those properties climbed from $735.8 billion in 1975 to $10.8 trillion (a 14x increase).
In December 2005 to January 2006 the Lincoln Institute estimated location value accounted for 31% of total real estate value in the US. 2005–06 is when the U.S. reached a 33 year peak in new home starts; after the housing crash of the great recession the U.S. never came close to having enough new home construction to keep pace with population pressures from immigration, illegal migration and continuing urbanization.
The result is that today only 2 metros have a housing market that is affordable to households in proportion to their position in the income distribution: Youngstown and Akron, Ohio where median single family houses are $175K and $240K respectively. Even Youngstown has a 4,000-unit housing shortage for households making less than $25K ($12.50 an hour over a 40 hr week) and has a 7,500 person waiting list for subsidized rentals so in reality there are no metros where all income levels can afford housing.