Why Doesn’t the Housing Market Produce More Housing?
Introduction to the market dynamics that limit housing production and drive up home prices and some of the factors causing this problem
Unless you’ve been living under a rock, you know that—with a few notable interruptions—rents and home prices in many regions have been rising faster than incomes for the last few decades. This is true not only in places like San Francisco, Boston, New York, and Los Angeles, but also in Miami, Minneapolis, and Pittsburgh. As a result, housing is taking a bigger and bigger chunk of our incomes.
To understand why this is happening, we need to review the basic laws of supply and demand
In a well-functioning market, increases in demand are met with increases in supply that moderate price increases. For example, let’s say Starbucks develops a wildly popular new chocolate drink. In the short run, the increased demand for cocoa may lead prices to go up. Eventually, new suppliers will emerge to supply additional cocoa, moderating prices. In the long run, prices will settle at a new equilibrium.
The housing markets in high-cost cities, towns, and counties don’t work this way. In many cases, increases in demand are not met by increases in supply. That means rents and home prices rise much faster than incomes.
There are a lot of reasons for this. First of all, housing markets are very different from the markets for cocoa and other consumer goods. New houses and apartment buildings last a long time; they are expensive to produce and often command a premium relative to older homes; and housing costs reflect more than just the features of the unit itself, but also the features of the neighborhood. These include things like schools, access to jobs and transportation, access to arts and cultural amenities, and safety.
It also takes time to produce new housing in response to an increase in demand. And new construction requires land, which is in limited supply. As Will Rogers famously said, “Buy land. They ain’t making any more of the stuff.”