New Studies Explain Why Housing Is So Expensive And Why It Is So Hard To Make It Cheaper

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Rear view of an embraced couple looking at built structure from outside. Copy space. getty Most Americans—more than 80% in a recent National Association of Home Builders poll—think housing affordability is a problem in their community. Yet despite the widespread agreement that housing is too expensive, it remains difficult for developers to build the housing needed to increase affordability. A few studies in the recent issue of the Journal of Economic Perspectives shed some light on what communities must do to reduce the price of housing and why doing what needs to be done is so hard. The first study examines perhaps the most logical cause of high housing costs—high building costs. The authors, Brian Potter of the Institute for Progress and Chad Syverson of the Booth School of Business, note that building costs account for 60% to 70% of the full cost of bringing a new house to market. If building costs have increased over time, then it would not be surprising to see housing costs go up, too. To track costs, they use housing cost data from RSMeans, a company that has been tracking cost data for the construction industry since the mid-20th century. They find that while building costs have exceeded overall inflation since the mid-1970s, these costs generally do a poor job of explaining housing prices. In a variety of cities over different time periods, growth in housing prices is substantially larger, and sometimes smaller, than growth in building costs. The table below shows the ten cities with the largest deviations in price from building costs over five-year intervals from 2010 to 2024. For example, over the 2020 to 2024 period, housing prices in Miami, FL grew 8.6% faster than building costs, while in Lake Charles, LA prices grew 2.8% slower than building costs. Price-cost deviations…