Friday, January 19, 2024

Post 42: The Housing Crisis -- Nuts and Bolts

In the late 1940s, our country was suffering from one of the worst housing shortages in our history. The depression decade of the 30s saw an extremely low level of investment in new housing due to lack of demand and capital, and the World War II years of the early 1940s saw construction investment funds redirected toward the war effort. Consequently, soldiers returning from overseas who wanted to get married and start a family had precious few housing options to choose from. 

At the time, economic prospects were generally good. America was the only world power with a fully functioning manufacturing and transportation industry. Consumer optimism was high, employment was strong, and returning servicemen had access to the benefits of the Servicemen's Readjustment Act of 1944 (commonly known as the G.I. Bill). These benefits included low-interest, zero-down-payment mortgages for purchasing a home. The problem was finding a home to buy at a reasonable price. 

Across the country, homebuilders stepped up to the challenge. One of the most innovative was Levitt and Sons who built three massive residential developments in the New York City - Philadelphia area, and later spread to 13 other states. Prior to the war, the firm built primarily high-end houses for wealthy clients, but during the war one of the sons constructed barracks for the military and learned techniques for mass production of standardized housing. 

In 1947, Levitt and Sons bought 4,000 acres of farmland in the middle of Long Island, New York (roughly 25 miles from downtown Manhattan) and started building small, highly standardized homes designed and marketed for young families. Known as Levittown, the development initially offered only one house design – an 800-square foot Cape Cod. The house had two bedrooms, one bathroom and a kitchen with modern appliances, but it had no basement, no garage and the attic was unfinished. The houses were boxy and plain, with shutters on the front windows as the only ornamentation. They were, however, extremely affordable with prices starting around $7,990, or roughly $112,000 to $200,000 in current dollars depending upon which inflation index is used. 

Hundreds of buyers lined up to sign sales contracts when the development first opened up. In the next few years, other models were added with more room and more features, but the focus remained on building a standardized product at a low price. Eventually, Levittown, New York contained more than 17,000 houses and nearly 80,000 residents. 

Levittown, New York

The Levitts kept costs low by using an assembly line approach to housing construction. The process was broken down into 26 steps that were virtually identical from house to house to house. Construction teams were trained on one specific step and would repeat that step from one home to the next. Some components such as stairways and cabinets were prefabricated at a Levitt-owned factory and shipped to the site. To save on costs and simplify logistics, the company built a concrete plant in New York and bought a lumber mill in California so that wood could be custom cut to the required sizes. The process became so efficient that dozens of homes were ready for occupancy each week. [1]

There were disadvantages to the Levittown approach, of course.  Many considered the end result to be boring and somewhat soulless.  Pete Seeger famously sang a song titled “Little Boxes” critiquing this approach to urbanization:

There’s a green one and a pink one

And a blue one and a yellow one

And they're all made out of ticky-tacky

And they all look just the same

My point is not to necessarily advocate a return to Levittown-style housing but to illustrate that there are ways to reduce housing construction costs if we are willing to think creatively.  My goal with this post is to look at possible techniques for reducing construction costs and increasing production quantities.  As I pointed out in my previous post, the current housing crisis is particularly acute with respect to moderate cost housing options.  While building expensive housing does help the situation by increasing total supply, a more effective approach would be to build moderate cost housing so that the “trickle down” impact on the market can reach low- to middle-income families more rapidly.  Consequently, I will focus on techniques that are most applicable to moderate cost housing.

Some Caveats 

I will not, however, directly address the problem of housing the homeless or those households living in extreme poverty.  It is my opinion that neither the private sector nor local governments can effectively create long-term housing solutions for that segment of the population without significant financial assistance from either the state or federal level – and that is a topic for another post.

I am also not going to address the rehabilitation of the existing housing stock even though this is probably the most effective way to provide housing at a relatively modest cost.  Almost every major city has a large number of housing units that are slowly decaying into a blighted condition or are already so blighted that they need to be demolished.  Allowing houses to become so deteriorated that they must be torn down is a travesty that cities should do all they can to avoid.  Rehabbing an existing house can extend its useful life for decades and provide a safe and reasonably efficient dwelling at a cost that will almost certainly be well below the cost of building something new.  But again, I will save that topic for another post.

Finally, I am looking for ways to reduce the cost of residential construction but I am not going to advocate for housing that is inexpensive because it is badly built.  Durability and energy efficiency are sources of long-term value and should not be compromised in order to save a few thousand dollars on the initial sales price.  There is, however, a point of diminishing returns.  New code requirements for additional safety features or additional energy efficiencies should have their cost evaluated against the anticipated impact on the eventual residents before being adopted.  There are organizations, for example, who use climate change to argue for extreme energy efficiency requirements to the detriment of affordable housing production.

The Current Home Building Process

Like Levitt and Sons, there are large homebuilders that control the entire housing process from buying the land, to installing the basic infrastructure, to building the house, to marketing the final product.  However, it is more common, particularly in the midwest, for the process to be split between a variety of smaller businesses.  A Developer typically buys the land and oversees the creation of finished lots that are ready for a home.  The lots are typically sold to a Builder/General Contractor who oversees the construction of the home and its sale to the final owner.  Most of the work is actually done by a variety of Subcontractors who typically specialize in a portion of the construction process and might work for several different builders.

This diversified approach spreads the risk of a relatively cyclical market among all of the participants, each of whom can expand or contract as needed, or who can shift temporarily to another aspect of the construction industry during a housing downturn.  The end result is flexible and adaptable to shifts in housing demand.  Since each business entity is relatively small, the barriers to entry tend to be low which means that new players are frequently entering the market, and less efficient players go out of business or reform themselves to focus on a different niche.  This is particularly true for subcontractors who use relatively inexpensive tools and equipment, buy materials on an as needed basis, and frequently employ recent immigrants who are willing to work for relatively low wages.

The actual technique that is used for building virtually all new homes or apartments is known as wood frame construction.  The basic principles of this construction approach are widely understood, relatively easy to learn, and flexible enough to build anything from a modest cottage to an elaborate mansion.  The other major advantage of wood frame construction is that the resulting home can be easily expanded or remodeled.  In fact, if you were to visit the original Levittown today you would find few of the simple, 800-square-foot Cape Cods.  Most of the homes have additions or have been extensively remodeled so that the “tract housing look” is largely gone and current sale prices are typically between $500,000 and $750,000.

The Factory Approach

The fractured nature of the current approach, however, slows down the entire process and creates numerous inefficiencies.  In addition, on-site construction – which takes place in all kinds of weather – leads to less precision, wasted or damaged materials, and mistakes due to poor communication or coordination.  Most site-built homes are plagued with unintended gaps, door and window openings that aren’t quite the right size, nooks that are missing insulation, and walls that aren’t completely square. Caulk, shims and drywall cover a multitude of sins.  Consequently, there have been calls throughout the past 60 years for a more “modern,” assembly-line approach to home construction.  Surely, a vertically integrated and automated factory could create housing units that were both better and cheaper.

The most vigorous attempt to realize the potential of factory production was a 1969 HUD-funded program called Operation Breakthrough.  The intent was to transfer advanced manufacturing technology into an industry that was perceived to be resistant to change, and to push local and state governments into standardized building regulations that would make mass produced units easier to deploy.  The first phase was to select promising construction technologies.  A request for proposals was sent to nearly 5,000 companies across the U.S. and Canada.  Over 600 responses were received, and 22 were selected for prototype development.  Some of the selected companies were experienced builders such as Levitt Technology, a spinoff of Levitt and Sons, who proposed building “box modules assembled from plastic wall panels.”  Others were huge national manufacturers with advanced technology but little home building experience such as Alcoa, General Electric, Boise Cascade and Republic Steel.

Modular housing built as part of Operation Breakthrough

Operation Breakthrough was conceived and implemented during the height of the Apollo space program with the assumption that the processes behind that success could be applied to the housing industry.  The head of the program was Harold Finger, a former NASA administrator and literal rocket scientist.

The second phase was prototype construction at nine sites across the country.  Eventually, 2,800 units were built, but with 22 systems spread across a variety of locations none of the manufacturers could come anywhere close to the volume needed for the expected economies of scale.  Consequently, the process was heavily subsidized by the Federal government.  Prototype construction was completed by 1973 and while many of the participants started preparing for full scale production, others were disillusioned by the difficulties they encountered and either left the program or went bankrupt. 

The final phase was to build 25,000 federally subsidized units for the general public.  By 1976, 18,000 such units had been built through the program, and several thousand more units using Breakthrough designs were built outside the program.  Excitement for the program, however, quickly faded away.  Public response to housing made from mass produced modules was lukewarm at best and the hoped for cost savings proved elusive.  Only a handful of participants continued production after subsidies ended and none of the systems are in production today.  In the end, Operation Breakthrough did not produce any system that was clearly superior to conventional construction, although efforts to standardized local regulations did make substantial progress and are still providing benefits today. [2]

There are efficiencies to be gained by factory-built modular housing, but one of the key problems is that any large-scale manufacturing business is very capital intensive and involves hiring a large, permanent workforce.  That means that success depends on having a market that can absorb a steady stream of a very standardized product – something that the cyclical housing market prone to the changing whims of the public has a hard time guaranteeing.  In addition, the transportation of large housing modules is complicated and expensive, meaning that the necessary demand needs to be relatively close to the factory.

Still, the dream lives on and several high-tech startups such as Blokable and Factory_OS are trying to prove that factory-built modular housing is a viable solution for housing production.  For the most part, these companies are located in areas (such as California) where housing demand is enormous and prices are high.  Companies that focus on multi-family housing where repetitive unit designs are the norm and are located where demand is consistently high may indeed succeed.  It is also clear, however, that factory production of standardized modules is not the panacea that it was once thought to be.

The Humble Mobile Home

If any form of housing needs a good PR campaign it would be the mobile home – or as the industry strongly prefers, the manufactured home.  This form of housing is actually experiencing a bit of renewed popularity, primarily because of the expense of other options.  Total shipments have roughly doubled over the past 10 years to about 100,000 units annually.  However, this is still just a third or less of yearly shipments during much of the 1980s and 90s. [3]  There is a stigma attached to living in a manufactured home despite the fact that new units are safe, full of modern conveniences, and reasonably well-built.

Manufactured housing is, in fact, required to be mobile.  It is built on a frame (or chassis) which can be lifted onto a trailer or mounted with wheels so that it can be towed from place to place.  The reality, however, is that once a manufactured home is towed from the factory to its first occupied location it very rarely moves again.  Most units are affixed to a foundation and connected to utility lines such as water, sewer, gas and electricity in a manner not too dissimilar to a site built home.  There are, however, important distinctions.

First, manufactured homes are exempt from local building codes.  They are built to a code established by the federal Department of Housing and Urban Development in 1976, and updated periodically to keep up with modern building materials and practices.  This dramatically simplifies the process of building a standardized product and shipping it to any community.  It has led, unfortunately, to a perception of being distinctly inferior to site-built housing in terms of quality, which in turn has led to not-so-subtle forms of discrimination in terms of development approvals by local governments.  A more fair assessment would be that a manufactured home is roughly equivalent in quality and energy efficiency to a site-built starter home.

Source:  Clayton Homes

Second, manufactured homes have historically been placed on land that is leased from the owner of a “manufactured home community” even if the unit itself is typically owned by the occupant.  This practice goes back to the early assumption that the unit would be moved periodically from place to place, which meant that owning land was a hassle to be avoided.  Now that it has become clear that units rarely move, more manufactured homes are being placed on land owned by the occupant of the home.  Manufactured home communities are still prevalent, however, and they have a distinctive look and feel that is different from a standard subdivision.

Third, manufactured homes historically have not appreciated in value at the same rate as conventional homes, and can fall in value even if they are reasonably well maintained.  This has made traditional lenders reluctant to finance manufactured homes in the same way as conventional homes.  As the quality has improved and homes are increasingly placed on individually owned lots, this practice is beginning to change.  In many cases, federally insured loans are available through traditional mortgage lenders.

Finally, manufactured homes just look different from site built homes which has made the stigma difficult to shake.  They are built as long, skinny modules that are typically 14 to 16 feet wide and placed as either a single unit (800 to 1100 square feet in area) or as a “double wide” in which two units are joined side by side (1600 to 2500 square feet in area).  The roof line is much flatter than a typical site built home, and porches, decks and additions are often nonexistent or minimal.

Still, they are a reasonably affordable form of housing that should be more widely utilized than is currently the case.  Typical costs (before transportation, land purchase, and utility hook-ups) range from $80,000 to $200,000 depending upon size, interior finish quality, and customized features.  In communities where land costs are low, this means that a manufactured home might be $50,000 to $100,000 less expensive than a conventional site-built home of a similar size.

Manufactured Components

The final category of construction technology that has a reasonable shot at impacting housing cost and volume is the factory assembly of housing components, sometimes referred to as panelization.  This approach is already widely used for select components such as engineered floor joists, roof trusses, cabinets and countertops which are rarely built on-site and have simplified the traditional construction process.  There are some companies, however, which have taken this approach to the point where the entire structure (excluding the foundation), is built at a factory as floor, wall and roof panels, loaded onto flatbed trucks, and then assembled at the home site in a matter of a few days.

The end result is not a fully completed house.  Instead, it is the shell of a house that is structurally complete and sheathed on the outside surfaces so that it is reasonably weather resistant.  The work that still remains includes exterior siding and roofing, interior plumbing and electrical work, and final finishes such as drywall, cabinets, countertops, painting and more.  That work, however, can be done in an environment that is largely protected from the weather, and by the types of subcontractors that are already common in residential construction.

Source:  Davis Frame Company

Like factory built modular housing, panelized housing has the advantages of factory precision, an indoor working environment, and the ability to order materials in large quantities at discounted costs.  Home designs can be computer optimized for efficient use of materials, structural strength and energy conservation, and can be scaled from a small bungalow to an apartment building.  The end product can be delivered more rapidly, be of higher quality, and (at least in theory) be 10 to 20 percent less expensive.

Panelized housing is different from modular housing, however, in several important ways.  To begin with, the production factory can be significantly smaller in size and less elaborate in the degree of automation.  This means that capital costs are substantially less for the same volume of housing output.  Secondly, transportation is far less complicated and expensive because the product being moved is far less bulky and fragile.  At the construction site, unloading and placement can be done with a forklift or small crane versus the large cranes that are needed to unload and place housing modules.

Finally, because the finished surfaces and interior details are completed on-site in a largely conventional manner, the final product looks like a traditional house and can be more readily customized to the needs of the buyer.  This minimizes any stigma associated with “cookie cutter” factory production.


The bottom line is that there are construction techniques that can speed the production of housing and lower its cost compared with traditional construction practices.  There are not, however, any “magic bullets'' that will instantly solve the housing affordability crisis.  And despite the occasional media hoopla, 3-D printed homes, shipping container conversions, or similar trendy ideas will not revolutionize the housing production process any time soon.

Even the best of the construction techniques discussed in this article are likely to have only a modest impact on the final cost.  Modular housing can be effective particularly for multi-family projects in areas with high housing demand.  Manufactured homes can be a moderate cost solution in a variety of locations if government approvals can be obtained, but are probably best suited to small and mid-sized cities where land costs are low and conventional development expertise is focused on the high end of the market.  Panelized housing has the greatest potential impact but only where there is a market that can absorb a steady flow of housing units without significant interruptions.  

To really achieve significant cost savings, the construction techniques discussed here need to be paired with a dozen other small improvements in the way we design, approve, finance and own our country’s housing stock.  Big improvements will not be realized through a single dramatic change, but through numerous small adjustments made by virtually all of the players in the housing industry.  Check back next month for the final installment in the Housing Crisis series.


1. Emory University:  The Architect + The City; “Developing the American Dream: A Comparison of Levittown, New York and Celebration, Florida; Spring, 2018;

2. Brian Potter; “Operation Breakthrough:  America’s Failed Government Program to Industrialize Home Production”; Construction Physics; February 2021;

3. The Federal Reserve Bank of St. Louis; “Total Shipments of New Manufactured Homes;” January 2024;

Saturday, December 16, 2023

Post 41: The Housing Crisis -- Defining the Problem

 I have lived in the same house for more than 35 years.  It meets all of my needs and it is located in a good neighborhood with convenient access to the places that we go on a regular basis.  More importantly, the unpaid balance on my mortgage is less than a third of the value of the house and my interest rate is just over three percent.  Am I anxious to move?  Not in this housing market.

On almost a daily basis, the mainstream press puts out a new variation on the “housing crisis” story.  The current market is described in cataclysmic terms and statistics are quoted that show housing costs are at unbearable levels.  There are, in fact, problems with both housing affordability and availability but most articles seem more focused on “the sky is falling” story lines rather than a clear analysis of the problems or any logical strategies for solving the problems.  My goal with this post, and the subsequent ones that follow, is to sift through the mountain of housing data to find the nuggets of information that are actually useful in understanding the dynamics of the current housing market, and then to lay out some suggestions for making things better.

To begin with, many articles focus on just the total cost of housing because total cost is an easily understood statistic.  And yes, the total cost of housing has risen dramatically in recent years.  From the first quarter of 2020 through the fourth quarter of 2022, the median sales price of new homes sold in the U.S. rose 46 percent from $329,000 to $479,500. [1]  The problem with this type of statistic is that the average hides a great deal of variability, total price hides the fact that there are multiple factors at work, and using the cost of new homes ignores the reality that most people buy an existing home rather than a newly built one.  

For example, the use of a national average obscures the great degree of variability between states (and even within states).  If you look at the typical home values by state according to Zillow, homes in California are more than triple the cost of homes in Ohio, Iowa or Kansas.  In fact, virtually the entire midwest has average home values well under $300,000 compared with $760,000 in California, $607,000 in Massachusetts, or $586,000 in Washington. [2] 

Exactly how bad is it?

Regardless of location, however, the point remains that housing costs have risen more rapidly than income to the point where finding appropriate housing at an affordable price is challenging for many households.  To really understand how bad it is, I’m going to look at the issue from a variety of perspectives.

Let’s start with a hypothetical family in Columbus, Ohio, that earns the median income for the area ($75,800) and would like to buy a house.  If we start with the common practice that a mortgage payment should generally not exceed 35 percent of monthly gross income, that means that the household has $2,110 per month to work with. [3]  Let’s assume that $610 per month would go toward escrow for property taxes and insurance, that leaves $1,500 for principal and interest.  At current interest rates of 6.75 percent, that means that the maximum loan amount would be roughly $231,000.  Unfortunately, the median priced home for sale in Columbus is approximately $328,000 leaving a gap of almost $100,000.  This means that our hypothetical household has to either (1) make a huge down payment, (2) pay a higher portion of income for housing and economize elsewhere, or (3) start looking for houses much nearer the bottom end of the market.  Families making substantially less than the median income are likely limited to just rental options.

Columbus is one of the more affordable metro areas in the country with a ratio of median housing cost to median income of 4.3 (Kansas City and Chicago are at 4.4, Minneapolis is at 4.2 and Indianapolis is at 4.1).  This is well below the national average of 5.8 and much better than several California cities where the ratio is 9 or above.  The national average, however, is 50 percent higher than it was in 2000.  The net effect of housing cost rising faster than income is that more and more households are priced out of the home ownership market. [4]

A second way to look at this issue is to compare the change in home values with the change in income over time.  According to data from the Federal Reserve, the median value of single family homes has increased more than twice as much as household income since 2000.  If home prices had grown at the same rate as income during that time period, the median home value would be roughly $294,000 – about 32 percent less than the 2022 value of $433,000.

A broader measure of housing affordability is the percentage of households that are considered “cost burdened” with respect to their housing expenditures.  According to the Joint Center for Housing Studies at Harvard University, a household is considered cost burdened if it spends more than 30 percent of its gross income on housing (either rental or owner occupied) and is severely cost burdened if it spends more than 50 percent. [5]

The impact of being cost burdened with respect to housing differs with household income.  An affluent family might be cost burdened if they opt for a lavish residence, but their ability to meet other budgetary needs is unlikely to be severely compromised.  A poor household, however, is likely to be cost burdened because no other acceptable options exist, and the ramifications of spending 40 or 50 percent of income on housing is that cutbacks have to be made on food, transportation or medical costs.  High housing costs can easily keep households living paycheck to paycheck – thus making wealth building impossible.  This, in turn, perpetuates poverty and undermines the American dream of being upwardly mobile due to hard work and ingenuity.  

The table below shows the percentage of all households that are considered cost burdened in three representative midwestern metropolitan areas.

Percent of All Households that are Cost Burdened


Severely Cost



Kansas City









What is more remarkable, however, is when this same measure is applied only to households that rent.  Housing costs tend to be flat over time for people who own their home, but housing costs escalate over time for households that rent.  Consequently, homeowners may grow out of being cost burdened as their incomes rise, but renters are much less likely to accomplish the same thing.

Percent of Rental Households that are Cost Burdened


Severely Cost



Kansas City









The difference is stark and it underscores the point that the housing affordability crisis is more problematic for renters than it is for homeowners.  The headlines may focus on the cost of buying a home but the issue is far more severe for those whose only choice is to rent.  And the lower the household income, the higher the probability of being cost burdened – to the point where more than 70 percent of poverty-level households are severely cost burdened.  Eventually, of course, you reach the level of the more than 600,000 people who are homeless on any given night.  All of the cost burdened numbers, by the way, are record highs for as long as the Census Bureau has been tracking this statistic.

Housing Cost Components

The statistics above should make it fairly clear that there is a housing affordability problem.  But none of those statistics answers the question of why housing has become so expensive.  To figure that out, a much deeper dive into the data is required and it starts with a look at the various factors that determine housing cost.  Understanding the impact of each cost component is the first step toward developing a rational strategy for addressing the problem.

Cost of land.  To anyone who has driven through the deserts of the southwest, the farm fields of the midwest, or the wilderness forests of the far north, it may seem like this country has so much vacant land that the cost should be nearly zero.  That assumption, however, would be wrong because the vast majority of people don’t want to live in the wilderness.  They want to live near their jobs, their friends and the attractions of major cities.  Land in cities is expensive for reasons of supply and demand.  When it comes to land for housing, people generally want the location of their residence to be sheltered from the hubbub of commercial and industrial activities, but reasonably near their place of work, the places they shop, their doctor’s office, their church and a dozen other places.  It turns out that not much land meets all those criteria which means supply is low relative to demand.

It also turns out that getting land ready for housing development involves a lot of grading and infrastructure construction which is expensive.  Some cities used to help developers out by allowing much of this cost to be covered by a municipal bond which would be paid back through special assessments tacked on to the property taxes for each new lot.  That turned out to be bad for the financial health of cities, so now most developers have to front these costs themselves, meaning that it gets included in the cost of each developable lot.  The net result is that the cost of land can easily end up being 15 to 25 percent of the final cost of a new single-family home.  

Nationwide, the average cost for a finished lot for a new home is roughly $55,000.  This is up from approximately $35,000 twenty years ago. [6]  If you adjust for inflation, this means that land costs have been relatively flat.  However, the nationwide average hides a great deal of variability once again.  In major metropolitan areas or popular resort areas the costs can easily be two to five times greater, and in extreme cases eight to ten times greater.  If a typical suburban lot in a nice subdivision is $125,000 to $150,000, it isn’t surprising that the resulting house will be $500,000 and up.  The bottom line is that the cost of land is a major component in the cost of housing, although it may not be particularly at fault for the recent run-up in housing costs.

Direct construction costs.  This is the housing cost category which is probably most obvious and, as it turns out, one of the primary factors responsible for recent housing cost increases.  The COVID-19 pandemic disrupted supply chains, shipping costs, labor availability, and manufacturing practices which ended up causing the cost of construction to skyrocket.  According to data from the Federal Reserve Bank of St Louis, the Producer Price Index for Building Materials and Supplies (2004 = 100) increased from approximately 155 in April of 2020 to 260 in March of 2022 – an increase of 67 percent in two years. [7]

The index has since moderated to around 210 but that is still a 35 percent increase over three years.  It is also not clear how fast the declining prices are showing up in finished construction costs quoted by builders.  A volatile market may have made builders prone to overestimate costs so they don’t get burned by another price spike.  The bottom line is that construction costs exploded during the pandemic and haven’t fully returned to normal levels.  Whether they will in the future is unknown at this point but the index has been flat (rather than declining) for the past year or so.

Building and development fees.  Virtually every city in the country issues a building permit for new construction and charges a fee for the plan review and inspection work that goes along with the permit.  This permit fee has been around for decades and rarely exceeds one percent of the ultimate price of the eventual structure – and so is not a major contributor to housing inflation.  However, there is another class of fee that is less universal but which is growing in popularity.  These charges, known generically as exactions or impact fees, can end up costing tens of thousands of dollars per housing unit which is not a trivial amount.

Impact fees first became popular in cities that were growing rapidly.  Growth, and especially rapid growth, brings with it the need to widen roads, build new facilities such as schools, parks and sewage treatment plants, and hire new police officers and firefighters.  Existing residents got tired of seeing their taxes go up to pay for these expenses that they attributed solely to new growth.  They argued that the financial impact of new growth should be borne by the new residents rather than by existing residents.  Thus, the creation of “impact fees” which were designed to have each increment of new growth (each residence, each shop, each office building) pay for the anticipated financial impact that it would generate.  Initially, impact fees were limited to a few hot-button issues such as traffic improvements or new schools, but they have proved so lucrative that they have been expanded to a wide array of municipal infrastructure and services.

Not every city charges impact fees and the amount charged varies widely from city to city.  As cities become more strapped for cash, however, impact fees can become an enticing new source of revenue – one that is typically not limited by state caps on property taxes or sales taxes.  The bottom line is that development fees can have an impact on housing costs and in some locations have undoubtedly contributed to the escalation of housing prices.

Profit, overhead and commissions.  This cost category is a potential bright spot in the fight against high housing costs, although probably not enough of a bright spot to make a major difference.  Profit and overhead for builders seems to have remained relatively flat as a percentage of total housing cost.  There can be exceptions, of course, but generally there is enough competition in the construction industry that profit margins rarely get out of control.

The bright spot comes with respect to realtor commissions.  A recent court verdict and a slew of pending court cases threaten to disrupt the commission rates that have historically been locked in place by the real estate industry.  Technology has broken the stranglehold that realtors had on market information and transaction processing, but commission rates have stayed at high levels (typically around 6 percent of the sale price).  If the current court ruling stands, the cost of real estate services could be reduced by up to half.  This may take several years to play out, but my guess is that the role of the realtor is likely to follow the path of the stockbroker and travel agent.

Financing costs.  Over the past two years, no component of housing cost has had as much of an impact as the interest rate charge for a typical mortgage.  As recently as January of 2021, the average 30-year mortgage rate was around 2.65 percent.  In early November of 2023 it peaked at 7.75 percent. [8]  To put it in dollars and cents, the payment for principal and interest on a $300,000 loan amount would have gone from $1,209 to $2,149, an increase of 78 percent.  No wonder housing affordability has taken a hit in recent months.

The good news is that mortgage rates are already showing signs of moderating and have dropped below 7 percent.  With inflation appearing to be somewhat under control, many experts believe that mortgage rates will continue to drop.  It is important to point out, however, that the sub-3 percent interest rates of a few years ago were a historical anomaly and are not likely to be repeated in the near term.  Over the past 30 years, the average rate for a 30-year, fixed rate mortgage is approximately 5.6 percent and that level is probably a reasonable target for the next couple of years.

Taxes and insurance.  The final component of housing cost includes two factors that vary widely from place to place.  Both costs are typically rolled into the mortgage payment so many people aren’t really aware of how much they pay, but the amount is a significant contributor to total housing cost – often in the neighborhood of 20 percent of the annual total.  Property taxes as a percentage of house value tend to be relatively stable, but since housing values have been rising rapidly the actual dollar amount has also been rising.  This is often seen as a source of cash flow stress for homeowners on a fixed budget, although it does mean that their total wealth is likely increasing.

Insurance costs have traditionally been relatively stable as well, although recently costs have been rising more rapidly – by double-digit percentages in some cases.  States seen as being at high risk for natural disasters such as hurricanes or wildfires have been particularly hard hit in the past few months.  In California and Florida several insurance companies have gone bankrupt and several others have decided not to write new policies because insurance rates have not been allowed to rise rapidly enough to cover potential claims.  The bottom line is that insurance costs are likely to keep increasing although homeowners that avoid high risk locations and take steps to make their homes less prone to damage should be able to keep increases to reasonable levels.

Supply and Demand

While increases in several housing cost components – particularly land, construction costs and financing – explain a great deal of the housing affordability problem, there is another issue that has generally received less publicity.  Like any commodity, the cost of housing is affected by the laws of supply and demand.  In the last couple of years in particular, the balance between supply and demand has gotten out of whack for a couple of different reasons and the result has been an under-supply of new housing units which leads to price inflation.

The basis for demand, of course, is the number of households seeking a place to live.  In the long run, the growth in households is based on the growth in population but in the short run other factors can come into play.  For example, following the Great Recession many young adults did not form households at the expected rate.  They moved back in with their parents or shared housing with other young adults.  The share of the population aged 25-34 heading a household fell from more than 45 percent in 2006 to roughly 40 percent in 2017.

That trend has sharply reversed over the past five years and the result has been an unexpected surge of new households seeking housing.  For example, for the five-year period from 2011 to 2016 the expected number of new households based solely upon population change was 1.35 million households per year.  The actual number was 774,000 annually, a deficit of 579,000 households per year.  From 2016 to 2021, the expected number of new households was just under 1.1 million households per year but the actual number was over 1.7 million households.  That is an annual surplus of 640,000 households, or a swing for the 10-year period of 1.2 million households. [9]

Unfortunately, the supply side of the equation has not kept pace, particularly with respect to single family homes.  Since peaking at the end of 2020 at an annual rate of 1.3 million housing starts per year, single family home construction plummeted to a low of 820,000 new starts by the end of 2022.  New home starts have bounced back somewhat over the past few months but have still not gotten back to the historical average.

At the same time, the sale of existing homes has fallen as well.  Homeowners with mortgages in the 3 to 4 percent range have been reluctant to give those up for a new location with a mortgage at double that rate, even if the inclination to downsize or relocate is strong.  Consequently, the supply of homes for sale is near record lows. [10]

Homes For Sale and Months of Supply

The number of existing homes available for sale remained near record lows reached during the pandemic. In March 2023, there were just 970,000 homes for sale, up from 930,000 at the same period in 2022 but well below the 1.67 million homes available for sale in March 2019. Even after accounting for the declining number of sales, just 2.6 months of available supply were available on the market, up from 2.0 months one year earlier but well below the 6.0 months considered a balanced market.
Source:  Joint Center for Housing Studies of Harvard University


Multi-family construction has stayed strong until recently which has helped bridge the gap in terms of available housing units.  The problem is that for both single-family homes and multi-family apartment projects, new construction has focused on the high end of the price spectrum.  Home builders are finding it more lucrative to focus on large, elaborate homes rather than starter homes, and multi-family developers are finding it far easier to get high end projects approved for construction as opposed to moderately priced apartments that generate NIMBY opposition.  Thus, supply is tight, demand is high, and the housing being built isn’t focused on the low- and moderate-income households where housing choices are most limited.


Our country has a housing affordability and availability problem.  This isn’t the first time this has happened and it surely will not be the last, but that doesn’t make it any easier to tolerate for those caught in a housing crunch.  The side effects of this housing crisis  ripple throughout our economy and society.

In summary, there are two things to keep in mind.  First, the housing crisis is not just about young professionals who are not able to buy a house.  Yes, that problem exists but the housing crisis extends all the way up and down the economic spectrum and the lower you go the more severe the problem becomes.

Second, there is no single cause for high housing costs.  It is not just high interest rates or high building material costs that are to blame.  There are many factors contributing to high housing costs which is why the problem is so difficult to solve – there is no single fix. Because the problem is difficult, the housing industry has reverted to what is easiest - building high end single family homes and large apartment complexes for affluent households.

I think there is a decent chance that housing costs will actually moderate over the next 12 months.  We may be in a bit of a housing bubble at the moment (but not like 2008 - 2010) and that bubble may be starting to pop.  I don’t believe, however, that any bubble popping will really solve the current housing crisis.  There are significant structural changes that need to be made to the housing industry to even come close to giving most households a reasonable selection of affordable housing options.  What are those changes?  Check back next month for the second part of this series!


1. Jack Caporal; “Average House Price by State in 2023”; The Ascent; November 2023;,when%20the%20median%20was%20$329%2C000.&text=MEDIAN%20SALES%20PRICE%20OF%20HOMES%20IN%20THE%20U.S.

2. Op. Cit. Caporal.

3. Dori Zinn, Josh Patoka; “What Percentage of My Income Should Go To My Mortgage?”; Forbes Advisor; June 2023;,earn%20%247%2C000%20every%20month%20in%20gross%20household%20income.

4. Jaime Dunaway-Seale; “Home Prices Are Rising 2X Faster Than Income”; Home Bay; November 2023;

5. “Renter Cost Burdens Reach Record Levels”; Joint Center for Housing Studies of Harvard University; 2023;

6. Natalia Siniavskaia; “Lot Values Set New Records”; National Association of Home Builders; September 2022;

7. “Producer Price Index by Industry: Building Material and Supplies Dealers”; Federal Reserve Economic Data; St Louis Federal Reserve Bank; December 2023;

8. “30-Year Fixed Rate Mortgage Average in the United States”; Federal Reserve Economic Data; St Louis Federal Reserve Bank; December 2023;

9. Daniel McCue; “The Surge In Household Growth and What It Suggests About the Future of Housing Demand”; Joint Center for Housing Studies of Harvard University; January 2023;

10. “The State of the Nation’s Housing 2023”; Joint Center for Housing Studies of Harvard University;

Special thanks to Rose Saracini for her insights into the mortgage industry and current lending practices.