During the war of 1812, Commodore Oliver Hazard Perry sent a victory message to his boss, General William Henry Harrison, which contained the line: “We have met the enemy and they are ours.” In more recent times, that message has been turned on its head (most famously by the cartoon character Pogo) to indicate a situation in which we are our own worst enemy. “We have met the enemy and he is us” pretty accurately describes the housing affordability dilemma that we are currently facing.
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| Commodore Perry |
It would be nice to have someone or something to pin the blame on, especially if that could lead to a quick solution. Alas, that is not the case. The reality is that there are numerous contributors to high housing costs and nearly all of them exist because they support some other laudable goal, because of some human foible, or because of some systemic factor that is beyond local control. There is no quick fix, there are only difficult trade-offs. My goal with this article is to make the trade-offs clear in preparation for next month’s post which will suggest some possible paths forward.
In last month’s post, I tried to outline the scale of the problem, gave a brief overview of the history of housing finance, and explained why Wall Street bankers or federal housing agencies are unlikely to lead the charge on reducing housing costs. To be clear, there are only two ways to close the housing affordability gap: significantly increase household income (particularly for low-income and middle-income families) or significantly reduce the cost of home ownership. As appealing as it might be, I’m going to ignore the first option as unrealistic and focus exclusively on ways to reduce the costs of housing production and ownership.
Contributing Factors
Housing costs have risen over the past decade because of a dozen different reasons, not just one or two. What is even more important to understand is that very few of these cost factors will be easy to reverse. They are either the result of other worthwhile goals that simply have the side effect of raising housing prices or they are so baked into our society or our systems that convincing people to change will be a long, hard slog.
I have outlined below what I see as the main factors, with a particular emphasis on those that I think are not given enough discussion in the popular media. High interest rates, for example, are repeatedly called out as the main affordability culprit even though current rates are fairly close to long term averages and only appear “high” in comparison to the unusually low rates that followed the 2008 financial crisis. Yes, they have contributed to the problem but they are just one piece of the puzzle. The list is not in any particular order and is not necessarily comprehensive.
Neighbors like us. The vast majority of people like living in neighborhoods where they are surrounded by people who are more or less the same as they are. We like to think of ourselves as open minded with respect to people from different backgrounds, but the reality is that most of us aren’t when it comes to where we live. We want neighbors who have similar economic resources, have similar commitments to home maintenance, and similar feelings on public behavior. We have outlawed provisions that were obviously racist, but there are dozens of subtle provisions in zoning codes, deed restrictions, and development practices that almost guarantee that neighborhoods have a high degree of homogeneity – particularly with respect to housing value.
To be blunt, people in an upper class neighborhood don’t want my middle class house next to theirs and people in my neighborhood don’t want a cheap house to be built nearby that might be occupied by a poor family. Large minimum lot sizes, big yard setback requirements, off-street parking requirements, expensive homes association dues, and similar actions all raise the cost of housing even if they are not technically necessary for high quality construction. Consequently, housing prices in “nice” neighborhoods are higher than they need to be and it is often difficult to find good locations to build modestly sized, affordable housing.
Energy codes. The building industry typically updates the model building codes every few years and cities typically adopt them with only minimal modifications. Over the last several decades, each revision has included stricter standards for energy efficiency. The latest code version has forced most builders to switch to 2 x 6 framing instead of the traditional 2 x 4 framing in order to make room for additional wall insulation.
In addition, new houses are required to be so air tight now that builders have to pump in fresh air and pump out stale air in order to meet air quality standards. During the winter, cold incoming air is warmed by the outgoing air (vice versa in the summer) using a heat exchanger which is a relatively new piece of equipment that was rarely seen in home construction even a few decades ago. No one disputes that energy efficient construction saves money on utility bills and increases comfort levels, but it comes at a cost that makes producing affordable homes more difficult. At what point are we energy efficient enough?
Lumber prices. Single family homes use a lot of wood and thus home prices are very sensitive to lumber prices. The cost of various wood products account for somewhere between six and ten percent of the cost of construction. Unfortunately, the process of harvesting timber, cutting it to useful sizes in saw mills, shipping it to distributors, and selling it to builders is lengthy and complex. As a result, the lumber industry has difficulty responding to demand surges, which means that lumber prices tend to jump up and down frequently in response to changing housing demand levels.
COVID caused all sorts of things to go wrong which resulted in lumber prices nearly quadrupling between 2018 and 2021. Things have settled down a bit since then but prices are still roughly double what they were 10 years ago – higher by a factor of nearly three compared with the consumer price index. Future prices may well trend up again as a result of Trump’s tariffs on Canadian lumber which are currently in the vicinity of 35 percent. Steps have been taken to increase domestic production but that will take years before the effects are felt.
Insurance costs. Buying home insurance is generally mandatory if you have a mortgage and is generally a good idea for most people regardless of how a home is financed. The monthly payment for insurance is almost always rolled into your mortgage payment which means that higher insurance costs effectively mean a higher cost for home ownership. Insurance costs have skyrocketed in recent years, with the national average increasing at roughly double the rate of inflation over the past four years. In some states, including several in the midwest, the increases have been much higher. The insurance industry blames more frequent disasters due to climate change, higher construction costs for repairs, and our tendency to want to live in places that are scenic but dangerous (in heavily wooded areas, near the ocean, near rivers, etc.). On a $300,000 mortgage, a typical increase in insurance costs over the past five or six years is equivalent to a roughly $13,000 increase in the price of the home.
Labor shortages. Over the past decade, there has been a growing problem with the construction labor market. Too few new workers are entering the construction trades to replace workers who are retiring or changing jobs. This problem is now being exacerbated by federal efforts to deport illegal immigrants, many of whom work in construction. The result is that builders are reporting widespread shortages in virtually all construction trades. [1] These shortages are lengthening typical construction times by roughly two months and causing builders to pay higher wages to retain workers. The net impact can be several thousand dollars added to the cost of a new home.
Fire safety codes. As with energy codes, fire safety requirements in local building codes have gotten increasingly strict over time. The result has been a steady decrease in fire fatalities (currently less than 3,000 per year). The latest push, however, is a relatively costly recommendation to install fire sprinkler systems in all residential construction, including single-family homes. This move is being opposed by home builders because of the additional cost – estimated at roughly $2 per square foot of floor area or $4,000 to $8,000 for a typical new home. Given that nearly 60 percent of home fire fatalities occur in houses where there is not an operational smoke detector (a $40 item), an argument can be made that further reductions in fire fatalities should focus on upgrading existing homes rather than making newly constructed houses more complicated and expensive.
Bureaucratic red tape. Forty or fifty years ago, cities generally embraced new residential development requests and there were often subtle (and not so subtle) subsidies given to builders to make the process as painless as possible. Those days are long gone as existing residents complained about traffic congestion, overcrowded schools, and property tax increases that they blamed on new development. Now cities painstakingly review each development request and every building permit to make sure that new growth is paying its own way and complying with every community goal and code requirement. Major development requests can take years to get approved and even a simple building permit can take months and account for 25 percent of total construction time. Every city can cite a list of legitimate reasons why the extended review times are warranted, but the net result adds thousands of dollars to each housing unit.
The demise of the starter home. Following World War II, the firm of Levitt & Sons built thousands of starter homes for returning service men and their families on Long Island, New York, in an area that became known as Levittown. The average house size was between 750 and 800 square feet and there was little variation between units. The definition of “starter home” has expanded considerably since then, but the generally accepted standard is around 1,400 square feet. Forty years ago, roughly 40 percent of all new single-family homes were that size or below. Today, fewer than 10 percent of new homes meet that definition. [2] The primary reason is that the fixed costs of building a new home (land, utility connections, permitting costs, etc.) are so expensive that it is significantly less profitable to build a starter home than a home which is $500,000 or more. In the Kansas City area, the cost of a ready-to-build lot in a nice subdivision is at least $75,000 and can easily be double that amount. The rule of thumb is that land accounts for 20 percent of the total home cost which yields a range of $375,000 to $750,000.
In my opinion, however, there is a secondary reason related to social media and our societal expectations. We have all watched Fixer to Fabulous or Extreme Makeover: Home Edition on TV and scanned Pinterest and Instagram for the home details that social media influencers are obsessed with. What percentage of the home buying market would accept a 750 square foot Cape Cod in Levittown or even a 1,400 square foot home in the suburbs? Even first-time homebuyers have become conditioned to expect a large, open kitchen, a spacious family room and walk-in closets the size of garages. It could be that starter homes aren’t being built because no one wants to buy them.
Construction productivity. Since the end of World War II, the productivity of the American worker has roughly tripled. Up until about 1970, construction productivity grew as well, but then entered a gradual decline while the remaining economic sectors continued their upward climb and doubled in productivity. [3] There are arguments about how productivity is measured, but virtually everyone agrees that the construction sector has been a laggard. Construction equipment has gotten better over time but the general process of building each house on-site with very little automation and very few factory built components is largely unchanged over the past 50 years. We have learned to automate and mass produce virtually everything else in our lives but we build each house like a bespoke suit from Savile Row. Is it surprising then that homes seem expensive compared with everything else?
The Bottom Line
Everyone expects prices to gradually rise over time. The crux of the problem with housing affordability is that housing prices over the past 15 years have risen roughly four times faster than the median household income. The nine factors I’ve listed above don’t account for all of that increase but I’m willing to bet that they account for the vast majority. No single factor, however, accounts for enough of the cost increase to make it the obvious target for housing reform.
Unfortunately, several of my nine factors cannot have their cost easily calculated. If I were to make an educated guess, I would say that the nine factors have collectively made the cost of a modest new home $50,000 to $80,000 more expensive over the past 10 years. And if anything, I’m probably being conservative in estimating the impact.
The conundrum that we face is deciding which of these factors we are willing to tackle to make housing more affordable. Are we willing to push back on NIMBYism and tell a room full of homeowners that they need to accept lower priced housing in their neighborhood? Are we willing to roll back energy and fire safety codes to allow houses to be built to a “good” level instead of a “great” level? Are we willing to simplify review procedures knowing that the result will inevitably be an occasional missed issue? Are cities willing to lobby at the federal level for tariff exemptions on lumber or a guest worker program for immigrants in the construction industry? None of these actions will be in the comfort zone for most local politicians, and to make a significant difference they will have to tackle not just one issue but four or five.
In next month’s post, I will make some suggestions on how to move forward toward more affordable housing. I suspect that all of my ideas will be unpopular with some influential group or another – but nothing ventured, nothing gained. Tune in to see just how far out into left field I’m willing to go!
Notes:
1. “The Home Builders Institute Construction Labor Market Report”; Fall 2024; Home Builders Institute; https://hbi.org/wp-content/uploads/2024/09/Fall-2024-Construction-Labor-Market-Report.pdf
2. Carlos Waters; “Why it’s so hard to find starter homes in the U.S.”; January 2025; CNBC; https://www.cnbc.com/2025/01/14/few-starter-homes-in-us.html
3. Chen Yeh; “Five Decades of Decline: U.S. Construction Sector Productivity”; August 2025; Federal Reserve Bank of Richmond; https://www.richmondfed.org/publications/research/economic_brief/2025/eb_25-31
