A recent study by the Federal Reserve found that the average (“median”) price of a home is $350,000 and that a new home costs $440,000 ($100,000 of this for the land). Homeownership rates have been around 65% since the 1950s. The same report found that 77% of people could not afford a $350,000 home. Simply put, about half the people who want to buy (and can qualify to do so) are priced out of the market, including mostly younger people looking for their first home. To meet that demand, homes need to be priced around $250,000. That is a huge gap and a looming political challenge to the status quo because of the belief that homeownership is essential for family wealth. This article explores three related elements of this issue: construction costs, policies to reduce them, and the myth of homeownership and wealth creation.

Although the first topic is the cost of “homes,” apartments face the same challenges, albeit at an average construction cost of $250,000. There are two components of current home prices: construction costs and supply/demand dynamics in the resale market. Costs of homes for sale are tied to new construction costs, because one is a substitute for the other.

New home costs have five major elements: land, labor, materials, capital (to build and buy), and government fees and mandates (i.e., insulation, trees, runoff, etc.). Each one of these has unique cost drivers and business requirements, so ALL need to be addressed to reduce costs. That is impossible. First, landowners, laborers, and material suppliers won’t voluntarily lower their prices. Second, capital costs follow the lead of the Federal Reserve which focuses on the entire economy, not just housing. That leaves government fees and mandates as the most likely cost control lever.

Government charges are 10-20% of construction costs. Efficiency, “green,” and other mandates add somewhat to material costs as well. If all government requirements and fees were eliminated it may just offset land costs and still leave the price of a new home at $340,000. This is still unaffordable to the majority of people who are trying to buy a home. It is also unrealistic to expect the government to do so.
The other factor in home prices is supply/demand balance. At present, supply and demand are NOT balanced, in part because Boomers are holding on to their homes longer due to high replacement home costs and interest rates and the high cost of new homes. The “political” solution has two planks: “build more,” and “expanding beyond the city.” Neither will work. Building more will increase demand for land, materials, and labor, which will INCREASE costs. This is basic economics! Worse, the “expansion” strategy encourages new home buyers (who are wealthier) to leave the city for new suburbs leaving urban areas to their current struggles. We have seen this movie before; it’s called Redlining.

The term “redlining” literally comes from a red line the federal government used in the 1930s to map areas it determined were too risky for banks to lend in. These were mostly inner-city neighborhoods usually with minority populations. Redlining 2.0 resulted from the post-WWII housing boom and construction of new suburbs. This housing boom was fueled by favorable government policies and financing programs for returning veterans, mostly white GIs. Its legacy was that major cities lost their middle- and upper-class residents to new suburbs. This left the remaining poorer residents to foot the bill for repairing, replacing, and maintaining century old infrastructure. It also imposed a huge burden on government institutions to deal with new fiscal realities of high costs and lower revenues. Adding insult to injury, urban residents were also paying taxes to support construction of new roads, bridges, and schools for these suburbs!

This will, of course, be the same outcome from Oregon Governor’s growth boundary expansion strategy as new urban infrastructure will be needed to support expansion of housing in the suburbs: this is Redlining 3.0. This is evident in Eliot as increased pressure to widen I-5 and replace the Interstate Bridge to support suburban travelers and delivery of their online purchases.

This brings us to the “homes are wealth” myth. Prior to WWII only 45% of the population owned a home and they were mostly on farms and in rural areas. Urban dwellers rented. The war transformed America from a rural to an industrial and urban power. Suburbs opened the door to homeownership, which soared to 65% of the population. As noted, most of these new homes were subsidized with low-cost GI Bill loans and other government funds for civic infrastructure (using taxes collected from all taxpayers).

Demand for new housing and home prices rose steadily from the md-1950s until Y2K. That trend supported the “homeownership for wealth creation” myth used by developers, realtors, and bankers to sell homes. Which increased demand and steady home price increases until the 2008 “housing crisis.” Recall, the housing crisis wiped out almost 10% of homeowners. They lost wealth, a lot of it! Nevertheless, home prices rebounded, and prices increased at an even faster rate. However, this trend masked significant home price declines in the Rust Belt and some old economy (textiles, shoe making, etc.) cities as well as in many rural areas. Imagine yourself as a homeowner in these areas! Selling your home at a loss or worse, losing it to the bank! That would be enough to turn you against the government and ripe for anti-urban elites claims of the MAGA movement.

To recap, housing is too expensive for as many as half of new buyers, mostly first-time buyers. “Building more” will make the problem worse by increasing demand for labor and materials already in short supply. “Expanding” outward will further erode tax revenues for urban areas and will subsidize new suburban dwellers sprawling onto farm and habitat lands.

What is a would-be homebuyer to do? And what can governments do that will actually help them?

First, recognize that “homeownership to build wealth” is a myth. Millions of homeowners have lost money. While millions have profited, most break even at best, after factoring in inflation and interest on their mortgage. A return of $0 isn’t “wealth creation.” To illustrate using the “average” case. The “average” home price in 1953 (oldest data available) was $214,000 in “today’s” inflation adjusted terms. In 2024, 70 years later, an “average” home would be worth $404,000. If that initial 10% down payment ($21,400, inflation adjusted) had been invested in the stock market, it would now be worth nearly $3 million! More importantly, that return is for just the original down payment. A mortgage is a recurring payment that also requires annual payment of taxes, insurance, utilities, maintenance and periodic major repairs. When those costs are deducted ownership is a loser for the “average” homeowner.

There are reasons to own a home, such as having a fixed housing cost, location, and dwelling size. Thanks to the legacy of Redlining, you may be able to choose neighbors who look like yourself (self-segregation). However, ownership can be a liability if you are forced to sell in a hurry to relocate or get divorced. The same is true if can’t afford increasing taxes or don’t like your neighbors or increased noise and crime. But what is the alternative – renting.

Realtors and bankers warn rents are high and landlords are greedy! Historically, home prices have increased 6.6% annually, whereas rent increases are half that, 3.3%. It’s true a fixed rate mortgage is more stable than rent, but tenants have the flexibility to move to lower their rent, change neighbors, change unit size, etc. Changes that are difficult for homeowners, and in the current home market economically prohibitive. Historically, renters have fewer choices of neighborhoods due to restrictive zoning laws. However, that has changed with the abolition of single-family zoning, the rise of ADUs and other novel housing options. Renters tend to be more transient; however, new rental “communities” offer amenities like adjacent grocery stores and onsite fitness and other facilities to retain residents and enable car-free living. This appeals to a younger generation that wants housing options that are both flexible and have a sense of permanence, be an affordable home or stable rental community.

What does this mean for government policy, especially if homeownership rates are likely to fall as both population and home prices grow? First, governments need to recognize we/they can’t “build” or “expand” our way into “housing affordability.” Housing is going to cost what it costs and that means it won’t be “affordable” to most people. The second is to recognize persistently high home prices means a growing share of the population won’t become homeowners. Homeownership enjoys a variety of subsidies, mostly tax based. This could be justified if 65% of the population owned a home. Homeowner subsidies may become an intergenerational flash point if that isn’t the case in the future. Policy makers should eliminate, rather than expand incentives for home ownership in favor of a housing neutral “affordability” payment available to both homeowners and renters based on need. A low to middle income family would get a similar, income-based, payment to assist with either rent or mortgage: their choice. Such a payment would give residents an equal voice to developers, realtors, bankers and more importantly, legislators.

this post was originally intended for the Eliot News newspaper