Why Aren’t We Building Affordable Houses Anymore?

Last week in my article on self-driving cars, I noted the phenomenon that affordable (say $200,000 or less) new houses simply aren’t being built anymore and speculated that might lead to people choosing longer commutes. As a second part, I thought I’d look at some possible reasons affordable houses aren’t being built any more. For the purposes of this article, “house” means “single family detached house,” the kind where you can paint your siding whatever color you like and plant a flower garden in back.  I also acknowledge that there are people that prefer different formats of housing–I had a friend that liked his detached townhouse because he could play movies as loud as he wanted on his home theater Friday nights and not have to worry about mowing the lawn the next day. But this article is about those that don’t.

Our Exhibits:

First, the original 1951 “Levittowner” house, priced at $10,990; 1000 square feet; three bedrooms, one bath, one car garage, inflation adjusted with the Consumer Price Index, would sell for $97,100 today. Estimated monthly payment: $67.00 (or $592.00 today) At that price unless you’re flipping burgers for a living almost anyone could afford it.

Now here’s a house typical of what’s being built today, the “Bristol”: priced at $320,990, 2185 square feet, four bedrooms, 2.5 bath, 1/5th acre lot, estimated monthly payment: $1245.00. In practice, I’m sure they’d be willing to build you a house and sell it for that price if you insist, but if you walk up and want to buy a house, just like buying a car off a dealers lot, it’s probably filled with expensive add-ons. This one has an upgraded kitchen, sun room, and garage extension, pushing the price to close to $400,000. To be sure, there are some advantages to durable finishes. In a memorable cooking disaster my sister set fire to our Formica countertops. And I absolutely love spending evenings on the couch in the sun room or in a hammock on the deck. But not everyone can afford these.

So what do you do if you’re lower middle class and want a house today? You either have to settle for new multi-family housing instead, or a used house. For now, at least, there’s a plentiful supply of used houses, but with a declining supply (thanks to tear-downs, including some initiated by cities including Richfield’s apparent war on affordable houses with their willingness to tear down entire neighborhoods), and increasing population, eventually there will be a day of reckoning, with used prices being unaffordable also. (Compare Portland, median home value $330,100, as opposed to $202,500 here.) So choices will be a house in St. Cloud (at least you can sleep during your 2 hour commute in your electric self-driving car) or settling for a stack & pack.

I have my own house now, but I see this as a problem both out of altruism because I want other people to be able to have theirs, and selfishness because in a classic case of a first-world problem I want my house to be worth as little as possible to keep property taxes and insurance costs down. As another data point, here’s my house: 1100 square foot, two car garage, originally bought by my parents for $27,900 in 1970, very slightly used (the owners got divorced and had to sell right after building their dream house). That’s $165,000 today, so still pretty affordable for a basically new house.

So why are no affordable houses being built?

Quite simply, I don’t know. So I’ll throw out a few possible reasons:

#1 Consumer and developer preference is changing

Just like you can’t buy a Yugo anymore, consumers are demanding more space and luxury in houses.

To some extent, to avoid living in a used house or an apartment, I believe people are overextending themselves and buying stuff they can’t afford and might not even want simply because that’s all that’s available. I know I’d eat Ramen and rice every night if it meant not having to live in multi-family housing.

#2 Developer preference

But what if it’s not just consumer demand for more and more elaborate houses. What if builders have simply decided they’re simply not interested in building affordable houses. I’m not knowledgeable on the economics in this, but maybe they figured out that they can maximize their profit by only building mansions and multi-family housing. Usually it’s the option in the middle that gets forced out, because those consumers can stretch themselves to upgrade, or settle for a downgrade. (Again, I’m talking about people that want to buy a house, not those that prefer multi-family housing, which is why I use that characterization).

And it’s not just housing. How well did Mervyn’s do compared to Macy’s and Target? How well did Mercury do compared to Ford and Lincoln? Although I’m lucky enough to have been able to get a used house and be able to live comfortably, given the choice of living in a house and eating rice and beans every night, or living in multi-family housing and eating steak, I’d take the former.

#3 Zoning policies by cities trying to maximize their tax base

But what if it goes even above builder preference and is skewed by local policies? New houses in Shakopee must be on 1/5th acre lots, Compare that to Levittown, which was notable for having extremely generous lot sizes because land was cheap but in the booming post-war years construction was expensive, which had 1/7th acre lots. Minneapolis proves you can have a single family house on a 1/12th acre lot. A typical lot in Shakopee is $85,000. There’s a general rule in the construction and finance industry that you build a house worth three to five times what a lot is worth, so this means $250,000 to $400,000 houses are built. Theoretically, if we went back to 1/7th acre lots a sub-$200,000 house would be possible.

#4 Anti-growth policies artificially limiting supply

But what if the problem is even beyond local zoning? The area in blue the MUSA (Metropolitan Urban Service Area) line. No municipal sewer and water service is allowed beyond it. Instead of a natural barrier limiting land supply, we’ve created a political one.

In addition, Lake Elmo and Afton have anti-growth policies of their own and, even with the new St. Croix Crossing, the river is a physical and psychological barrier. If there’s anything I learned in college economics, it’s supply and demand. If you limit the supply of something, with an increase in demand, the price is going to skyrocket. The Builder’s Association of the Twin Cities obviously has an agenda to push so they might not be the most unbiased source of information, but it’s the only information I could find. They claim a shortage of build-able land is adding $35,000-$100,000 to the price of a house in the area. When you see how much more houses in Portland cost with the much stricter anti-growth boundary, or the Bay Area with pretty significant physical boundaries, it does seem plausible.

Solutions?

So what is the solution? I don’t know.

As should be obvious, I’m not even entirely clear what’s causing the problem. It could be a bit of all the above. But for starters, we could eliminate any zoning that forces a certain lot size and minimum value of house to be built. Then, in the context of that, evaluate whether the MUSA line really is causing a land shortage, and if so, expand it.