Why House Prices Skyrocket And Why The New Biden Housing Plan Won't Work
The Biden Administration just announced its Housing Supply Action Plan with 19 immediate steps. Their top priority is to reform local zoning. On the upside, the Plan focuses on new funding for new construction instead of new funding for buying existing houses which just increases house prices and makes housing less affordable.
On the downside, the Biden Administration took the industry view that supply is the problem. The Biden housing plan does nothing to reduce the government incentives that currently pump up investor demand, the area where we can have the fastest and largest impact on stabilizing house prices and increasing home ownership. Here’s why.
The conventional wisdom in recent years has become that skyrocketing house prices are only caused by the low supply of houses for sale, and the low supply of houses for sale is only caused by residential zoning, NIMBYs, and local government inefficiency. There’s some truth to all of that but a far, far bigger reason house prices have skyrocketed is the supply of houses increases extremely slowly, by nature, and supply can't keep up with any fast changes in the demand for houses.
People think gold is the quintessential example of a product where supply grows extremely slowly, but the total number of single-family houses in the U.S. grows much more slowly than the total supply of gold worldwide. In fact, the supply of gold grows almost twice as fast (1.7% per year) as the supply of single-family houses in the United States (0.9% per year)
The reason house prices skyrocket is this mismatch between how fast supply can change and how fast demand can change. The demand for houses can rise–and fall–a lot faster than supply.
It doesn't take large increases in the demand for houses to outrun the naturally extremely slow increases in the total supply of houses, and when that happens, prices can skyrocket.
Supply: Total
It makes sense that the largest thing, by far, that the typical American buys would also take a long time to build and would take a long time to scale up production. Demand for houses can jump up a lot faster than construction can be cranked up.
Part of it is because houses can last 100 years or more, so fewer need to be built each year compared to most other products. The industry naturally has very low production relative to the total number of houses in existence, so it takes years to significantly increase the total number of houses in existence.
To make matters worse, you can’t import houses from Germany or Japan, or from the state next door. Unlike gold and most products, you can’t just import more houses to increase supply when your local demand increases. Read More…
