Supply Problems and Rising Home Prices

There’s a new culprit accused of inflating home prices: investors.

The share of U.S. homes sold to real estate investors reached a record 18.4% in the final quarter of 2021, according to real-estate firm Redfin. Metro Atlanta had the highest share of any major market: 33%.

Investors aren’t simply buying and flipping houses. An emerging trend is called “build to rent,” in which an entire subdivision is developed and then sold to investors who lease them all. The practice is irking local elected officials who face increasing pressure to lower housing prices.

There’s little doubt that these practices affect home prices. But there’s reason to believe they are symptoms of a much larger problem: high demand and too little supply.

Investing in single-family houses is attractive because prices are rising so quickly. Why are prices rising so quickly? Demand exceeds supply.

Similarly, investors like rental properties because they command large monthly payments. Why? Demand exceeds supply.

Squeezing the investors seizing these opportunities might offer some relief at the margins. But if we want to solve the root problem, we have to get serious about increasing supply.

The 2010s were a dismal time for homebuilding in Georgia. During that entire decade, fewer new home permits were issued than during the last half of the 1990s. Yet, there were 2.5 million more Georgians counted in the 2020 census than there were in 2000.

Mortgage giant Freddie Mac has estimated the United States has a housing shortage of almost 4 million units. Based on pre-2010 trends and continued population growth, the shortage in Georgia alone could be in the hundreds of thousands.

While there are many reasons for the shortage, from soaring lumber and labor prices to the bankruptcy of many builders after the Great Recession, there’s one factor public officials can address head-on: the cost of regulation.

My organization, the Georgia Public Policy Foundation, released a study earlier this year that found almost 27% of the price of a new single-family home in our state comes from some sort of regulation, tax, fee or other cost imposed by the government. The study, in which we surveyed dozens of lot developers and home builders across the state, did not attempt to allocate these costs to the federal, state or local governments. But it’s clear that we have a particular problem in Georgia: A similar study conducted last year by the National Association of Home Builders put the nationwide cost at just under 24%.

Solving this problem will require many seemingly small actions to reduce the impact of the many different government-imposed costs.

Here’s why: The single largest cost identified in our study is what home builders spend to comply with changes to the building code in just the past 10 years. The builders estimated that cost at 7% of the price of a new home. While 7% may not sound like much, it’s the cumulative effect of that cost, plus more than 4% for architectural design standards, plus more than 3% for lot developers to comply with zoning requirements, and so on. It all adds up.

And while the right number here is not zero – some regulations are justified, and the cost of some government services would be passed on to taxpayers if not borne by builders or buyers – there surely is room to trim a 7% cost to, say, 5% or 6%. And then to trim the 4% cost, and the 3% cost. And so on.
Let’s convert these percentages into dollars. If a new home is priced at $400,000, then our study would put the portion attributable to regulatory costs at a staggering $107,600. Cut those costs by even one-third, and the savings would approach $36,000. That would make homes more affordable to buy, but also to build – which is key if we’re going to increase supply.

Rising home prices are a multi-faceted issue requiring multiple solutions. But first and foremost, government officials should quit making homes pricier than they need be.

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