The Expert Podcast

Here's the real reason why home prices are as high as they are. It's not anything about interest rates, it's not about corporate greed, it's not about anything other than there's a shortage of homes. Millions of housing units are needed in the U.S. The most expensive cities are expensive because of policy. What is the policy and who is behind it? The biggest reason affordable housing isn't available is because there's not permitting to build enough homes.

Most cities that have a housing problem have very serious permitting restrictions where it's either difficult or impossible to get a new permit for new housing structures unless the fees, impacts, and all of the other legalities around it are very expensive. So, in some cities, just the permit fees and regulatory requirements add three or four hundred thousand to the cost of building a new house before you even buy the property or break ground. Sometimes you can't even get a new permit no matter how much you spend.

As an example, in California, the reason California has the affordability problem is because we did not build in the 60s and 70s. They were building two to three hundred homes per year. Even in the last boom, they only built a hundred thousand. So, that's a half or a third, that's during the time when the population was booming.

So, what is the shortage? Well, we've talked about it before, but the number of new units needed to be built estimates the shortage to be somewhere between four and seven million. One estimate says it's a 35 million shortage of homes. The number that most people use is about 5 million, which is in this range. But think about it, if we're 5 million homes short right now, every year that number's going higher because even though some houses are being built, it's not at the same rate that more housing households are being created. People are graduating college, forming families, moving out of their parents' house, and immigration are all adding a need for more housing units. Whether it's apartment, condo, single-family house, or multi-family, whatever it is, you need more housing units.

And here's the problem: the current housing slowdown and higher interest rates is forcing builders even to build fewer homes. I'll bet you if you go back and you see this number here, they talked about 100,000 in California during the boom. I'll bet you if we look back in the next couple of years, that number will be even less. And this is during a housing crisis. California knows that more home structures are needed, but I can guarantee you that there'll be less than a hundred thousand homes built in California in 2023 and 2024 just because builders don't want to spend the money for the impact fees.

In California, the rough number for our typical single-family house is 200 to 250 for all the permits, and it may take two or three years to get them. That's additional carrying costs for that property.

So, the takeaway is the price of a house going up has more to do with supply and demand, meaning that there's not enough homes to go around. It's like musical chairs: there are people that want to buy a house, but there's not enough houses to go around. So, that's naturally going to bump that price up. Certainly, as interest rates go up and as the price is higher, that may cut back on some of the demand. Some people just can't afford it. They can't pay them out even if they can find a house. But there's still enough buyers out there that have the affordability, have the income, or will somehow struggle to afford that higher price at the higher interest rates, leaving others still without a housing unit to call their own.