The idea is not that price drops lead to supply, it is that supply leads to price drops.
Now, price drops do not incentivize building, as the difference between cost to build and the price you can sell the building for shrinks.
However, the idea should not be building more "cheap" buildings. The entry level buyer should be buying the older properties, not the newest properties. Buildings can depreciate over time, even if land costs do not.
The problem is that when supply leads to price drops supply very rapidly dries up and waits for prices to rise again. Today’s housing production system just turns off if the market goes down meaningfully.
Filtering is great, and part of the solution. But it’s not the whole solution. Just like the car market, there’s a role for the Kia’s and the Nissan Versas to play.
In the periods of time that we’ve seen widespread entry level housing there has been a lot of new construction of small, cheap, starter homes. That’s early 1900s Chicago doubling in a decade, or the first wave of suburbanization in the 1950s.
The best today’s system can do is hold prices flat and wait for wage appreciation to catch up. But if we can unlock new products that can pencil at much lower price points, or be built for non-profit motivations (ie. building an ADU for your aging parents to move in), then we change the equation, and can open up a new entry level market that works even when the major developers walk away.
"The idea is not that price drops lead to supply, it is that supply leads to price drops."
I'm not as generous as Andrew is in my time for people who either don't read the article, don't wrestle with the underlying issues it raises, or write like a housing bot.
It's also a question of ensuring that price drops don't lower builder profit margins. If builders could still build profitably in a flat price market, they would. But if all costs are high, then they will only build into a rising price market that can support decent margins. Hence, eliminating rules and requirements, including around labor and materials, and of course zoning, etc. becomes an essential part of making "starter home" building possible. After all, what determines whether a home is a "starter" is not the size - there are many $1m+ condos that are tiny - but the price. Cheap to build means cheap to buy. And even better than trimming rules to lower build costs would be massive innovation in production methods, i.e. pre-fab, factory built, printed on site, etc. We need to see the cost of producing a house drop like the cost of TVs and sneakers has.
This was a very interesting piece. Your point about falling house prices is key and often overlooked, and I think a bottom up approach to development is more politically palatable for a lot of people when it comes to increasing housing supply.
However, I don’t see how your solution addresses the original problem you raised. The crux of the argument seems to be that our financialized housing market cannot tolerate falling prices. Yet wouldn’t building more entry level homes bite into the valuations of the larger overpriced homes we already have at some point —even if there is currently a niche in the market for that sort of development— which would make developers pull back again?
Good question. A localized market for entry level homes is going to be less sensitive -- maybe even insensitive -- to the financialized housing market. As long is there are demand for units, they will continue to be built, regardless of what is happening to interest rates, mortgage-backed securities, default swaps, and the like. With local developers and local financing, it's a localized market with real supply and demand feedback.
Its such a religious conviction that home prices will go up. I here it all the time, dont throw your money away by renting, buy a house and build equity. I saved by far the most money when I was renting. Owning a home provides stability for my family but when I was single it really didn't make a lot of sense to buy a home. I also really wanted to buy a condo in walking distance to bars and restaurants but my 50,000 person college town built overwhelming single family homes. There were only a few condos and way out of my price range.
Isn't calling for "entry homes" like asking car-manufacturers to make last year's model? Why not have builders make the best homes they can and have the second-hand market deal with entry homes?
Go Chuck!
"Price Drops Don’t Lead to Supply. They Kill It."
The idea is not that price drops lead to supply, it is that supply leads to price drops.
Now, price drops do not incentivize building, as the difference between cost to build and the price you can sell the building for shrinks.
However, the idea should not be building more "cheap" buildings. The entry level buyer should be buying the older properties, not the newest properties. Buildings can depreciate over time, even if land costs do not.
The problem is that when supply leads to price drops supply very rapidly dries up and waits for prices to rise again. Today’s housing production system just turns off if the market goes down meaningfully.
Filtering is great, and part of the solution. But it’s not the whole solution. Just like the car market, there’s a role for the Kia’s and the Nissan Versas to play.
In the periods of time that we’ve seen widespread entry level housing there has been a lot of new construction of small, cheap, starter homes. That’s early 1900s Chicago doubling in a decade, or the first wave of suburbanization in the 1950s.
The best today’s system can do is hold prices flat and wait for wage appreciation to catch up. But if we can unlock new products that can pencil at much lower price points, or be built for non-profit motivations (ie. building an ADU for your aging parents to move in), then we change the equation, and can open up a new entry level market that works even when the major developers walk away.
"The idea is not that price drops lead to supply, it is that supply leads to price drops."
I'm not as generous as Andrew is in my time for people who either don't read the article, don't wrestle with the underlying issues it raises, or write like a housing bot.
It's also a question of ensuring that price drops don't lower builder profit margins. If builders could still build profitably in a flat price market, they would. But if all costs are high, then they will only build into a rising price market that can support decent margins. Hence, eliminating rules and requirements, including around labor and materials, and of course zoning, etc. becomes an essential part of making "starter home" building possible. After all, what determines whether a home is a "starter" is not the size - there are many $1m+ condos that are tiny - but the price. Cheap to build means cheap to buy. And even better than trimming rules to lower build costs would be massive innovation in production methods, i.e. pre-fab, factory built, printed on site, etc. We need to see the cost of producing a house drop like the cost of TVs and sneakers has.
This was a very interesting piece. Your point about falling house prices is key and often overlooked, and I think a bottom up approach to development is more politically palatable for a lot of people when it comes to increasing housing supply.
However, I don’t see how your solution addresses the original problem you raised. The crux of the argument seems to be that our financialized housing market cannot tolerate falling prices. Yet wouldn’t building more entry level homes bite into the valuations of the larger overpriced homes we already have at some point —even if there is currently a niche in the market for that sort of development— which would make developers pull back again?
Good question. A localized market for entry level homes is going to be less sensitive -- maybe even insensitive -- to the financialized housing market. As long is there are demand for units, they will continue to be built, regardless of what is happening to interest rates, mortgage-backed securities, default swaps, and the like. With local developers and local financing, it's a localized market with real supply and demand feedback.
Its such a religious conviction that home prices will go up. I here it all the time, dont throw your money away by renting, buy a house and build equity. I saved by far the most money when I was renting. Owning a home provides stability for my family but when I was single it really didn't make a lot of sense to buy a home. I also really wanted to buy a condo in walking distance to bars and restaurants but my 50,000 person college town built overwhelming single family homes. There were only a few condos and way out of my price range.
Isn't calling for "entry homes" like asking car-manufacturers to make last year's model? Why not have builders make the best homes they can and have the second-hand market deal with entry homes?
"a new credit scoring model—VantageScore 4.0—that allows rent and utility payments to count toward credit history"
Are you saying a credit card payment is more worthy of credit scoring than a utility bill payment? I beg to differ.
I wondering what you think of housing development that is not subject to market pressure.
An example is the ‘war homes’ built in Canada after WWII.
https://www.google.com/gasearch?q=war%20homes%20canada
These are now highly sought after by people entering the housing market and others downsizing and empty nest.
Is this perhaps too large scale for what you suggest? Are there examples of smaller-scale projects?