The Folk Economics of Housing

If arguing about this on Facebook has taught me anything, it is that most people definitely do not believe it. They always make the same argument, which is that new housing stock tends to be high priced homes, so if what we need is low price homes why are we building high priced homes? Anybody who understands economics knows why this argument is wrong, but most people don’t.

Nonetheless, I don’t think this has much to do with the public policy as it stands because the people who make the policy do understand this. So while I think the assertion is correct, people do not believe it, I do not think that is a large factor and why the policies restrict housing.

I think that what contributes to this view is that new construction always seems to be at the high end of the market. This makes sense, it doesn't cost the builder a lot more to build a $500k house than to build a $250k house, and building two $250k houses will take twice the time and close to twice the costs. So builders/developers are going to build what is most profitable, which is the most expensive houses that they think they can sell in the local market.

What is less obvious is that this still increase housing supply. It's not new affordable housing, but the people moving in to the new expensive houses are leaving their old houses, and the people who buy those are leaving their old houses, so eventually the price drops happen on the older, smaller homes at the bottom end of the market.

> One legitimate reason to not think supply reduces prices is because of big financial companies buying up lots of houses and having effectively free rein to price how they want.

Big corporations don't have unlimited money to do this kind of thing.

And in practice, the expensive areas they do it in, are usually very limited in how much new housing goes up, they're still very much supply constrained markets.

If what you're suggesting was really happening, then what you'd expect to see is an area with a relatively high vacancy rate (due to all the new supply), like 8% or even higher, but stubbornly high prices in spite of that. And I can't think of any examples where that happened. Can you?

If you could build houses for free then obviously adding supply would eventually reduce the price.

But I have been looking at the cost to build a home, it costs even more to build than to buy a used one. Who, exactly, is going to be able to afford to buy the new houses while selling their current home at a lower price than it would currently fetch?

Maybe if AI replaces all the software developers they can flood the home construction market in their quest to find new work and push the price of labor down, thus reducing the cost to build a house, but otherwise...

Well, you would have to compare it to an imaginary world in which they didn’t build those homes since 2010. Prices may not have gone down, but in the imaginary world, they might have gone up markedly so it has still reduced housing costs compared to if they did not build that much.