Understanding what is causing the housing crisis is a complicated problem. Given the tremendous amount of work and supplies it takes to build a house, it’s no surprise that housing is expensive. However the problem of exorbitant housing costs has been exasperated over the years due to completely avoidable reasons. The housing crisis is caused by growing populations, economic cycles, demographic shifts and lack of action and reform from city governments.
Labor intensive
Housing is something we have the tendency to take for granted. Building housing is one of the most labor intensive tasks in our modern world. The roof over our head, the walls surrounding us, and the floor beneath us only exist because teams of people over multiple generations built and repaired them.
Awareness is the first step
To fix the housing crisis we must become more aware and informed of what is causing then housing crisis. We must petition our local governments for land use reform. We must become self reliant in learning to build and repair housing ourselves.
Why is housing so expensive?
The price of housing is an outcome of supply and demand just like any other good or service. Demand comes from how large the pool of potential buyers is and how much money those buyers have. Supply comes from the available housing on the market for sale. Housing is expensive because demand is outstripping the supply of housing.
A very complex problem
The problem is more complex and multifaceted than demand outstripping supply. Supply and demand of the housing market has many factors on both sides. The real quest to ask is why is demand outstripping supply and causing then housing crisis? Below I have listed in order from most important to least important why demand is higher than supply.
#1 Causing the housing crisis: Lack of zoning reform in cities
The biggest contributing factor causing the housing crisis comes from the supply side. We are not producing enough housing units for the population. This lack of housing production is in most part due to lack of reform or relaxation of draconian city zoning laws. In many cities only single family homes can be built when the population of the area demands that higher density housing be created. Long story short we need to house more people on less land.
Housing creation is difficult as existing homeowners nearby petition to stop housing developments. Through the 20th and 21st century the human race saw large increases in population. However we haven’t seen commensurate increases in housing supply. Often times our land development laws are so old that they apply to a time when the population was much less.
It may may sound crazy but at one point in history there was zero restriction of what you could build on your land. Land rights have been massively diminished over the last 100 years under draconian zoning and code laws. We can once again loosen and reform these regulations to create more housing.
#2 Causing the housing crisis: Outdated cultural norms around housing
The second biggest contributor to the housing crisis is also stifling the supply side. Our cultural concepts of what a home or neighborhood should look like need to be massively reformed. This cultural shift must come hand in hand with any legal shifts that are made from zoning reform.
The first is allowing people to build and live in smaller structures. For example my city has a 1100 SqFt minimum on all newly built structures. 1100SqFt is way too big and we need to allow structures of any size. To support this we need to allow lots to be subdivided into smaller segments. We need to accept its culturally okay to live in a smaller structure and we are no lesser a person for deciding to do so.
The second is allowing people to live in structures that are different than the single family home paradigm. We can live in 10plexes, tiny homes, shipping containers, yurts, RVs, house boats, and whatever else our brains can think up. We need to stop judging others and ourselves for the houses we live in.
#3 Causing the housing crisis: Growing populations
The third biggest contributor to the housing crisis is on demand side. The overpopulation problem is tightly linked with the zoning reform problem as they play off each other. The population of the US rose 60% over 50 years and the population of the UK rose 20%. The overpopulation problem is even worse in urban areas close to job centers where in the most expensive cities populations have doubled in a decade.
Its just natural that as populations grow the demand for housing will grow and so will the price. Its important to note that there is plenty of space on earth for everyone and we have a choice to live in a highly populated area or not. Some areas can be so highly inhabited there is nothing much than can be done to make things affordable. In these cases it makes sense to move from more densely populated areas to more sparsly populated areas.
We can’t control the population of the world. However we need to be more open minded to the option of moving to areas where land is cheaper and housing costs are lower.
#4 Causing the housing crisis: Low interest rates
The 4th biggest contributor to the housing crisis comes from the demand side. Low interest rates often get the most flack for causing the housing crisis because they have most recently been low. However the housing crisis has been brewing for decades and precedes current day low interest rates. That being said as of March 2022 low interest rates have created inflation in all sectors of the economy including housing.
The way interest rates increase housing costs is by making it easier and cheaper for buyers to purchase a house. More incentive to buy houses boosts demand for housing causing prices to jolt upward quickly. Most notably during the covid pandemic interest rates have remained very low and money has been printed quickly causing demand to spike. Low interest rates are gasoline on a housing crisis fire that was already raging.
As of March 2022 there is no doubt monetary policy needs to tighten to curb inflation. As of this post (3/16/22) the fed has already raise rates 25 basis points. During the 2008 housing crisis many safeguards were put in place for lending with the Dodd Frank Act.
#5 Causing the housing crisis: Supply chain issues
The cost of a housing is impacted by the costs of all the components that make housing. Wood, metal, labor, construction supplies, cement are some of the most expensive components in a house build. If there is a labor shortage production levels go down and cost to hire employees goes up because they are more scarce. It makes sense when people are sick with covid they are not able to work this leads to a decline in output.
During the covid pandemic every part of the supply chain has been disrupted in the economy. In particular the building materials supply chain has been disrupted leading to shortages in materials and higher cost.
It all starts with labor. If people are out sick or die or retire they cant be workers in the economy. Other workers took time off with unemployment payments and started a business in the pandemic. The shortage in the labor pool is trickling down to raise the cost of manufactured all goods and services. In particular the construction industry was impacted by immigration restrictions because it was harder to source workers.
Why is housing demand outstripping supply?
Economic stimulus, unemployment benefits and stock market gains have made the economy flush with cash. More buys will increase demand fast. However housing supply isn’t made over night as it takes time to build houses.
Is inflation to blame for housing prices?
Greater economic inflation is responsible for rising housing costs but not to the extent of other factors. Labor costs have risen fast in the last year but nothing out of control. Lumber prices spiked in 2021. Lumber costs have since slowly edged down based on filling gaps of labor at lumber mills. However its a slow process to fill the gaps in the supply chain for the cost of goods will stabilize. Inflation will fade over time but will be around for the foreseeable future.
How can we fix whats causing the housing crisis?
Ultimately the biggest solution will be to address the housing demand with commensurate supply. This will not only be increasing the supply of total housing units but diversifying the housing supply with more choices of housing types. These housing units will be placed where they are in demand the most in urban areas close to jobs. Housing demand can also be tapered with federal reserve monetary policy.
I will address each housing problem listed above with a solution below.
Lack of zoning reform in cities: Loosen and reform zoning and permitting
If you look at zoning maps of american cities you will see that vast swaths of the city will be zoned for low density. For example in Austin the low density zoning is called SF-3 which designates only a duplex can be built on the lot. While some may point to the fact that a duplex is allowed to say its increasing density but really this is not enough.
The solution is to unrestrict the numbers of units allowed to be built per lot. In addition the minimum unit size should be removed as well. Lots should also be able to be subdivided into smaller segments to allow smaller houses. Other restrictions that can be removed are height limits and parking minimums. In this way whatever the economic landscape desires will end up being built.
This change in zoning would preferably come from the political action of the cities themselves however state and federal intervention may be needed. There is fierce political opposition to zoning reform. The opponents of zoning reform already have housing and are typically older and more financially secure.
Outdated cultural norms around housing: Become more imaginative and open minded about housing
This piece will go hand and hand with creating zoning reforms. The single family home is so entrenched in the culture of the US it will be hard to break this habit. People have been accustomed to having ample space and privacy. If people are allowed to build whatever housing they want will they still choose the single family paradigm?
If housing units are available for sale that are smaller square footage and unorthodox but more affordable will consumers still demand them? At the end of the day we all vote with our wallet. If there isn’t demand for something it doesn’t get built. However given how desperate people are for housing I think affordable smaller units would sell very easily.
Here are a few ideas of types of housing that can be built that will create affordable housing. Tiny house villages, triplexes, quadplexes, micro units in apartment style buildings, RVs and trailers.
Growing populations: Build more housing!
Hate to sound like a broken record but we need housing creation to match growing populations. Not just more single family homes but all of the housing types I mentioned above.
Low interest rates: The fed needs to raise rates
This process has already begun. Inflation rates have reached up to 8% annualized as the fed printed money and acquire bonds to stimulate the economy. As the economy has showed recovery from the covid pandemic, rates will be raised to cool down home buying. While some prices of the components of housing won’t go down until supply chains are stabilized. Raising rates only lowers the demand of goods that are purchased with credit including home mortgages.
Supply chain issues: Wait it out and source your own materials
As the economic cycle has progressed workers have flooded back into the workspace. That being said it will take time for every link in the supply chain to work itself out. As of March 2022 the world is still in a pandemic and war is raging in europe. Prices wont level out until the world is in a more stable spot.
In particular the price of oil trickles down into other areas of the economy as it is needed to transport goods. Countries like Russia are major exporters of oil and sanctions will constrict global supply, driving up prices.
Lumber prices have already come down from their high in the last two quarters of 2021. Employment is rebounding nicely. Things will normalize over time but in the meantime get more creative about sourcing materials.
Collecting reclaimed wood and processing it for reuse. Look on craigslist, facebook for free wood or look around your neighborhood for piles of wood or home build jobsites.
Conclusion: What is causing the housing crisis
The housing crisis has been an ongoing problem as populations have grown and there has been little political and cultural reform. Inflationary pressures from the economy have thrown gasoline on the fire. To solve what is causing the housing crisis we must rethink our housing expectations.
More Resources: https://www.businessinsider.com/housing-shortage-real-estate-inventory-foreclosures-builders-millennials-goldman-sachs-2021-5