Why is housing so expensive?

Im no expert but I think that maybe it's because anything that costs money to make we have to pay for. I know what you're saying, many years ago I had a thought that everyone should be housed in low cost housing because everyone needs somewhere to live, looking back i think how niave that was, things like health care which is another service that should be made available at a low cost to people on low incomes, which also costs alot of money, the NHS in the UK is getting worse. If I didn't work I would have bad teeth, (I still have it's that expensive it's taking me ages to pay off). So things that should be made available to us at a low cost aren't, why I dont know, the only thing I can conclude is that it is because of money. I have no idea how much things cost like the lab bill for the dentist for instance. Then there are dentists wages and the nurses and the equipment and so on, like I said im no expert.

It shouldn't be - I wish it wasn't.

Inflation, government subsidized housing, GSE lending programs; the first increases the cost of everything (not only nominally, but in real terms with respect to wages), the second and third create artificial demand for housing, which increases prices.

Would you mind explaining this a bit more please?

If at any time, in any market, the government gives a subsidy to an individual to buy something, or rent something, that means that in this market there is one more buyer (or renter) than there was before: more demand, thus higher prices. If the person in question could buy or rent the house without said subsidy, he wouldn't need the subsidy: the whole idea is to allow someone who could not otherwise buy/rent a home to do so. Basically its the same with the low income loans which the government mandated Fannie and Freddie to make. People who could not otherwise have entered the market as a buyer did, therefore increasing demand and prices. And of course that turned out wonderfully didn't it?

A general answer to why housing is so expensive is a simple application of economic principle of supply and demand.

Basically, when supply goes up, demand goes down and when supply goes down, demand goes up. Obviously, there has to be some demand for the price of a house to go up. So essentially, the issue is "what are the effects of demand as applied to the housing market?" The health of the economy is a big macro-economic factor. When you have people with good, rising incomes, the propensity to spend within the margin of their own affordability rises. When the average income rises, the demand increases to match that higher standard. Simply, if Jack earns a million dollars a year, he won't live in a trailer home? he'll upgrade. If fifty of Jacks co-works earn the same amount, and there are only twenty homes of higher standard, the demand for those twenty homes rises, hence the price rises. Now if there are a hundred homes of high standard and those 51 workers including jack go out to buy them, the supply exceeds demand, and incentives and what not are needed to sell the homes. That's why there is a correlation in price/quantity and supply/demand.

But there are a lot of different factors besides that. When interest rates increase (which sucks for people with variable rate mortgages) the propensity to buy decreases, especially for current buyers subject to those higher interest rates. High unemployment correlates with lower demand for housing, heavily fluctuating market volatility also drives speculation lowering demand because of higher risk, and even one of the more important factors? the ability to even secure a mortgage in the first place.

On that note? the issue with the current housing crisis stemmed from the fact that because availability of mortgages increased because of lax standards and deregulation, defaults occurred in such a manner that batch mortgage assets, which were very profitable in early 2000, became "toxic," that is, no investor would buy a toxic asset and the market busted. Demand declined and housing assets remained in high supply. Supply and demand. But that's a really brief explanation though, there is certainly a lot more to it than that.

VideCorSpoon's explanation is very good, and really explains why anything we buy costs what it does.

Another problem which may have sent house prices up, even without more people, shortages of land etc, may be the expectations have also risen. Look at the tiny cabins entire families used to live in in the 19th century. No expensive appliances or fittings. No services.

Quite frankly I would rather have a dishwasher/bathroom/airconditioning, but there is a cost. My 80 year old house is the same size as the one my parents and 3 children lived in, now just 2 of us live in the same space. It's close to the city so the land is worth a lot, but when it was built it was a new suburb. It's hard to see a way out of the problem unless we can move out of dense cities into cheap land, but who wants to live without power or a sewer system?

Greed...............

A significant factor in housing prices is the role of housing as a commodity. Before retirement I practised as a bankrutpcy lawyer. I saw many young couples whipsawed in housing boom and bust cycles that were largely driven by speculators. The standard example was a young married couple, eager to start a family, that got panicked into buying at inflated prices for fear of being unable to buy at all when prices got higher yet. The bubble bursts and they're left with a house at such a depressed value that they're unable to refinance the mortgage debt when the term expires.

Many years ago I read of one Scandinavian country which decided that the social benefits of a stable housing market warranted excluding housing as a speculative commodity. The simple answer was to place a punitive tax on all profits from speculative house investment. If you bought a house as your residence and resided in it for a fixed number of years, you were not taxed on the gain when you sold it. Alternately you were allowed to sell the property and not accrue speculation taxes if you used the proceeds to purchase a replacement residence.

Driving the speculators out of the housing market dampened the boom and bust cycle, stabilized housing prices at a realistic value and enabled first-time buyers to avoid the devastation caused by wild fluctuations in housing prices.

The government's attitude was that there was no shortage of other commodities that speculators could invest in. Therefore the social utility of excluding housing from commodity trading was totally justified.

The cost of materials and the markups behind them. The cost of each subcontractor involved and the markups behind them. The real estate folks and the markups behind them. If a person had the ability to build their own home, and whatever they could not do themselves, hire their own subcontractors , the markups could be eliminated. But,I suppose it would depend on where you want to build that would dictate all of the legalities , license wise. If a person could eliminate the need for a general contractor, and delegate the necessary trades themselves, many middlemen would not be necessary, and all of the markups they tack on.

supply and demand

Hi,

I agree with most of what has been said. You can break down costs as follows;

1) Cost of land: this varies. Still very cheap in the middle of a desert, much more so in N.Y. Location, location, location.

2) Cost of construction: During the last real estate mania, cost of goods and labor went up astronomically, because of material and labor shortages. Plus, what was built was pretty junky to boot.

3) Cost of purchase: Mortgage rates have plummeted and have been low for some time. Realty agents are now ready to negotiate but were charging some exorbitant fees because of the monopoly they had on the MLS. You can sell now on the MLS for $500. Insurance is definitely up.

4) Speculative costs: During the last bubble, anyone could buy anything for no money. Totally silly situation which increased the number of buyers faster than the demand could satisfy (buying for nothing creates unlimited demand). Now that the bubble has burst we have witnessed the worst real estate crash in history. Prices appear to continue to go down as families attempt to close the gap between what they want and what they can afford.

Rich