Skyrocketing U.S. home prices, which have surpassed bubble levels of 2005-06, are being driven by a dramatic increase in the cost of residential land, according to Harvard University’s Joint Center for Housing Studies.
From 2012 to 2017, the median price per acre of residential land for existing single-family homes nationwide jumped 27%, from $159,800 to $203,000, researchers say. Such increases are fueling an affordability crisis for first-time home buyers and renters, with new home construction struggling to “barely keep pace” with the number of new households.
Compounding the sluggishness in housing construction is a tight labor market, excess housing supply built up in the boom before the Great Recession and “most significantly” regulatory constraints on development, according to Harvard’s “State of the Nation’s Housing 2019” report.
“These [regulatory] constraints, largely imposed at the local level, raise costs and limit the number of homes that can be built in places where demand is highest,” said Chris Herbert, managing director of the Joint Center for Housing Studies.
The report also highlights the unusual cooling of the nationwide housing market late last year. Weaker prices, sales and construction volumes in metropolitan areas are seen as surprising, given the strength of the overall U.S. economy.
“The primary culprit [for the slowdown] appears to be the lack of affordable housing,” according to the Harvard analysis.
Meanwhile, Mr. Herbert said, a large percentage of new housing is mostly intended for the market’s higher end because rising land costs have made developers less interested in building smaller, more affordable homes — despite the surging demand for them.
Jed Kolko, chief economist of the job listings website Indeed.com, told The Washington Times that the growth of the higher-end housing market has accompanied a migration shift that once was “from rural to metropolitan” but now is “metropolitan to suburban.”
“As the United States has gotten richer, people have wanted larger houses,” Mr. Kolko said. “This long-term trend slowed after the housing crisis and almost looked like it was reversing in 2011, but it has returned and is now in full swing.”
Nationally, the value of residential land hit bottom in 2010. Prices began bouncing back in 2012 “at a pace that shocked even veteran home building executives,” Brad Hunter, housing economist, recently wrote in Forbes.
From 2012 to 2017, residential land values climbed in 80% of U.S. counties, with the largest increases in Nevada (158%), Colorado (96%), California (88%), Arizona (81%) and Utah (81%).
The West saw the most extreme rates of increase because many East Coast housing markets already were highly valued.
The report’s authors anticipate the demand for entry-level homes will continue increasing, noting that “private industry is now pursuing innovative solutions with the goal of revolutionizing the design, construction, and financing of housing.”
But they caution that the trend of local communities restricting the land supply for higher-density development also will continue.
Such regulatory constraints and not-in-my-backyard (NIMBY) local opposition are adding to challenges of supplying more affordable types of housing, the Harvard report states.
“To ensure that the market can produce homes that meet the diverse needs of the growing U.S. population, the public, private, and nonprofit sectors must address constraints on the development process,” Mr. Herbert said.