Homes have gotten more expensive, and many complain that they can’t afford to buy one. What to do about it? Solution A: Give people money to spend on housing. That will make them happy in the short run, but will drive up the cost of houses. Solution B: Build more homes.
How many times do we need to re-learn the law of supply and demand? The rising cost of houses should be responded to in the same way as the rising cost of anything else–increase supply.
Is there actually a shortage of housing in the U.S.? My colleague John Phelan explores this issue. First, the cost of housing has indeed been rising nationally:
[A]s Figure 1 shows, the median sale price of a new house in the United States has risen from about four times median household income between 1987 and 2001 to an average of about five times since 2013. Given how vital housing is to people, this is a big part of the affordability squeeze.
House prices have risen because the stock of houses, relative to the population, has declined since 2005:
This slump in the housing stock relative to the population occurred because house building fell off a cliff in 2005, as Figure 3 shows. That year, 2.1 million houses were started in the United States, but this fell to 554,000 in 2009. The number of starts drifted up from there and picked up pace from 2019 to 2021, driving that increase in the housing stock relative to the population and decline in house prices as a multiple of household income since 2022 seen in Figure 2.
So to bring house prices down, we need to build more houses. This gets us to the real point: whether there is a housing crisis depends on where you look.
Figure 4 shows that the number of residential construction permits issued per 1,000 residents in 2023 ranged from more than eight in Idaho, North Carolina, and Florida, to between one and two in Alaska, Illinois, Pennsylvania, Massachusetts, Connecticut, and Rhode Island.
While the correlation isn’t perfect, the point is obvious: people are building lots of houses in red states, very few in blue states.
According to Ballotpedia, in 2024 there were 23 states…with a Republican trifecta — we’ll call this “Red America” — and seventeen states…with a Democratic trifecta, which we will call “Blue America.” Adding together state totals in each for population, net domestic migration, and new houses permitted, we can calculate net rates per 100,000 residents of housebuilding and net domestic migration for Red and Blue America.
John created this chart, which shows the conclusion starkly:
One more data point: in 2022, the Austin, Texas metro area permitted 18 new homes for every 1,000 residents, first in the nation. Meanwhile, the Los Angeles and San Francisco metro areas permitted only 2.5 units per 1,000 residents.
There are two things going on here, obviously. People are moving to Texas, Florida, South Carolina, South Dakota, etc, so naturally there are more homes being built there. Conversely, people are leaving California, New York, Illinois, etc, so there is less demand for new homes in those states. But one of the important reasons why people are locating to red states rather than blue states is that housing is more affordable. The “housing crisis” is mostly a blue state crisis, despite the relative lack of demand in blue states. If you can’t afford a house in Los Angeles or the New York suburbs, try Austin or Nashville.
John Phelan’s conclusion:
Why is it that Blue America finds it so mich harder to build houses than Red America? That is a question to which we shall return, and it is one of great consequence.
Stay tuned.
