Building more units reduces land cost per unit following the curve 1/n.
That means it matters a ton when you go from 1 unit to 2, and still matters going from 2 to 4, but once you get to 6-8 units it is not so impactful. At that point, the binding constraint on affordability of new units is construction cost.
Now, the overwhelming majority of residential land in America is single unit, so just unlocking ADUs and duplexes is an incredible opportunity for almost everywhere.
But it’s just worth knowing that for higher density projects, construction cost is a bigger problem than land cost.
It’s a good nit. I tried to gesture at that on my way out in the conclusion, but you’re ofc right and I’m glad you’re making the point plainly here in the comments.
The bit about the logic of density is so basic, but so crucial. I am convinced most normal people think density is a set of aesthetic or social-engineering preferences forced on people, not an almost inevitable outgrowth of the way successful settlements develop.
I like to compare density to buying a taller bookcase or getting an organizer to sit on top of your desk. They are literally exactly the same thing.
"In some discussions, affordability is implicitly defined as a decline in the absolute dollar value of existing housing. That framing is misleading. If housing prices were to fall rapidly across the board, it would probably cause a financial crisis (or be caused by one).2 This means that a scenario in which housing prices suddenly plummet entails significant human misery and so, would be bad."
If asset prices are based on future value, and future value is based on the fact that supply would be constrained, then existing homeowners overpaid for their assets. In a *rational market*, we should expect the prices of existing housing stock to fall after a commitment to abundance policy. As with the mortgage crisis, someone needs to take the haircut. Who should that be?
That’s a whole different discussion, but let me take a crack at it.
Housing is probably overvalued (for some definition of over valued) and I’m not sure there’s an easy dismount to be had already existing property owners who are highly leveraged. Going forward, I can imagine the gradual institution of land value capture (either taxation or leasing) gradually decapitalizing land rents.
Exactly how that could even play out, and over what timelines is a whole extra thousand words. And I’m still not quite sure when/how that would start breaking assumptions built into the current financial system.
There are two factors that could create room for a “haircut” without any serious ramifications:
One is inflation. Since debts are in nominal dollars, if we have a meaningful increase in wages as part of broad inflation, but real estate stays flat, then houses are getting cheap cheaper without messing up anyone’s loans. That is part of what we’d expect to see if interest rates are going up to curb inflation. However, we didn’t see that during the Covid inflation because, that inflation was partly caused by dropping interest rates to zero first which inflated asset prices, and then they flattened out. Bummer.
The second factor is the substantial appreciation that most houses have experienced since 2012. Unfortunately, recent buyers don’t have that cushion. But, if we had modest declines in home prices, most owners would only be losing paper appreciation, not going underwater.
That being said, I don’t think the housing market is very rational. This whole business we’ve seen over the last five years, where people refuse to move because they don’t want a higher interest rate, or refuse to lower their price even when their house sits on the market for a year, because Zillow told them it was worth so much in 2022, has really reinforced for me how irrational and sluggish the housing market is. Especially compared to the commercial market where we’ve seen more significant movement over the last five years.
Inflation is by default a debtors friend and a creditors enemy. I think the implication of your solution is that the creditors (investment banks) take the fall, but with a gradual landing. I'm fine with that and it would be possible to sell that politically, but not without a fight from the banks.
One tiny nit, I want to add:
Building more units reduces land cost per unit following the curve 1/n.
That means it matters a ton when you go from 1 unit to 2, and still matters going from 2 to 4, but once you get to 6-8 units it is not so impactful. At that point, the binding constraint on affordability of new units is construction cost.
Now, the overwhelming majority of residential land in America is single unit, so just unlocking ADUs and duplexes is an incredible opportunity for almost everywhere.
But it’s just worth knowing that for higher density projects, construction cost is a bigger problem than land cost.
It’s a good nit. I tried to gesture at that on my way out in the conclusion, but you’re ofc right and I’m glad you’re making the point plainly here in the comments.
The land vs structure distinction is key. A lot of the confusion in housing debates disappears once you separate those two drivers.
The bit about the logic of density is so basic, but so crucial. I am convinced most normal people think density is a set of aesthetic or social-engineering preferences forced on people, not an almost inevitable outgrowth of the way successful settlements develop.
I like to compare density to buying a taller bookcase or getting an organizer to sit on top of your desk. They are literally exactly the same thing.
"In some discussions, affordability is implicitly defined as a decline in the absolute dollar value of existing housing. That framing is misleading. If housing prices were to fall rapidly across the board, it would probably cause a financial crisis (or be caused by one).2 This means that a scenario in which housing prices suddenly plummet entails significant human misery and so, would be bad."
If asset prices are based on future value, and future value is based on the fact that supply would be constrained, then existing homeowners overpaid for their assets. In a *rational market*, we should expect the prices of existing housing stock to fall after a commitment to abundance policy. As with the mortgage crisis, someone needs to take the haircut. Who should that be?
That’s a whole different discussion, but let me take a crack at it.
Housing is probably overvalued (for some definition of over valued) and I’m not sure there’s an easy dismount to be had already existing property owners who are highly leveraged. Going forward, I can imagine the gradual institution of land value capture (either taxation or leasing) gradually decapitalizing land rents.
Exactly how that could even play out, and over what timelines is a whole extra thousand words. And I’m still not quite sure when/how that would start breaking assumptions built into the current financial system.
There are two factors that could create room for a “haircut” without any serious ramifications:
One is inflation. Since debts are in nominal dollars, if we have a meaningful increase in wages as part of broad inflation, but real estate stays flat, then houses are getting cheap cheaper without messing up anyone’s loans. That is part of what we’d expect to see if interest rates are going up to curb inflation. However, we didn’t see that during the Covid inflation because, that inflation was partly caused by dropping interest rates to zero first which inflated asset prices, and then they flattened out. Bummer.
The second factor is the substantial appreciation that most houses have experienced since 2012. Unfortunately, recent buyers don’t have that cushion. But, if we had modest declines in home prices, most owners would only be losing paper appreciation, not going underwater.
That being said, I don’t think the housing market is very rational. This whole business we’ve seen over the last five years, where people refuse to move because they don’t want a higher interest rate, or refuse to lower their price even when their house sits on the market for a year, because Zillow told them it was worth so much in 2022, has really reinforced for me how irrational and sluggish the housing market is. Especially compared to the commercial market where we’ve seen more significant movement over the last five years.
Inflation is by default a debtors friend and a creditors enemy. I think the implication of your solution is that the creditors (investment banks) take the fall, but with a gradual landing. I'm fine with that and it would be possible to sell that politically, but not without a fight from the banks.
A useless thing, though free, is yet useless.