This week in charts
Education
Trades
Housing
Property valuation changes
Ratios
Household debt
Bankruptcy
Unemployment
Policy rate decisions
What Makes Housing So Expensive?
Buying a home is by far the largest purchase most of us will make, and paying the rent or mortgage will be our largest monthly expense. In the post-pandemic home-buying boom, the median sale price of a new home peaked at almost $500,000 dollars, just under seven times the median household annual income that year (though it has since fallen). Most new homebuyers will pay around 30% of their income on their mortgage, and the median renter in the bottom quintile of income spends 60% of their income on rent.
People concerned about building more housing are right to pay attention to zoning and land use rules: over 100 million Americans live in places where most of the cost of residential property comes from the land itself. But they should not neglect the physical costs of building homes, which are overall more important. Unfortunately, as we’ll see, reducing these physical costs is far from straightforward.
We can divide the costs of a new home into roughly three buckets: “hard costs” (physically constructing the home), “soft costs” (design, administration, marketing, and other non-physical construction costs), and the costs of land. Per the NAHB, on average hard costs are about 56% of the total costs, soft costs (including builder profits) are about 25%, and land costs are about 18%.
The cost of housing comes from a variety of sources. In most cases, for both new construction and existing housing, the largest line item is the cost of constructing the home itself. For new construction this is on average 80% of the cost of a home (including hard and soft costs), while for existing construction it's still in the neighborhood of 60-70%.
It’s only in dense urban areas that the cost of land begins to dominate the cost of new housing, driven by regulatory and zoning restrictions that limit how much housing can be built in a given area. Another way of looking at it is that in the areas that we need housing the most, zoning and regulatory factors are responsible for the lion’s share of housing costs.
U.S. Home Sales Jumped 9.5% in February
Home sales rose in February from the month prior, marking the first time in more than two years that sales increased for two consecutive months.
Sales of existing homes, the majority of purchases, surged 9.5% to a seasonally adjusted annual rate of 4.38 million, the National Association of Realtors said Thursday.
Economists surveyed by The Wall Street Journal had estimated sales of previously owned homes to fall 1.3% in February.
The momentum in sales over the last two months comes just ahead of the spring selling season and follows one of the most sluggish periods for the housing market in recent history.
Home sales in 2023 fell to the lowest levels in nearly 30 years. Since 2022, higher mortgage rates, high home prices and limited inventory have stifled sales, which were still down 3.3% from a year earlier in February.
But mortgage rates that have dropped since last fall and a now-rising inventory of homes for sale are giving some buyers more choices.
“Additional housing supply is helping to satisfy market demand,” said Lawrence Yun, NAR’s chief economist.
The most expensive homes saw the biggest increases in sales. Homes sold for more than $1 million shot up 37% in February, compared with the same month a year ago. Sales of homes priced from $750,000 to $1 million rose 23%.
Thirty-year fixed mortgage rates have been trending down following a recent peak of 7.79% in October. The rate averaged 6.87% for the week ended March 21, according to Freddie Mac.
Home buyers in February also benefited from a more than 10% increase in the number of homes available for sale, compared with the same month a year ago, NAR said.
Demand, however, appears to be outstripping supply, leading to rising prices that will inevitably push some buyers out of the market. The national median existing-home price rose 5.7% in February from a year earlier to $384,500. That was a record high price for the month of February, NAR said. All four regions of the country analyzed by NAR saw price increases.
“Homeowners are in a happy situation with the rise in prices,” said Yun on a Thursday press call. “But home buyers are frustrated.”
Prices rose most in the Northeast, even though sales dropped more there than any other region, a development NAR attributed to still-lagging inventory.
Home buyers already feeling priced out shouldn’t expect affordability to greatly improve this year, said Charlie Dougherty, a director and senior economist at Wells Fargo.
“At the end of the day, you’re still looking at home prices that have risen 45% since January 2020 and incomes that haven’t risen as much,” he said. “The sales rebound is unlikely to be all that energetic.”
There are some signs that sellers are adjusting their expectations or capitulating more often on price. A smaller share of homes sold in February went for more than asking price, compared with a year ago, NAR said. And nearly 14.6% of homes listed for sale in February had seen a price cut, an increase from the same month last year, according to a report from Realtor.com.
Christine Quinn dropped the price of her mother’s house in Fairhope, Ala., more than once before selling it last month for $580,000. “The season was not a great time to sell,” she said. “I’m relieved that we’ve sold it.”
In Denver, Matthew Hingst bought a one-bedroom apartment in February for 1.7% below the listing price. The seller also gave him $3,000 to make small repairs. “I feel like the buyer has a lot more power to be able to ask for things,” Hingst said.
The height of the sales market typically comes in the spring and economists said results during those months will hinge in part on whether buyers can get more relief from mortgage rates. Federal Reserve officials have said they expect to cut the federal-funds rate at least three times this year. Those cuts could precede lower borrowing costs for home buyers.
Also still unclear is how NAR’s $418 million agreement to settle claims that the industry kept agent commissions artificially high will affect home sales. Rules about how agents are compensated are scheduled to change in July.
Yun said real-estate agents have raised the possibility that the new rules might squeeze first-time buyers, who might have to come up with money to pay an agent if sellers choose not to cover the cost. First-time buyers accounted for 26% of home purchases in NAR’s latest survey, matching the lowest figures ever measured for that cohort of purchasers, Yun said.
This week’s fun finds
Newest member of the Analytics and ESG team, Jack Bruton served up some Detroit-style pizza for his moai on Friday. The wait was worthwhile - it came with 25 lbs. of wings and his friend’s award-winning hot sauce. Well done!
On April 8, 2024, a total solar eclipse will cross North America, passing over Mexico, the United States, and Canada. A total solar eclipse happens when the Moon passes between the Sun and Earth, completely blocking the face of the Sun. The sky will darken as if it were dawn or dusk.
If you’re looking for something fun to do this weekend, check out how to make a pinhole camera.
You don't need fancy glasses or equipment to enjoy one of the sky's most awesome shows: a solar eclipse. With a few simple supplies, you can make a pinhole camera that lets you watch a solar eclipse safely and easily from anywhere.
All you need is:
- 2 pieces of white card stock
- Aluminum foil
- Tape
- Pin, paper clip or pencil
