Why is new housing so expensive?

A breakdown

Levittown, New York in the 1950’s

In the late 1940’s William Levitt began selling homes in his eponymously named Levittown on Long Island. The community was a pioneer of the large scale, industrially produced, tract subdivision housing project–and of suburban sprawl and racially exclusionary real estate practices. 

But I’m impressed by one fact in particular: Levitt sold houses, at a profit, for a little over $100 per square foot (in today’s dollars). Meaning that a 1,000 square foot typical Levittown house would cost just $100,000 to buy–imagine that in today’s overheated housing market! 

Now, certainly our typical new house today is nicer in many ways–better windows, insulation, doors, appliances, heating, AC, safer wiring, and so forth. It’s also the case that today the homes in the original Levittown (upgraded over the years) now sell for between $400,000 and $600,000. 

Levittown today. Homeowner renovations over the years have customized the originally standardized homes.

So why is used housing, let alone new housing, so expensive today?

First it’s helpful to define some terms rigorously. We often use cost and price interchangeably. Here I’m going to use them for two separate specific things: 

• Cost consists of the expenses that are paid to build a house: land, materials, labor, design, permits, etc. 

• Price is how much buyers will pay to buy (or rent it) once it’s done. 

This distinction makes it easy to see where Profit comes from. Profit = Price – Cost. Value is created where the Price that people will pay is more than the Cost you expended to build it. 

Let’s unpack Cost a bit more. Cost consists generally of the following categories:

• Land–how much does land cost per dwelling you can build. Land cost/sf generally goes up in desirable areas and down in undesirable areas. Cost/sf also generally goes up with lower density construction (e.g. 1-acre lots) and down with higher density construction (e.g. row houses, mid-rise apartments, etc). 

• Materials–how much does the wood, tile, wiring, etc. cost? Materials cost/sf generally goes up with nicer quality and down with lower quality. Cost/sf generally goes up with more stringent code requirements and down with looser code requirements. Cost/sf also generally goes up with heavier or less common construction types (e.g. reinforced concrete) vs. lighter or more familiar construction types (e.g. wood framing). And of course, since materials are commodities, the balance of supply and demand for materials can move prices a lot (as we’ve seen in the past pandemic year in particular).

• Labor–how much does it cost to pay for all those materials to get installed? Labor cost/sf generally goes up as construction becomes more custom and more complicated, which can come from both quality or code requirements. Some professions may be able to command a higher price, because their work hours add more value per hour, they have specialized skills, or are fewer in number (the skilled trades in particular). And of course, cost/sf also goes up where labor is in short supply and down where there is plenty of labor available.

• Soft Costs–This is a fuzzy catch all which includes things like permits, fees, approvals, architecture, and engineering—which, again, can be more or less for the same reasons as the construction labor above. Soft costs/sf also go up where development approvals are harder, more uncertain, or take longer. Developers have to pay for extra design, community meetings, and lots of additional holding costs (taxes and maintenance) on sites waiting for development. Soft costs/sf often also go up on smaller projects and down on larger projects where the costs can be spread over a bigger building and bigger budget.

Part of what Levitt was able to do is drive down the Cost of the homes he was building through standardization: lowering material, labor, and soft costs. Land costs were also very low because he was building on farmland at the urban fringe (even as new publicly funded highways made the previously remote site accessible to the city and the region). Overall–a low Cost approach to building. 

A staged photo of a Levittown house with prefabricated materials ready to be assembled.

We wouldn’t necessarily want to (or be able to) copy the Levittown model today. But we can learn some things from how costs were managed: quickly build a large number of fairly similar buildings using economical materials and labor. The New England triple decker and the west coast craftsman bungalow are earlier example of a similar approach. In contrast, notice how today every new residential building is a unique creation delicately guided through the approvals, design, and construction process–bespoke process… expect bespoke prices! 

A longer discussion of the rising cost of residential construction will have to wait for a future post, but increasing costs can be attributed to a combination of rising materials costs, rising labor costs, increasing quality (more insulation, AC, etc.), and increasing building code requirements.

Ok - so we have a handle on what factors influence a building’s Costs. But how does that relate to the Price you might have to pay to buy it or rent it? Not as much as you might think! At least not at first.

The Price of a dwelling (largely) comes from a different set of factors, which we’ll explore in our next installment.