[FactKnower69]

Impossible to estimate the amount of damage the runaway real estate market has done to competitiveness, innovation, and entrepreneurship in the interest of funnelling more free money to entitled landlords sitting on their asses cashing rent checks

[TeMPOraL]

Oh they're not sitting on their asses doing nothing. They're reinvesting the rent into buying, renting and/or flipping more property faster, screwing up things further for everyone.

[Schiendelman]

If you do one thing to help, never call it the market. It's the restrictions on the market.

[svnt]

Is this a shot at zoning? This particular problem would be and has been solved by known better regulation. The macro housing market demonstrates that most people don’t want to live in an imaginary Randian empire.

[Aeolun]

I’m sure prices would go down if it weren’t for all this regulation.

[wwweston]

Yes, restrictions are a problem where they’re a problem. YIMBY can help.

They’re not the problem. You could not only ban all zoning/building restrictions but make it legal to shoot people who suggest or support them you’d barely begin to touch the problem.

Incentives regarding what to build (or when or if) are as big a piece of the puzzle. And the fact that the very simple and hugely microeconomic concept of marginal returns rarely (if ever) makes an appearance in this conversation is a serious indictment of the economic seriousness of its players when it comes to how supply gets built. Cost disease also matters in construction. There are lots of moving pieces.

Even when supplying isn’t socially restricted, there are market forces that contribute to rising costs.

[Schiendelman]

I've heard people say this before, but when they point to a particular problem, such as the market currently building primarily studio and one bedroom apartments, you can usually find that there is a straight line from the incentives created through our land use restrictions and that problem.

What specific problem are you thinking of when you talk about market forces contributing to rising costs?

[wwweston]

Obviously, land use restrictions make a difference. I can think of a few acres down the street from where my parents house is that could easily be used to build about 48 units of modest (triplex/fourplex) density where a church on was just recently torn down. Neighbors NIMBYd a proposal along those lines.

OK, density/character politics strike again, familiar story.

But, notably, you could fit at least 12 single family homes with lot sizes that are 100% entirely in character with the surrounding neighborhood. Quite probably 16. Possibly as many as 20.

What's going in? 6 big lots + mcmansions.

Not because the city made the developer do it. Not because the neighbors wouldn't allow matching density. The difference between 16 and 48 might be a land use restriction problem, but the difference between 6 and 16 doesn't seem to be. For some reason, this is what the developer would rather build.

The microeconomic detail of the developer's decision isn't public, but it's a very well known phenomenon in many markets that producers do not want to oversupply and often target production a bit short of demand. This may not be true when marginal cost per unit is small (you may as well try to saturate the market and then create new demand)... but that doesn't describe housing, does it? Per unit costs are always non-trivial. Trying to maximize per-unit profit by producing short of demand may not be the only strategy, but it's an uncontroversial and reasonably incentivized one.

And this wouldn't be the first time that I'd heard that mcmansions on big lots can be considerably more profitable per unit. So I'm willing to bet that when these 6 houses go to market, they will sell for 2-5x comparable surrounding homes. There's comparables within a mile on smaller lots with multipliers in that range. So they'll get the same return from the project on without having to build as many units. And that's just on this site. In the geographic area, they will be keeping supply constrained and therefore keeping the marginal return on additional units they build higher.

Phrases like "per unit profit" and "diminishing marginal returns" commonly show up in some popular economic discussion in other markets -- agriculture at least. But for some reason, they're rare when not entirely absent from popular discussion of real estate development and housing.

I suspect additional significant dynamics with materials costs, financing costs, and price signaling (as well as supply) are also in play, but I'm probably a damned fool for posting as much as I have in hopes of a better public conversation and policy more beneficial for all. Probably would be smarter to find ways to play the game myself, especially given that existing homeowners share many incentives with developers. Other holiday activities are more likely to bring emotional rewards. Still, maybe someone smarter than me will provide me with the opportunity to discover why I'm wrong and more optimism is appropriate. That'd be a fine Christmas gift.