High Fixed Costs
High fixed costs creates market pressures that "bloat" offerings.
Consider two houses. One house is 800 square-feet and the other house is 3200 square-feet. Both houses had a "variable cost" to build of $100-per-square-foot.
Both are built on lots that cost $60k (including utility hook-ups).
Both have an additional $90k in regulatory compliance costs associated with building them.
The cost of the 800 square-foot house is $80k+$60k+$90k or $230,000 or almost $300 per square-foot.
The cost of the 3200 square-foot house is $320k+$60k+$90k or $470,000 or about $150 per square-foot. Four times more house (in terms of square-footage) at only twice the cost.
Which do you think is easier for builders to sell? Which do you think banks are more willing to finance with an eye of not losing their shirts on a distressed sale?
A feature, not a bug?
That inevitably dries up the flow of new "affordable" single-family dwellings entering the market which drives that demographic into dense-pack housing which might be the actual end-goal of the policy makers.
That creates a cascade of consequences which might appear to be good for the environment but is not always so good for the humans.
Even the "good" for the environment is debatable since it is an illusion. The environmental "costs" are simply driven over the horizon and are not visible.
And, for good or for ill, people in dense-pack housing are easier to "control" as we saw in China during COVID when authorities literally welded the doors shut on buildings.
The cost of the 800 square-foot house is $80k+$60k+$90k or $230,000 or almost $300 per square-foot. Thank you for your writing, I look forward to it.
ReplyDeleteForgive the Grammar NAZI, Joe, but it is nice to see "literally" used correctly. Thank you.
ReplyDeleteI remember an article you did on annual amortized expenses for a house. I note that this results in houses that cost considerably more to keep and repair.
ReplyDeleteAs costs of housing go up, more people are forced into homelessness.
ERJ, I was looking at the cost of permanent housing here in our new location. There is really nothing below $400,000, and likely nothing in a reasonable neighborhood below $500,000. Yes, this is largely an upper end suburban and rural area, but not every here is bringing in that kind of money (almost anyone, it feels like).
ReplyDeleteAnd yes, dense housing is just kicking the problem down the road. Look at any densely packed 3rd world city.
Housing is astronomical here. I don’t who can afford this. A 3 bd, 2 bath, on an acre or so, is a bargain at $500k, many are north of $600k. There’s an abundance of houses ‘newly updated’ (all the high end stuff) for over a million.
ReplyDeleteAdd in high interest rates, plus all those new cars everyone drives, the debt burden of some people is mind-boggling.
Southern NH
Highest cost per square foot was when a hairdresser for a star bought a 347 sq ft studio in Manhattan for over $500K. But that was the going price in that part of town so we approved her loan. But I did wonder what happens when the show shuts down.
ReplyDeleteYes. High non variable costs appear lower when spread over more units (in this case square feet).
ReplyDeleteThis is always true of regulation. It is also why regulations support and encourage big business - you need lots of units (items, customers, transactions, etc) to keep down unit costs.
This means it is entirely predictable that there will be fewer and more expensive houses in areas with a higher regulatory burden.
But if course the regulators never see that - they always see the fault as someone else's, and they usually see the cure as more regulations...
Jonathan
We lived through exactly this some decades ago in Chapel Hill, NC. Even allowing for the university, it was a nice place to live, as long as you were upper-middle class or content to rent. From what little I have seen since our exit it's only gotten worse.
ReplyDelete