Why Are Homes So Expensive?
Purchasing a house is most likely the largest purchase most people will ever make. It can take months to even years to save up for a traditional down payment and then there’s still another 15-30 years of financing involved. Some investors still need time to secure funding before purchasing a property. So why is it that homes are so expensive?
The average price of a home in America has changed over time due to:
- Changing economic factors
- Rising construction costs
- and many other elements…
Why homes cost as much as they do
The sudden price growth seen in the U.S. housing market is a result of several factors. Political, economic, and societal. Below are the main factors to why homes are so expensive now:
- Interest rates
- Increased local zoning regulations
- Higher construction costs
- Lower builder confidence
- Changing demographics
- Increased land prices
- Government subsidies
- Lower supply
Despite the recent increases in interest rates, they are still historically low. Especially last year. This gives more people more purchasing power and increase demands for homes.
Increased local zoning regulations
Things have changed a lot over the years and local zoning regulations are one of those major changes. These regulations make it more difficult to create new inventory and it comes along with more fees associated with permits. These obstacles have made it so that home prices have increased with supply being limited.
Higher construction costs
Many of the construction materials we use to build homes in America are imported. This means the price of materials are often dictated by trade agreements and the tariffs placed on those materials. These agreements have changed a lot over time and have directly increased the cost of building materials.
Lower builder confidence
Ever since the Great Recession, home builders faced significant losses with new constructions. That trauma has carried over, where they are only building for the super wealthy. Therefore, they are building less homes for prices out-of-reach for most Americans.
Millennials in recent years turn of age to start purchasing homes. This created more demand over the past several years. Even younger Gen Zs have begun looking for homes as well. With home building in decline and more demand, we can understand why home prices have increased as much as they have lately.
With a growing population, this creates more demand than there is supply in cities and towns across the country. Which causes more scarcity and competition, directly increasing the price of land.
As we watch home prices increase, the government tries to help first time home buyers with their purchase. They create programs, that help subsidize buying a home. However, the argument that government subsidies increase price is due to the fact that this creates more home buyers, which creates more competition and will lead to prices increasing.
Despite political and social issues, there are simply too many people seeking to buy a home than there is inventory available. This is driving home prices up.
How do expensive homes affect investors?
High home prices affect investors in two distinct ways: increased acquisition costs and increased profit potential. Investors are not immune to increasing housing costs and they will need to raise more capital to secure their deals. It is crucial to have funding sources to be able to act fast when a new deal presents itself and be able to analyze these high home prices and factor their profits.
In some markets, the increase in home prices results in more potential profit for investors. However, be sure to do you due diligence and evaluate deals on a case-by-case basis, to ensure your investment will perform well.