There’s a new culprit accused of inflating home prices: investors.
The share of U.S. homes sold to real estate investors hit a record 18.4% in the last quarter of 2021, according to real estate firm Redfin. Metro Atlanta had the highest share of all major markets: 33%.
Investors don’t just buy and flip homes. An emerging trend is called “build-to-let”, in which an entire housing estate is developed and then sold to investors who rent them all out. This practice annoys local elected officials who face increasing pressure to lower housing prices.
There is no doubt that these practices affect house prices. But there’s reason to believe they’re symptoms of a much larger problem: high demand and insufficient supply.
Investing in single-family homes is attractive because prices are rising very quickly. Why are prices rising so fast? Demand exceeds supply.
Likewise, investors like rental properties because they require large monthly payments. Why? Demand exceeds supply.
Pressuring investors to seize these opportunities could offer some relief to margins. But if we want to solve the fundamental problem, we must seriously increase the supply.
The 2010s were a dark time for home building in Georgia. Throughout this decade, fewer new residence permits were issued than during the second half of the 1990s. Yet there were 2.5 million more Georgians counted in the 2020 census than there were. in 2000.
Mortgage giant Freddie Mac has estimated that the United States has a housing shortage of nearly 4 million units. Based on pre-2010 trends and continued population growth, the shortage in Georgia alone could number in the hundreds of thousands.
While there are many reasons for the shortage, from soaring lumber and labor prices to the bankruptcy of many builders after the Great Recession, there is one factor that public officials can address from front: the cost of regulation.
My organization, the Georgia Public Policy Foundation, released a study earlier this year that found that nearly 27% of the price of a new single-family home in our state comes from some sort of regulation, tax, fee, or other government imposed costs. . The study, in which we interviewed dozens of lot developers and home builders across the state, did not attempt to attribute these costs to federal, state or local governments. But clearly we have a particular problem in Georgia: A similar study conducted last year by the National Association of Home Builders estimated the national cost at just under 24%.
Solving this problem will require many seemingly small actions to reduce the impact of the many different costs imposed by the government.
Here’s why: The biggest cost identified in our study is what homebuilders spend to comply with building code changes in the last 10 years alone. Builders have estimated this cost at 7% of the price of a new home. While 7% may not seem like much, it’s the cumulative effect of that cost, plus over 4% for architectural design standards, plus over 3% for lot developers to comply with zoning requirements, etc. . Everything adds up.
And while the right number here isn’t zero – some regulations are warranted and the cost of some government services would be passed on to taxpayers if not borne by builders or buyers – it is certainly possible to reduce a 7% cost for, say, 5% or 6%. And then to reduce the cost by 4% and the cost by 3%. Etc.
Let’s convert these percentages to dollars. If the price of a new home is $400,000, our study would place the portion attributable to regulatory costs at a staggering $107,600. Cut those costs by a third, and the savings would be around $36,000. This would make homes more affordable to buy, but also to build – which is essential if we are to increase supply.
Rising house prices are a multi-faceted problem that requires multiple solutions. But above all, government officials should stop making homes more expensive than necessary.