Herriges Rezoned: “Why Are Developers Only Building Luxury Housing?”

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Similar math applies to single-family homes. According to data from the National Association of Home Builders, the median cost of constructing a single-family home in 2015 was $289,415, or $103 per square foot. Even if the land costs nothing, and the developer makes no profit, this is already out of reach of many would-be buyers.

It’s not a new observation that construction cost alone situates brand new housing outside the budget of lower-income households. The same has been true in other eras. So how do these households afford housing at all?

The answer is filtering. As a building ages, it often becomes more affordable. The aesthetics are a bit dated, the place needs maintenance, the neighborhood that was once up and coming is now less so. Thus, older housing tends to “filter” down to a lower income bracket. The rich are buying the new stuff.

Think about who buys new cars versus used cars. It’s not all that different. Yet, as Joe Cortright points out, “There’s no outcry about America’s affordable car crisis”—because America has plenty of affordable cars, just not affordable brand-new cars.

And yet a lot of people dismiss filtering as magical thinking. “Oh, so you’re saying we can build housing for the rich and it will just somehow trickle down to the poor?” I understand why the idea engenders intense resistance. It often involves a complicated chain of cause-and-effect, and so it can feel like an article of faith.

The skeptics have a point: At the neighborhood level, or the individual-home level, filtering doesn’t behave like an inexorable rule. Various things can break the filtering chain. Gentrification can occur. A previously blighted neighborhood becomes desirable, resulting in rapidly increasing property values on those particular blocks. A softening housing market can unleash latent demand: Someone who was living with roommates may decide to get their own place, or someone who opted not to move to a certain city may now decide they can afford to make a change after all. This increased demand can keep rents from falling outright. 

Filtering is a very long-term process, and not every home will work its way down to become affordable to the working class. But that doesn’t mean it’s a not real phenomenon.

Most of us live in housing that has filtered. Only a small fraction of all the buildings in your city were likely constructed this year, or even this decade. It is unrealistic to expect new construction to solve our affordable housing problems, when new construction comprises a tiny share of the homes that exist.

Instead, we need to examine the forces that determine the price of already-existing homes and new homes alike. Chief among those forces is the interaction of supply and demand.

2. Supply and Demand Are Out of Whack

Let’s get this out of the way: nine times out of ten, “luxury” is really just a marketing term. Most houses marketed as “luxury” aren’t really luxurious in any meaningful sense of the word. Sure, if you’ve got a personal elevator, a home movie theater, or sixteen bedrooms, your house might be a luxury house. For most of us, though, “luxury” homes are totally ordinary homes for which some buyers and renters, if the market is hot enough, might be willing to pay luxury prices.

A simple thought experiment demonstrates this: Imagine that you could airlift a cute San Francisco Victorian house into East Baltimore. Would it still command San Francisco rents? Of course not.

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