Here's the Real Reason Young People Can't Afford a Home


Like so many millennials these days, Charles Bryant has been having a rough go of things in recent years. The 39-year-old New York native had a good job as a hotel manager in Delaware, but things changed quickly when the pandemic hit.

“I was one of those guys that had a five-year, 10-year plan,” Bryant recently told Fortune. “I wanted to be at a certain place.” Unfortunately, those plans dissolved when he had to take a pay cut and eventually made the hard decision to leave his hotel job. “The pandemic halted all the positive momentum I had built professionally in the 10 years prior,” he said.

After searching for new opportunities, Bryant finally found a job as an operations manager for a major retailer, a position that has helped him through these trying times. But while he may have avoided the worst, his life is still far from where he wants it to be. He has $42,000 in student debt and lives with his parents, an arrangement of necessity given the skyrocketing price of homes.

In a lot of ways, Bryant’s story reflects some growing trends. Many young people have had to change course in recent years; many are saddled with student debt, and many are living with their parents. Indeed, roughly 58 percent of 18-24 year-olds were living with their parents in 2021, as well as roughly 17 percent of 25-34 year-olds.

The reason for the trend is not hard to pin down. “A staggering 70 percent of Americans between the ages of 23 and 40 who want to buy a home say they can't afford to,” writes Peter Rex in a recent Newsweek column, “and those who can are doing so at a later age than their parents.” In all, only 43 percent of millennials are currently home-owners. And with house prices up nearly 120 percent since 1965 (adjusting for inflation), that number will likely remain low for quite some time.

Getting to the Root of the Problem

So why are housing prices so high? It’s a question that everyone is asking, but few seem to have a good answer for.

Some blame greed, but that argument really doesn’t hold water. People haven’t suddenly become more greedy than they were a few decades ago. Another explanation is that money printing from the Federal Reserve is causing inflation, and that is certainly part of the problem. The Fed’s purchases of Mortgage-Backed Securities in particular may be inflating housing prices above what they would otherwise be. But with housing prices ballooning so quickly, inflation likely doesn’t account for the lion’s share of the price-hikes.

What does account for it is good-old supply and demand. Simply put, the primary reason housing prices are soaring is because the supply is being limited while the demand is growing.

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Patrick Carroll is the Managing Editor at the Foundation for Economic Education.

Photo: by Brett and Sue Coulstock, under CC BY 3.0

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Explaining high cost of housing

We have designed about 1,700 developments in 48 states using methods we pioneered this past 30 years. This response is mostly based on facts, and some opinion.

While some blame regulations, or artificially raising prices, or supply chain problems, material costs, and labor rising - all those are true. However, what people don't realize is that the cost of raw land and simply bad design has more to do with the higher cost of housing - which by the way is a 'for profit' business.

Here in the suburban Minneapolis area we would be lucky to find raw land under $200,000 an acre. Even then, it would likely be laced with wetlands (regulations), easements, setbacks etc. in which the actual usable land would net somewhere around $300,000 an acre. Those cookie cutter jammed in 50' wide x 120' deep higher density lots will yield about 4.5 units per acre after the street right-of-ways are dedicated to the city. So the raw land per home before any improvements is $66,666 per house. Given the same site in Texas, and you can still find good raw land for $50,000 an acre with far less regulatory restrictions and that price per lot would be about $50,000 less. So why is that Minneapolis area land so expensive? Because developers are (stupidly) willing to overpay for the land - completely artificial pricing. Will Texas land soon be overpriced? Maybe. The realtors selling land can make 10% commission, so it's in their best interest to sell the highest priced land. In some areas land is running out, so maybe high cost is somewhat justified, but not in most areas.

I'll refer to our own development, The Ponds at Highland Hills in Rochester, Minnesota which we began the process November 2020 to negotiate on the 524 acres and start the design of the Master Plan and first 54 acre phase. At the time we were still dealing with interest rates in the 3% range. The City enacted a connectivity code which is another way to force a tight grid design with very short blocks. This form of regulation significantly increases street volume (length) forcing the most miniscule lots to achieve density.

We (myself and the Civil Engineer) successfully fought the regulations resulting in a 224% reduction of public street (over a mile less) with the idential density. In the two years from the beginning to contracting the construction, pricing the construction the cost increased 38% to $1,622 per linear foot of street, which factors in sewers, lighting, earthwork, and more. In other words, it went from $1,000 initially budgeted to $1,622.

If we complied with the regulations, we would have had an ugly and mundane 191 home development that would have cost us $8.5 million dollars more or nearly $45,000 more per home. That cookie-cutter grid would have been super quick and easy for the engineers to whip out a plan in CAD. The Rochester area engineers typically charge 14.5% of the construction costs, so they would have made $1,200,000 more in fees. The 'typical' engineer given the choice of an organic design in which no automated CAD can easily whip out plans vs. actually manually grading a site while making $1,200,000 less in fees - which do you think they would promote?

Our construction costs were also based on interest rates of 2020 which were in the 4% range. Construction loans are not fixed, so we are now paying over 9% monthly. Ultimately who pays for the increase - the home buyer.

I could complain about Rochester's City fees, but I won't. All Minnesota larger cities charge enormous fees, but that pays for the infrastructure costs so that the developer can build higher density vs. septic fields and water wells. We could have found 54 acres cheap in a small town but would have had 1/4th the density. I don't think Rochester was being unreasonable when compared to towns in the Twin City metroplex.

The more efficient design made our development economically feasible and still (we hope) profitable. Initially we projected homes selling for $500,000 and up back before the 38% increases and hovering around 4% interest. It seems that the builders are in the $700,000+ range. While some areas (again Texas as an example) we see fairly reasonable raw land prices, my clients nationally all have the same 38%'ish rise in construction costs and unavoidable high interest rates.

We have seen this past few decades city after city being influenced by smart growth and new urbanism which holds to century old design principals and ignores the latest innovations, as if cities of the past were better. The grid is simply a non-technical brainless solution that given a set of regulations anyone with zero experience can layout. A tight grid means cross streets need to be built without homes fronting those streets which equals an enormous waste. The 'lets build more streets' mentality to achieve walking connectivity is absurd. I forgot to mention the environment - you think building twice the street than necessary helps the environment in some way?

Just build a dedicated trail 'system' first, then the streets and you will have better and safer pedestrian oriented neighborhoods and a fraction of the streets.

However, when reading through these so called 'smart' regulations, it's easy to design a development that the civil engineer charging a % of construction costs will greatly profit from at the cost to the consumer. Meanwhile, the cities that take advice from the 'city planners' are unintentionally causing the unaffordable housing we desperately need.

In the end the only way to make affordable housing while ignoring the above factors is to overly densify, create the cheapest possible housing with the least architectural character, and to subsidize it through some form of TIFF, often creating instant slums that are not great places to raise a family. Of course that's just my opinion serving land developers worldwide since 1968.