|Understanding the Housing Cycle
It should come as no surprise to the reader that over the last ten to fifteen years housing costs have risen dramatically and recently they have fallen significantly.
This paper will attempt to explain the following conclusions:
The housing market is normally in a “growth mode” (where new homes are required to accommodate an increasing population) or a “retraction mode” where the supply of existing homes is more than sufficient to accommodate demand. When in the growth mode, home values are closely related to the cost of new homes (replacement value); when in the retraction mode, all bets are off.
The cost of building a house (the bricks & mortar) has, over the past several decades, increased, by almost exactly the same percentage as the cost of living (CPI);
The total cost of a new house, including land, has increased by a much greater amount;
The runaway cost of housing is due to rapidly increasing lot costs, resulting from:
An increase in lot cost results in a “multiplier effect” which causes housing costs to increase by more than the increase in the lot cost, as well as the structure.
Artificial constraints like building permit limitations, impact fees, etc. result in higher lot costs which, owing to the multiplier effect, push housing costs even higher.