It's the land, stupid: How the homebuilder cartel drives high housing prices

No shortage of land in the US, but everyone wants to live in the same few places (for good reason), and those places have a lot of restrictions on what can be built where.

It's satisfying to blame a big bad "them" for this, but the problem is "us". We all want our properties to increase in value so we collectively conspire to suppress supply that would make our properties less valuable.

>And I realized that to call these businesses “homebuilders” is misleading. It’s striking how little of their business has to do with, well, building. For instance, here’s D.R. Horton in 2023: “Substantially all of our land development and home construction work is performed by subcontractors.” Here’s Lennar in 2023: “We use independent subcontractors for most aspects of land development and home construction.” I suspect most of the other big guys would say something similar. These aren’t builders, they are financiers that borrow cheaper than real developers and use that cheap credit to speculate in land, hiring contractors to do the work. They are, in other words, middlemen.

This is pretty far out there. They are the general contractor and have substantial value add to the project.

Most of the rest of the article is misunderstandings like that.

> tax the land of lot developers so they don’t hold land off the market.

This is something I dealt with a few years ago. There were a few acreage lots (5-15 acres) my partner and I were considering buying and building a house on, and all of them had been in the $200k range a year or two before but had been bought by land speculators (in some cases by the same person). Prices went from ~$200k to ~$750k, which we weren't interested in.

Most of them sold. One of the larger lots was around $350k and is still for sale, now for almost $2 million.

I don't think developers should be forced to sell land just because I want to buy it, but the taxes they pay on their empty lots is extremely low. I checked on a couple of the ~$750k lots, and the taxes were something like $115 per year. At that rate, it costs the developer/speculator basically nothing to hold onto it while prices rise.

If lots like this were taxed at, say, 20x the current rate for lots that are near areas that are being built up and are ready to be bought, then there would be a stronger incentive for the owners to sell to people who are ready to build and start paying property taxes. It seems like such an increase would benefit everyone except the speculators.

Housing can’t be both a good investment AND affordable. As a kid, I was told that my house was a good investment and the houses rise in value overtime. Now, I own two houses which of both appreciated by about 9% per year for a decade.

We agree there is a problem.

But I doubt the premise that land hoarding is the key issue. It seems to me that everyone wants to live in a 3,500 square foot detached house near the city. But only so much of that exists.

At least one major reason is that neighborhoods actively fight the installation of semi-dense housing because it would “ruin the character of the neighborhood.” This gets encoded in zoning.

The people who have most power over local zoning regulations are neighborhood boards, not home builders.

I don't find this article very compelling. The core argument comes from a single 2018 paper from a single author who used IV regressions to claim that increased consolidation of homebuilders is consistent with a reduced amount of new construction.

The argument in this article is that small homebuilders got caught in the credit crunch and had to flip their lots to the mega builders, who maintained access to capital and credit that the small players didn't have. So now the big players are hoarding land and not building on it to control the market.

I can believe that a credit crunch has cooled the construction market. Nothing about that would be surprising. I have a harder time believing that the major home builders have bought up so much land that nobody else can build anything, leaving them to control the market price of houses by artificially limiting supply.

Anecdotally, the most expensive housing markets are in cities where most of the buildable land has already been used by something. This is where these supposed land-hoarding mega builders would have the least influence. In my experience there are a lot of affordable houses being built in smaller cities and in the outskirts of major cities, but the demand just isn't there. More people want to live in dense and desirable locations and they're willing to pay a premium for it.

This paragraph looks wrong. "In 2005, when D.R. Horton sold a record number of homes, it made $1.47 billion. In 2023, when it built roughly half as many, its profit was a little over three times as high, or $4.7 billion. "

It did not build half as many homes, it was 82917 homes in 2023 vs. 51172 in 2005. Also, the profit number should be corrected for inflation when comparing across almost 2 decades.

Overconsolidating is bad, but the article's chain of logic falls apart for me because it doesn't actually make any connection to indicate that these companies wouldn't make even more money by building more homes, while ignoring that local permitting and approval process have gotten ever more pricey and complicated over even just the past two decades.

For the extreme example, take a look at San Francisco, which has approved a grand total of 16 housing units so far this year (https://www.newsweek.com/san-francisco-only-agreed-build-16-...). Only a tiny margin of ultra-high-price housing can even be sustainable, let alone profitable, in that environment.

One of the worst aspect of these big home builders is that they impose homeowners associations on all of their new homes. It's difficult to find new homes free of HOAs.

Fun fact: About 89% of Canada's land area (8,886,356 km² or 3,431,041 sq mi) is Crown land: 41% is federal Crown land and 48% is provincial Crown land. The remaining 11% is privately owned. For example, 92% of Quebec, 87% of Ontario, 95% of Newfoundland and Labrador, and 94% of the land in British Columbia are Crown land. So when you “buy” land, you actually become a tenant to the Crown. If you don’t pay the property taxes, “your” property can be registered for sale. The laws around properties in Canada are extremely complicated and stupid. A friend of mine, after building their house and wanting to connect the sewer to the municipal one, was required to pay more than $50k! After 2 years, they ended up having a septic tank instead.

Unfortunately, there’s no hope to fix the housing issue in a democratic way because the majority of the voters are landlords. The only possible solution is like Japan (where houses are depreciated assets) by having centralized control over housing, zoning, permits, and everything to maintain a flat price. Other than that, the future is grim for young people or anyone who doesn’t already own a house. I remember a year ago I saw a mortgage here in Canada of 70 years, so if you bought a house at 30, you will become a Crown tenant by 100!

(1) https://en.m.wikipedia.org/wiki/Crown_land

I’m just not sure about this article. To me, it seems like these large homebuilders can only efficiently operate in tract housing so if you want to live in the middle of nowhere and have total uncertainty regarding the quality of the neighborhood that you live in and quality of the schools, etc because they just built it and pay through the nose for a brand new home, you can buy into tract housing, but I think many people want to live in established neighborhoods, where newly built homes are custom built and they mostly aren’t built by these new companies or they have to build large condos or apartments, because that’s the only way to efficiently add large numbers of units. High housing prices are the result of the fact that most people purchase used homes, because the risk of purchasing a used home in an established neighborhood is simply lower and there just aren’t that many used homes, because people want to live in established neighborhoods.

Have there been serious attempts at describing how a Georgist land tax would appraise the value of the land?

If the companies that are holding land are able to maintain steady profits with minimal competition, then the logical approach is to say we should incentivize them to build on the land, make improvements etc now to ideally decrease the value of the existing land to make it more affordable to people. So could you essentially say "if you own more than 20 properties that are not owner occupied, you have to pay a tax.. but if you sell the house, you get some large chunk of the tax money back".. something that should encourage the big builders to build something and to sell it -- not to build and potentially rent it out -- which is in many cases the most expensive type of house to rent.

We need to make it so that most neighborhoods are developed by homebuyers rather than large conglomerates. My 1920s streetcar suburb was platted by the original farmer/owner and then sold off in lots. Today, this would be illegal / cost-prohibitive. It also leads to nicer / more varied neighborhoods where people actually own their land. Instead of yet another branded neighborhood where everything looks the same and the HOA board thinks too highly of themselves

  Nearly 40% of the United States is public land, supported by taxpayers and managed by federal, state, or local governments. -- https://headwaterseconomics.org/public-lands/protected-lands/public-land-ownership-in-the-us/

Allocating a few more percentage points of that for housing could have a large effect on prices.

Absent from this article:

- Financing requirements & anticompetitive lending practices

- Municipal/state building codes and the regulatory capture thereof

- NIMBYism and activist urban planners

- The tyranny of the commute

So basically, if you're an individual, or a contractor who reinvests their earnings into the housing market, you face two challenges: getting competitive financing, and finding a plot of land to build on.

Question: is finance screwing up capitalism? Real estate is supposed to be one of the most competitive and dynamic markets. If you can turn even this very simple and basic market into a quasi-monopoly, then there is something fundamentally wrong with the whole economy. And it seems all fingers point to Wall Street.

Cornering the market, or a sufficiently large portion of it, doesn't necessarily drive prices higher. Demand plus cheap credit (and Wall Street shenanigans) are at least as much to blame.

Having a stable, rather than growing, population would go along way to reducing the price of housing. Competition would be much reduced.

So you see a problem like this and your reaction generally falls into one of three buckets:

1. There is no problem. This is working as intended. Everything is fine;

2. There are a few bad apples on an otherwise good and functioning system; or

3. The entire system is fundamentally broken.

To blame the "homebuilder cartel" sounds very much like (2) to me. My view is that the entire system is broken and it goes back to enclosures and private property borne from capitalism and liberalism, respectively.

Liberalism is the deification of individualism, implicitly rejecting any sort of collectivism. A key pillar is the idea of private property, that is the ability to acquire and maintain a state-backed exclusive use of land well beyond your personal needs.

Capitalism is really the evolution of feudalism and the origins were in England with the Enclosure Acts [1]. These transformed land use for grazing by all to people having exclusive use thereof. You might hear as a counterargument things like "the tragedy of the commons". Interestingly, this term originated in 1968, some 350+ years later.

I bring this up because when I see people hoarding land and people voting out of narrow short-term self-interest to restrict supply and reduce housing in order to increase housing costs, I don't necessarily see that as a failure of government or the fault of a few bad actors. I see it as inevitable given our economic system.

So much of history can be viewed as simply a land grab.

I don't expect our economic system to change anytime soon but the governmentr can do a lot to alleviate this. At a minimum:

1. Ban single-family house zoning in urban areas. Multi-family units should be legal anywhere within city limits;

2. Stop subsidizing suburban expansion to the degree we do by building roads to a ridiculous degree;

3. Build public transit infrastructure. For the successfully-propagandized Americans who will fight this because "it'll raise our taxes", people on trains will make it faster and more convenient for you to drive. Literally everyone benefits.

4. Punitive taxes on non-prrimary residences (ie investment properties, second/vacation homes); and

5. Get rid of tax breaks for home buying.

I have zero confidence any of this will happen.

[1]: https://www.thecollector.com/what-were-the-enclosure-acts/

This Matt Stoller guy paints a misleading picture of the dynamics of what is to be in the industry.

I grew up in the housing industry as the son of a homebuilder. Not to date myself, but I wrote what was probably one of the first cost accounting spreadsheets on the nascent PC of the day using VisiCalc. The spreadsheet took into account all costs associated with building a starter single family home, including land acquisition, financing, municipal fees, material, and labor costs, I.e. everything one one need to run a successful business as a home builder. I know this industry intimately.

Yes, Stoller is correct it’s harder to be a small (i.e. 10-20 homes per year) home builder than it was 40 years ago. But it’s not due to some conspiracy. It’s because the local zoning has become much more arcane and the red tape so Byzantine that the little guys have been effectively pushed out. For instance, you need a full time staff person to negotiate with your local ZBA (Zoning Board Association) to get permission to get something built. Beyond the direct costs, the delays and uncertainties are killer as they eat into your profits. (The gross margin is slim, somewhere between 10-20% on a home for a small time builder. I know - I wrote the damn spreadsheet that calculated it.) As a consequence of all these regulations, only the big builders can afford to absorb and amortize these costs over tens to hundreds of homes. Of course, this also means the big guys still need a fatter profit to to deal with zoning hurdles, long time frames, uncertainties, and what have you, thus margins need to be higher on average even for them. This is what is going on. Not some monopolistic conspiracy.

I looked Stoller up. Here’s the Wiki:

https://en.wikipedia.org/wiki/Matt_Stoller

His gig is railing against monopolies. The housing industry is just another nail for his one-size fits all monopolistic hammer explanations.

The real culprit here actually is a cartel ironically. But this cartel is made up of homeowners who flex their power through local zoning codes that make it near impossible to build new homes, especially apartments.

TLDR: In other words, the YIMBYs are right: the problem is zoning restrictions on new supply. Reform zoning and small time home builders will be back with a gusto.

The mistake made by Georgism is to assume that rent extraction is a bug. It's not. The economy is literally owned by rich people -- that's what capitalism is -- so rich peoples' opinion is the one that counts, and rich people want to get paid for being rich. Rent extraction is a feature not a bug. Georgism will never see political success due to this misunderstanding of political economy.

Can't afford 'high' prices? Work harder spend less time on play or leisure pursuits. Realize maybe you should have studied harder in high school or picked a career based on earnings rather than 'what you enjoyed'. While this doesn't cover all situations for sure it does cover many 'whiners' who wish things were just easier for them 'because they should be and that's why'.

Not everyone can 'win' and the people who try harder often win more. And of course don't forget 'luck'. It plays a large part as well.

And guess what? Many of those people who win actually worked harder and weren't born or inherited and are from disadvantaged groups. Nobody wants to think that. Everyone thinks the other person has an edge 'and if I just had that edge things would be fine for me'.

(My father came to this country with nothing. My mother grew up and her father died back when there was no social safety net. All the children went to work. And yes because of that and in addition to my personal hard work and attention to school things are better for me for sure.)

We have a DR Horton home. It's really nice and well built. They deserve to make money.