Why Do Houses Cost So Much?

Housing affordability is one of the biggest problems facing California, and much of the world. How did houses get so expensive? The short answer is that no one really knows. There’s a shocking lack of research and data on why houses have become so unaffordable, considering that housing affordability affects us all.

About 50 years ago, in 1970 in Sonoma County, the average house cost $ 23,000. But what about inflation? Correcting for inflation, that’s $ 180,000 in today’s dollars. The average priced home in June 2023 was $ 810,000. House prices have risen 450%, after correcting for inflation! No wonder this is such a crisis, influencing all of our lives, directly and indirectly.

Some Causes

There are a variety of causes which are commonly identified when we talk about the shocking rise in home prices. Here are the most common:

• Decreased land availability (less buildable land left)

• More difficult to build (the land available is harder to build on)

• Tougher building codes (improved energy efficiency and higher strength requirements)

• Delays in project review and time to obtain building permits has increased cost (delays and uncertainty increase risk and cost)

• Worker shortages

• Labor costs

• Material costs

There’s no doubt that all these factors have increased construction costs. Many builders would like you to believe that the cost of materials and regulations are the largest factors driving home prices.

But the two biggest factors are labor cost and labor productivity. Construction is the only major industry where productivity has dropped over time.

What’s really happened is that the world has changed significantly during the last 50 years, but the way that homes are built, and the way that labor is organized has not. For example, air tightness was a negative 50 years ago (homes need to breathe) and now air tightness is key to an energy efficient home. This increased air tightness has increased construction complexity, and had the unintended consequence of increasing mold and rot because moisture can’t escape.