Why you should care
There may be a solution to soaring home prices.
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
In the mid-1970s, my grandfather retired after decades with the Admiralty, the U.K.’s equivalent of the U.S. Navy, and bought the first home he ever owned — paying 100 percent cash for it. Not bad for a man who spent most of his life getting by on a government salary. These days, the idea that an average working person in Britain or the U.S. could accomplish such a thing seems ludicrous, a truly impossible dream.
The issue, of course, is that the price of even a modest dwelling has risen faster than incomes have. It goes beyond simple supply and demand and the continuing availability of cheap money to borrowers. It’s about how homes are built, which means the increasingly expensive residential real estate market is likely to get worse unless new ways of construction are adopted.
Shipping containers, which radically changed life on the docks, could make the building of homes faster and cheaper too.
In 1975, the average sale price of a house in the United States was $40,900, about 5.4 times the average income, according to St. Louis Fed data. By mid-2015, you’d not only have to shell out $334,300 on average, but that price would be six times the average income. This is no temporary aberration. As people get wealthier, they tend to spend a larger and larger proportion of their money on housing, explains Andrew Pease, global head of investment strategy at Russell Investments in London. It results in housing costs going up faster than income or wages, Pease says. It’s worse for the young, the typical first-time home buyers. In the U.S., they are disproportionately unemployed — at a rate of 9.4 percent for those ages 20 to 24 versus 5 percent for the general population. That can make scraping together enough cash for a down payment nearly impossible.
Further aggravating the housing-price problem is the way new homes are built. “A lot of the construction game is getting the business with a low bid, then putting in change orders and looking for excuses to raises prices post-bid,” says Robert Wright, professor of economics at Augustana University and author of the book Fubarnomics, which outlines how such change orders significantly drive up the cost of homes. He adds that a patchwork quilt of widely different building regulations across the country means that many builders only work locally, preventing wider competition.
So what’s the solution? A number of things can be done. In Sweden, the government is streamlining the permitting process in an effort to eliminate on-site construction delays. In addition, efforts are being made to increase competition in the industry. Having more companies competing against each other tends to simultaneously reduce prices and increase quality. The country is also investing in public transportation systems to help make previously isolated locations accessible for commuters, and more attractive to builders.
All common-sense ideas. But here’s one that could be profound: improving the efficiency of the construction itself, something we are beginning to see happen with modular construction. Shipping containers, which radically changed life on the docks, could make the building of homes faster and cheaper the same way, by reducing the need for skill and manpower. Steel boxes like these can easily become the basic components in home construction. Four 20-foot containers, at a cost of $2,500 each, can provide the basic walls and ceiling for a 640-square-foot dwelling. Adding a roof, interior walls and other amenities would depend on your budget and housing codes.
Not surprisingly, there is a burgeoning business in firms offering to help you assemble just such a new pad, and claiming that the result will be cheaper and sturdier than a traditional home. What is surprising, perhaps, is that it has taken so long to put the pieces of this new housing solution together.