A rare sight these days.

Photographer: Matthew Busch/Bloomberg

New Starter Homes Hit a Dead Stop

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Can you build a house for less than $200,000?

Well, you personally probably can't. But what about developers? Builder magazine says it's getting harder and harder to do. The market for new "starter homes" is drying up, mostly on the supply side. As credit markets recover, there are more and more people who could be buying their first homes ... if only builders could build them. But for a host of reasons, they can't:

  • Materials costs have risen.
  • They lost a lot of their labor force during the economic downturn.
  • Communities entitled large lots during the boom, and now they won't zone them for smaller parcels.
  • Cash-strapped local governments have raised permitting and other fees.
  • Building codes and other requirements make it harder to build cheap.

This makes it extremely difficult to build a house for less than $200,000 in many places, which is a hefty multiple of local median incomes.

How much does this matter, though? It's not actually necessary that starter homes be new. In most places, housing goes through a natural cycle: New homes sell for a premium, then decline in value. You could conceivably have a healthy housing market with builders building for the top of the market, with new families taking over the older houses that have been vacated.

But the builders in the article say that many communities also don't offer a strong market for the more expensive homes on larger lots that they are theoretically permitted to build. So the inability to build cheaper homes effectively means an inability to build at all, starving the market of housing it needs to let new households form.

The article suggests that, for some communities, that's the point: It keeps out younger, poorer people who might change the "character" of the place (and require lots in the way of services such as schools). But for others, it's merely inertia, combined with the fact that land is a finite resource, and communities only have one shot to get the various upfront payments that will help them cover the costs of new infrastructure that will be required.

For the country as a whole, however, this is a giant problem. We need space for people to live, grow families, build lives. The more costly we make it to build those spaces, the less of it we will get.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net