Breaking Down the Price of a Home
The price of a home comprises the cost of the land and the cost of the physical structure. In a few (mostly coastal, large) Metropolitan Statistical Areas (MSAs), the biggest price challenge is that land is expensive. Meanwhile, in most of the country, where land is relatively less expensive, escalating construction costs drive up the price of building physical structures.
The price of the physical structure includes the cost of a new structure less the wear and tear (depreciation). Since buildings depreciate slowly, a well-kept older home won’t be dramatically cheaper than a new one in the same location. The cost of building a new home often acts as a market ceiling when land is cheap.
Consider a median-sized U.S. house (about 1,800 square feet), excluding the lot (land), with construction costs of $350,000. In places where land is relatively cheap—say, a lot costing $30,000—the combined price for the home (land plus physical structure) is $380,000.
In such markets, fitting two housing units on the lot instead of one (an enormous increase in density) leads to relatively low savings. The land cost per unit drops to $15,000, reducing the home price from $380,000 to $365,000. By contrast, cutting construction costs by even 10 percent would decrease the house price significantly more, to $345,000.
Contrast this with places where land is expensive. Suppose a lot costs $600,000, bringing the combined price of the same house and land to about $950,000. In these markets, doubling the density—splitting the cost of land between two units—reduces the cost by $300,000. In comparison, similar-sized construction cost improvements have a much smaller impact on the overall home price.
These scenarios illustrate the importance of considering housing proposals in a disciplined and nuanced way. In places where land is expensive, lowering housing costs should focus on building more units per acre. In most of the country, where land is inexpensive, the focus should be on reducing construction costs.
Where Are Places with Expensive Land Located?
According to the U.S. Census, the average derived price of land under a house across the U.S. increased from about $84,000 in 2014 to about $109,000 in 2024, a $25,000 increase. This suggests most of the country is closer to the $30,000 lot example rather than the $600,000 lot.
Using data from Realtor.com, metro areas where land is expensive are identified as those where the median price of a home, less the imputed cost of new housing construction (excluding land), is greater than $150,000.
Evaluating Current Housing Proposals
These organizing principles should guide assessments of federal, state, and local housing proposals to gauge their potential impact on lowering house prices. Below is a high-level overview of five often-discussed proposals.
1. Cutting Zoning and Local Regulations (“Pro-Growth” or YIMBY Proposals)
Reducing various zoning requirements is a crucial tool against the not-in-my-backyard (NIMBY) status quo. This includes addressing minimum lot sizes, maximum density requirements, maximum building heights, setbacks from streets, floor area ratio (FAR) limits, parking requirements, environmental reviews, and multifamily building specifications like the required number of staircases.
Proposals include both incentives (“carrots”) and penalties (“sticks”) offered to municipalities and states. Analysis shows that even expensive cities are not dense enough. For example, Ventura and Snohomish Counties—suburbs of expensive Los Angeles and Seattle—have about 0.25 housing units per acre, which is only one-third of the U.S. larger-county average of 0.75 units per acre.
By comparison, Manhattan and Brooklyn lead with over 20 housing units per acre. Easing zoning laws to make multi-story, multi-family housing easier to build can reduce costs significantly in high-land-price areas. However, such measures have less effect where land is cheap, as land costs make up a smaller fraction of the home’s total cost.
Therefore, federal incentives to reduce local regulatory and zoning barriers should be targeted mainly at cities where land is expensive—primarily large, coastal cities. Given current political challenges, penalties (“sticks”) might be a more pragmatic approach.
2. Allowing Manufactured Housing (MH) and Accessory Dwelling Units (ADUs) by Right
Manufactured housing (MH) presents an affordable entry-level home option, with construction costs around $120,000—about a third of the price of site-built homes. Allowing MH by right (permitting it as long as it meets existing zoning and codes that do not discriminate against MH) could dramatically lower construction costs in much of the country.
Similarly, converting garages, basements, and sunrooms into ADUs is also significantly cheaper than new construction.
However, financing remains a hurdle for both MH and ADUs. MH is often limited to MH parks due to zoning, which forces residents to rent the land beneath their homes. Financing home-only loans is complicated, and because moving manufactured homes is expensive, park owners can charge high land rents.
Additionally, there is a limited number of single-family homes suitable for ADUs, and these policies will not substantially increase density in large, expensive coastal cities. For instance, in Los Angeles, fewer than 50,000 ADUs permitted over the last eight years increased density from about 1.415 to only about 1.434 housing units per acre.
3. Low Income Housing Tax Credits (LIHTC)
The LIHTC program subsidizes most or all construction costs (excluding land) via tax credits that developers sell to investors. It is one of the largest federal programs supporting affordable housing, costing taxpayers over $10 billion annually. However, LIHTC is an inefficient developer subsidy unlikely to improve housing affordability widely.
Because these costs are borne by taxpayers rather than developers, LIHTC incentivizes cost overruns. Research indicates that LIHTC-funded construction often replaces projects that would have been built without the credits, rather than adding new supply.
In expensive cities, LIHTC may increase housing units due to zoning relaxations and taxpayer-funded construction costs. While taller buildings cost more and larger units add value, building less densely than efficient zoning allows increases prices.
LIHTC’s inefficiency might partially offset these broader issues by bringing unit density closer to efficient levels, but at great taxpayer expense. A more effective approach is lowering zoning and regulatory barriers for all developers and construction projects.
4. Affordability and Inclusionary Zoning (IZ) Requirements
Affordability and IZ requirements mandate that a portion of units in new buildings be affordable to lower-income renters. However, these do not directly add to or lower construction costs, nor do they increase housing supply (unless paired with zoning relaxation).
Consequently, they are neither particularly helpful in reducing costs nor dramatically harmful. The transfer of benefits to lower-income renters is more efficient than LIHTC. However, because landlords bear the cost through forgone rent, IZ may influence developer decisions and reduce the number of units built.
Expensive cities should focus on relaxing zoning restrictions for all construction. Selling development perks—for example, allowing developers to build fewer parking spots in exchange for cash payments that fund housing vouchers—may be more efficient than IZ.
5. Banning Large Investors from Owning Single-Family Homes
Large corporations purchasing single-family homes for rental remain an essential source of housing supply, accounting for a small but significant share of the U.S. housing stock. These mega-investors tend to be more active in the Southeast and Midwest, where land is cheap.
Forcing investors into financing condo units is likely counterproductive. A better policy question is why households who could afford to buy single-family homes continue to rent. Millions of renters qualify for mortgages and want to own but are still renting, suggesting mortgage standards may be too strict or perceived to be so.
Editor’s note: The views expressed in the articles on The Rooftop are those of the authors alone and do not necessarily reflect the opinions or policy positions of New America.
https://www.newamerica.org/future-land-housing/blog/markets-where-land-is-expensive-must-densify/