Why Housing Is Unaffordable in 2024: The Real Reasons Behind Rising Home Prices (Not Wall Street)

TL;DR

• Home prices have increased from 3x annual salary in the 1950s to 7-10x today, but it's not primarily due to Wall Street investors
• Government regulation accounts for 25% of single-family home costs and 40% of multifamily development costs
• The average home size increased from 983 square feet in 1950s to 2,700 square feet today
• Only 3% of homes are sold to large investors - Wall Street impact is "pretty much a rounding error"
• Overregulation, zoning restrictions, and permit delays are the real culprits behind unaffordable housing
• California's parking requirements can force 600 sq ft units to cost as much as 1,100 sq ft due to space mandates
• The solution requires collective action to change local zoning laws and development policies

What is the housing affordability crisis? The housing affordability crisis is a systematic failure of the housing market where government overregulation, restrictive zoning, and bureaucratic barriers have made it "literally impossible to build anything that's even remotely affordable," forcing developers to create only luxury units to avoid losing money. — Graham Stephan

The Housing Market's Perfect Storm: From Affordable to Impossible

The American dream of homeownership has transformed into what can only be described as a nightmare scenario for young buyers. When you examine the numbers, the shift is staggering and undeniable.

In the 1950s, the median home price was just $7,300, which translates to approximately $89,000 in today's inflation-adjusted dollars. Fast forward to today, and that median price has skyrocketed to $430,000. But here's where it gets truly eye-opening: "back then, if you wanted to buy a house in the 1950s, that was equivalent to roughly three years worth of your paycheck. Whereas today, that same house is going to cost anywhere from seven to ten times your annual salary, or even more if you're in a state like California."

This dramatic shift didn't happen in a vacuum. The housing market is experiencing what I call "the perfect storm of BS" - a combination of factors that have converged to create an environment where affordable housing development is virtually impossible.

The most visible symptom of this crisis is the complete absence of entry-level homes. In the 1980s, about 40% of homes were considered entry-level properties that first-time buyers could realistically afford. Today, that number has plummeted to just 9%. This isn't because developers have suddenly become greedier or because there's some conspiracy against young buyers. The reality is far more complex and frustrating.

Developers aren't choosing to build luxury properties because they want to exclude affordable housing from the market. They're being forced into this position by a regulatory environment that makes small, affordable units financially impossible to construct. "Some states have made it so difficult to build that developers are now either canceling projects entirely or forced to create luxury units because renting at $4,500 a month for a one bedroom is the only way they won't lose money."

The situation has become so dire that we're seeing entire projects cancelled rather than built at a loss. This creates a vicious cycle where housing supply continues to shrink while demand from population growth and household formation continues to increase, driving prices ever higher.

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Key Insight:

The housing crisis isn't about evil developers or Wall Street conspiracies - it's about a regulatory system that has made affordable construction financially impossible.

The Size and Expectation Revolution: How Luxury Became Standard

One of the most overlooked factors in rising housing costs is the dramatic evolution of what Americans consider a "basic" home. This shift represents a fundamental change in housing expectations that directly impacts affordability.

The stark contrast between then and now is immediately apparent when you compare square footage. In the 1950s, the average home was just 983 square feet. These weren't spacious family compounds - they were modest structures with "two to three bedrooms, one single bathroom, a living room, a kitchen. That's it." Air conditioning wasn't standard, and luxury amenities were virtually non-existent.

Today's "starter home" tells a completely different story. The average new home now spans 2,700 square feet and comes packed with features that would have been considered luxury items decades ago: multiple bathrooms, attached garages, energy-efficient windows, central heating and cooling systems, and numerous other amenities that buyers now consider non-negotiable.

This expansion isn't just about American excess - it reflects genuine cultural and demographic shifts. Throughout the 1970s, buyer preferences evolved away from small starter homes toward properties that families could "grow into." The post-war suburban ideal transformed from a basic shelter to a comprehensive lifestyle statement.

Housing Feature	1950s Standard	Today's Standard	Impact on Cost
Square Footage	983 sq ft	2,700 sq ft	175% increase
Bathrooms	1	Multiple	Significant plumbing costs
Air Conditioning	Rare	Standard	HVAC system costs
Garage	Often none	Attached 2-car	Foundation/structure costs
Windows	Single-pane	Double-pane energy efficient	Material cost increase

The land equation compounds this size problem dramatically. "The US population has more than doubled since the 1950s, and the majority of that growth is concentrated within a small number of metropolitan areas that everyone wants to move into." What used to be cheap and abundant land in desirable locations is now completely developed, driving up the base cost before a single foundation is poured.

This creates a compounding effect: larger homes require more land, but available land in desirable areas is increasingly scarce and expensive. The result is that even if builders wanted to construct smaller, more affordable homes, the land cost alone often makes such projects unviable in the markets where people actually want to live.

The cultural shift toward larger homes isn't inherently problematic, but it does mean we can't directly compare today's housing costs to those of the 1950s without acknowledging that we're essentially comparing completely different products. A modern "starter home" contains more amenities, space, and features than what middle-class families in previous generations would have considered luxurious.

The Regulatory Nightmare: How Government Rules Killed Affordable Housing

The most significant and under-discussed factor driving housing unaffordability is the labyrinthine web of government regulations that have transformed home construction from a straightforward business into a bureaucratic obstacle course.

The numbers are staggering and should outrage anyone concerned about housing affordability. According to the National Association of Home Builders, "government regulation accounts for nearly 25% to the price of a new single family home and an even more staggering 40% to the cost of a new multifamily development."

But here's what makes this particularly insidious: "many of those development costs are flat fees or barely tied to the size of the project." Whether you're building a 900-square-foot bungalow or a 5,000-square-foot McMansion, you're going to spend roughly the same amount on permits, utility connections, and regulatory compliance. This creates a perverse incentive structure where builders are essentially forced to build as large as possible to spread these fixed costs across more sellable square footage.

The real-world impact of this regulatory burden is best illustrated through concrete examples. In Minneapolis, builders discovered they "found it effectively impossible to construct homes in the $150,000 to $250,000 price range." The analysis was brutal: a house that cost $182,000 in actual labor and materials ended up with an all-in cost of $372,000 after adding $56,000 in various government fees and administrative costs. That's more than doubling the price through regulation alone.

California represents the extreme end of this regulatory dysfunction, but it's not unique. The state's zoning requirements have created situations so absurd they border on parody. "In many large California cities, a lot of the zoning requirement is dictated by parking. So if you want to go and build a brand new 600 square foot unit, you also have to supply an additional 300 square feet for that resident to park their car."

This parking mandate alone can kill affordable housing projects. If developers build parking at ground level, they lose space that could house another family. If they go underground, construction costs skyrocket. Either way, that 600-square-foot unit effectively costs as much to build as an 1,100-square-foot unit when you factor in the parking requirement, minimum lot sizes, mandatory open space, and common area requirements.

The permit process itself has become a Kafkaesque nightmare designed to discourage development. My personal experience illustrates just how broken the system has become: "Even for me, I spent over $200,000 building out a 720 square foot unit. I paid over $10,000 in city fees and permit filings. But then they charged me another $20,000 to fix a sewer line, which required me to go and get a permit from Urban Forestry to trim the city-owned tree roots. But the tree turned out to be diseased, so I had to get another permit to be able to remove the tree, and another permit to be able to replace that tree with another tree."

This isn't just bureaucratic inefficiency - it's a system that actively prevents housing construction through death by a thousand cuts. Each permit can take "hours, days, weeks, months" with no guaranteed timeline and constant risk of denial that forces you to start over from the beginning. Meanwhile, workers sit idle, overhead accumulates, and uncertainty makes financing nearly impossible to secure.

Key Insight:

Overregulation hasn't just increased housing costs - it has fundamentally changed the economics of construction to make affordable housing financially impossible to build.

Wall Street Scapegoating: Why the Villain Narrative Is Wrong

One of the most persistent and misleading narratives about housing unaffordability centers on Wall Street and large investors supposedly buying up all the available homes and pricing out regular families. This story is emotionally satisfying and provides a clear villain, but it's also largely incorrect and distracts from the real causes of the housing crisis.

The Wall Street home-buying narrative appears to have originated from viral social media posts claiming that "BlackRock is buying every single family house they could find, paying 20 to 50% above asking price and outbidding normal home buyers." However, when these claims are investigated, they typically reference purpose-built rental communities that were never intended for individual sale to begin with.

Let's examine the actual data behind investor home purchases, because the reality is far different from the inflammatory headlines. In 2022, there were headlines claiming that "investors are buying nearly one in four homes, most in all cash deals." On the surface, this sounds alarming and suggests massive institutional interference in the housing market.

But the numbers tell a more nuanced story. First, this 25% figure is actually lower than investor activity in 2004, 2005, and 2011, suggesting this isn't a new or unprecedented trend. Second, the term "investor" is deliberately broad and misleading in these reports.

"Of the roughly 26% of homes that get sold to investors, more than half of those are mom and pop investors. And even of those half, only 12% are mega corporations." This means that when you go to buy a house, 75% of your competition consists of other families looking for homes to live in. Of the remaining 25% that are investors, the vast majority are small-scale landlords - often retirees renting out properties for income or families buying their first rental property.

The mega-corporations that dominate the scary headlines? They represent just 2.8% of investor purchases. CoreLogic found that in 2021, less than 3% of all homes were sold to large investors. Even more telling, "in almost all of those cases, those large investors were funded by everyday people who had their money invested from pensions, retirement funds, 401ks, and so on."

By mid-2022, Americans for Financial Reform determined that private equity only accounted for 3.6% of all apartments and 1.6% of all rental homes nationwide. "This means that the impact Wall Street has on homebuyers is pretty much a rounding error. They do not care about Sally and Joe making their first offer on a $400,000 home that could rent for $1,500 a month. It's just bad business for them."

The math simply doesn't work for large investors to compete with owner-occupants for moderately priced homes. The rental yields on a $400,000 house that rents for $1,500 per month are inadequate for institutional investors who need to generate returns for pension funds and institutional clients. These investors focus on markets and property types where the numbers make sense - typically higher-end rental properties or purpose-built rental communities.

Blaming Wall Street for housing unaffordability is "really just seen as the scapegoat to a much bigger issue." It's politically convenient to point fingers at faceless corporations, but it prevents us from addressing the real structural problems that are actually driving up housing costs.

The Real Perfect Storm: What's Actually Driving Unaffordability

After examining all the popular explanations for housing unaffordability - from Wall Street to immigration to rising construction costs - the real culprit becomes clear. We're dealing with a "perfect storm of BS" that combines several structural factors, each reinforcing the others to create an environment where affordable housing simply cannot be built.

The foundation of this crisis lies in "a combination of prior artificially low interest rates that's led to locked-in sellers who don't want to move, restrictive zoning that makes it impossible to add more inventory onto the market, overregulation to the point where no one wants to build, sky-high consumer debt that keeps people bogged down, and a surplus of demand from everyday homebuyers who simply believe that buying a house is the American dream."

Let's break down each component of this perfect storm:

Locked-In Sellers: Years of artificially low interest rates created a situation where existing homeowners have mortgages at 2-3% interest rates. With current rates at 6-7%, these homeowners are essentially trapped in their current homes because moving would mean giving up their low-rate financing. This dramatically reduces the supply of existing homes available for purchase.

Restrictive Zoning: Local zoning laws in most desirable areas prevent the construction of diverse housing types. Single-family zoning dominates most residential land, preventing the construction of duplexes, townhomes, small apartment buildings, and other "missing middle" housing types that could provide more affordable options.

Regulatory Barriers: As we've seen, the permit and approval process has become so cumbersome and expensive that it effectively prohibits small-scale, affordable development. The fixed costs of regulatory compliance force builders to construct larger, more expensive units to maintain profitability.

Consumer Debt Burden: High levels of student loans, credit card debt, and other consumer obligations prevent potential buyers from saving for down payments or qualifying for mortgages, increasing competition among the remaining qualified buyers.

Cultural Homeownership Expectations: The persistent belief that homeownership is essential to the American dream creates sustained demand even as prices reach historically unaffordable levels.

The interaction between these factors creates a vicious cycle. As supply remains constrained due to regulatory barriers and zoning restrictions, prices continue rising. Higher prices mean that only luxury development remains profitable, further reducing the supply of affordable housing. Meanwhile, demographic trends and cultural expectations continue driving demand, putting additional upward pressure on prices.

How to Actually Fix the Housing Crisis (6 Steps)

Solving the housing affordability crisis requires acknowledging that "this is a very solvable problem if we talk about the one thing that everybody misses." The solution isn't federal intervention or grand policy schemes - it's local action focused on removing the regulatory barriers that prevent affordable housing construction.

1. Reform Local Zoning Laws

Eliminate single-family-only zoning in areas near job centers and transit. Allow duplexes, townhomes, and small apartment buildings in residential neighborhoods. This "missing middle" housing provides more affordable options without dramatically changing neighborhood character.

2. Streamline Permit Processes

Establish clear timelines for permit approvals with automatic approval if deadlines aren't met. Eliminate redundant review processes and consolidate permits where possible. Create online systems that allow real-time tracking of permit status.

3. Reduce Regulatory Compliance Costs

Convert fixed fees to percentage-based fees tied to project size and value. This removes the current incentive to build only large, expensive units to spread fixed costs. Eliminate requirements that don't directly relate to safety or environmental protection.

4. Reform Parking Requirements

Reduce or eliminate minimum parking requirements, especially near transit lines. Allow developers to provide car-share programs or transit passes instead of parking spaces. Recognize that many young renters don't own cars and shouldn't be forced to pay for parking they won't use.

5. Engage in Local Politics

"If you want anyone to blame for this, it's probably just your local city council, state legislation, and maybe the person in charge of issuing permits and inspections." Attend city council meetings, vote in local elections, and support candidates who prioritize housing affordability over neighborhood opposition to new development.

6. Support State-Level Preemption

Support state laws that override local zoning restrictions that prevent affordable housing development. California's SB 9, which allows duplex development on single-family lots, is an example of state intervention to overcome local resistance.

Key Insight:

The housing crisis is fundamentally a local government problem that requires local political engagement to solve - federal solutions can't override the zoning and permitting decisions made by city councils and planning departments.

FAQs

Q: Is Wall Street really buying up all the houses and pricing out regular families?

No, this is largely a myth. Wall Street and large investors account for less than 3% of home purchases. The vast majority of your competition when buying a home (75%) comes from other families looking for places to live. Most investor purchases are small-scale "mom and pop" investors, not massive corporations.

Q: Why can't developers just build smaller, more affordable homes like they did in the 1950s? Government regulations make small homes financially impossible to build. Fixed costs for permits, fees, and regulatory compliance can add $50,000-100,000 to any project regardless of size. Builders are forced to construct larger units to spread these costs across more square footage and remain profitable.

Q: What can individual people do to help solve the housing crisis? The most effective action is local political engagement. Attend city council meetings, vote in local elections, and support candidates who prioritize housing development over neighborhood opposition. Since zoning and permitting decisions are made locally, this is where individual voices can have the most impact.

Q: Are rising home prices just a natural result of supply and demand, or is there something artificial driving them? While supply and demand play a role, artificial regulatory barriers are the primary driver of housing unaffordability. Government regulations account for 25-40% of housing costs, and zoning laws prevent the construction of diverse housing types that could provide more affordable options. This isn't a natural market outcome - it's the result of policy choices.

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This article was created from video content by Graham Stephan. The content has been restructured and optimized for readability while preserving the original insights and voice.