“Over the past 50 years, the percentage of household income spent on food fell 30 percent, and spending on clothing has dropped by 64.9 percent, yet housing costs have increased by 12.1 percent. What explains this rise? At least six key differences between homes in the early 1970s and in 2023 help account for the change,” reports The Doomslayer:
- Size: The average home in 1972 measured 1,634 square feet, compared to 2,614 square feet in 2023—a 60 percent increase (980 additional square feet).
- Household Size: Average household size declined from 3.06 persons in 1972 to 2.51 in 2023, an 18 percent decrease.
We’re buying more house per person.
In 1972, the average living space per person was 534 square feet; by 2023, it had nearly doubled to 1,041.4 square feet. In terms of affordability, one percent of household income bought 23.95 square feet of housing in 1972, compared to 41.66 square feet in 2023. We’re getting 74 percent more housing per person for the same share of income.
Four other factors also help explain the difference:
- Air Conditioning: In 1971, only 36 percent of homes had central air; by 2023, that number had reached 99.4 percent.
- Garages: The share of homes with garages rose from 59.8 percent in 1971 to 97.3 percent in 2023.
- Bedrooms: In 1971, only 24.6 percent of homes had four or more bedrooms; in 2023, 50.2 percent did.
- Bathrooms: The percentage of homes with 2.5 or more bathrooms increased from 16.3 percent in 1971 to 67 percent in 2023.
After adjusting for increased square footage and smaller household size, the share of household income spent on housing falls to 14.3 percent. If we further account for improvements—such as the addition of air conditioning, garages, extra bedrooms, and bathrooms—a modest 25 percent quality adjustment brings the rate closer to 10.7 percent. In effect, we’re now spending less than half as much of our household income on basic housing compared to the early 1970s.
People could spend less of their income on housing if housing production became more efficient.
In most industries, productivity has risen enormously since 1947. But not in construction, where productivity has not increased at all over the last 75 years. As Market Watch noted in 2017,”While construction has appeared stuck in a time warp, other sectors have transformed themselves. Consider that in the United States between 1947 and 2010, agriculture achieved cumulative real growth in its productivity of 1,510% and manufacturing 760%…U.S. construction-sector productivity is lower today than it was in 1968.”
Why is productivity so low in construction? Partly because high-cost, low-productivity methods are promoted by federal housing regulations and subsidies. The Foundation for Research on Economic Opportunity (FREOPP) explains:
According to the U.S. Bureau of Labor Statistics, construction productivity in 2020 was 40% lower than in 1970, even though productivity in other sectors of the economy more than doubled during that time. While local regulatory policy is unquestionably a factor in this decline, FREOPP Visiting Fellow Jackson Mejia notes that restrictions on the methods of housing production also affect the supply of affordable housing. Prefabricated factory-built housing costs about one-third as much as traditional “stick-built housing,” but it constitutes just 10% of new single-family home construction today. In the 1970s, it was 60%. That dramatic decline is thanks to monopolistic government policies, from mortgage subsidies to federal safety standards, that irrationally favor stick-built methods over factory-built. To make more housing available to more Americans at lower prices, the federal government must get out of the way and allow housing construction to modernize the same way other sectors of the economy have.
Federal policies promote “‘stick-built housing,’ when buildings are constructed on-site by traditional construction methods. This method requires highly skilled, frequently unionized workers to produce homes on-site. Pre-fabricated factory-built housing, by contrast, costs about 1/3 as much per square foot”:
Research by economist Jim Schmitz at the Federal Reserve Bank of Minneapolis highlights that the prevalence of stick-built housing is a function of monopolistic behavior by construction companies and government policy, particularly the National Association of Home Builders (NAHB) and the Department of Housing and Urban Development (HUD). This happened in a couple of steps.
First, HUD developed Section 235 in 1968, a program that substantially subsidized mortgages on stick-built but not factory-built homes. Given the relative inefficiency of stick-built production, this program effectively subsidized a low-productivity technology at the cost of other, more efficient production methods.
Second, HUD and NAHB pushed the National Manufactured Housing Construction and Safety Standards Act of 1974 through Congress. The act effectively operates as a national zoning ordinance and restricts the production of factory-built homes substantially by requiring such homes to meet certain standards. At the time, factory-built housing competed with stick-built housing largely in low-density areas, many of which had no zoning laws to begin with. Before factory-built housing could make headway into urban areas, it was strangled in the crib.
Local building codes that vary from county to county and state to state make housing more expensive by preventing mass production of housing by factories. A factory can’t just come up with cheap, durable modular housing and then sell it everywhere. Imagine how much more expensive cars would be, if they had to be produced by hand in tiny factories located in each individual state or county, rather than (as is currently the case) being mass produced in large factories in a few states (in facilities that use robots and take advantage of economies of scale).
The endless variation in what is required for different locations, makes it hard for factories to produce housing that can be used in many different places. That makes it hard to set up factories that produce large amounts of cheap, high-quality modular homes.
The net result is lower productivity in the construction industry.
