So, why do homes cost so much?

Washington Research Council
The conclusion of research at the national level on home price trends around
the country can be summed up with the following chain of events:

1. Lot prices increase. In the face of a strong economy and strong demand
for housing, an insufficient number of “permissions to build,” pushes up
the value of those permissions, and thereby the price of the building lots to
which they are attached. This inflation in the value of permissions applies
both to existing building lots with homes on them, and to newly developed
building lots.

2. Builders move upscale. The high price of building lots leads homebuilders
to move upscale and build ever more expensive homes on those lots. This
is, in part, due to the need to follow established practices of the ratio of lot
price to home price (the “contributory lot value” that will be described below).
But moving upscale also makes business sense: if the number of units that
can be built is restricted by the shortage of permissions, the obvious reaction
is to build only the more expensive products. This is analogous to the
reaction of the Japanese auto industry to the restraints on auto imports to
the U.S. in the1980s. When Japanese carmakers were restricted in the
number of units they could ship to the U.S., they stopped making stripped
down economy cars and moved upscale.

3. Prices of existing homes move up. With the price of new homes moving
up in response to high lot costs, and the inability or unwillingness of the
housing industry to build new, low-cost homes, prices of existing homes
rise to reflect the embedded value of the “permission to build” that comes
with their building lot. Hence, the $400,000 rambler in Bellevue, which
provides an “affordable” alternative to the $700,000 new homes in the
area.