The Economics of House Hunting Envy

Let’s pretend you just bought a new house. 3 bedrooms, 2 baths, and ALL the upgrades.

One night you turn on your favorite house-hunting show, only to find someone buying basically the same house as yours - at half the cost.

So, what gives? Supply and Demand. Just like any other market, if you have lots of buyers and few houses for sale, prices go up. Lots of homes but not many buyers, and prices go down. Normally, when demand rises, builders respond by building new homes, which brings prices down.

But if for some reason new builds are prevented, prices can go through the roof.

Just look at the Bay Area of California versus Houston, Texas. In the last decade, Houston’s population has grown twice as fast as the Bay Area’s, which means housing demand is high. But Houston has also issued three times as many building permits as the Bay Area over the last 10 years, while the Bay Area has sharply limited new construction.

The results are that Houston has kept housing prices reasonable by matching supply to the demand, while prices in the Bay Area have skyrocketed.

So back to your pretend house with the high price tag. In areas with similar demand, house prices ultimately depend on how often new housing is added to the market and how easy it is to build it.