“Our Housing Market Has Failed”
Classical economics teaches us that a market will always adjust so that supply and demand are in balance.
In the case of a housing market, if the demand for housing exceeds the supply, the builders will react by building more housing.
But as we’ve seen in the housing market in resort community after resort community, this doesn’t happen. Supply does not adjust to equal demand.
Housing markets in general and housing markets in resort communities in particular are subject to a series of external factors (“externalities”) that affect the supply of housing and the demand for housing and cause the housing market to fail.
The primary externalities affecting a resort community housing market include:
Land Use Regulations
There is a desire to keep paradise unique, preserve the environment, and maintain the postcard image of paradise. Communities create a series of land use and zoning regulations, environmental regulations, and growth management regulations. While these regulations are designed to help preserve paradise, they also have the effect of limiting the number of homes that can be constructed and increasing the cost of houses that are built. Builder focus on supplying larger, more expensive homes, and do not supply smaller, more affordable homes.
Retirees and Second Home Owners
Resort communities are prime destinations for retirees and second homeowners. Retirees and second home buyers complicate the local housing market by bidding up the price for housing beyond what local workers can afford. The local workers move away or endure long commutes, while the composition of the community shifts from full time residents to part-timers and vacationers.
Resort communities are always located in beautiful, but out-of-the-way places. It’s the water or mountains that makes paradise desirable. These boundaries limit the amount of land available for housing.
Watch Dr. Bill’s video discussing resort community housing markets: