Why do homes cost so much?

First Answer:

Because of the economy and how they're making a whole bunch of money.

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Second Answer:

The prices of houses, and all commodities, fall in line with what is called the "law of supply and demand." This means that if there is an oversupply and many items (houses in this case) remain unsold the prices will fall as house prices did recently. If few houses are available for sale yet people still want to buy them (as they did from 2001-2007) prices will rise rapidly.

The supply of houses is somewhat controlled by the cost of construction since if it costs more to build a house that it can fetch on the market, few houses will be built. If the cost of construction is much lower than what a house will fetch on the market many houses will be built as builders seek quick profits. In this way the free market is self regulating. Shortages cause price hikes which cause an increase in supply. Oversupply causes price declines and fewer houses will be built.

The danger comes when speculators or government try to upset this balance by creating artificial demand by buying houses on the presumption a house bought today can always be sold later at a profit. The US government forced bankers to make loans under the Community Reinvestment Act to people who could not pay the loans back. This situation allowed too many dollars to chase too few houses forcing up prices but eventually leading to a rapid fall/crash when the loans became due and people could not afford their payments.