A broken-down 80-year-old, 908-square-foot home in Palo Alto, California, just sold for $2,555,000 in the latest sign of the Silicon Valley housing bubble. It’s a story that’s worth paying attention to because the poor condition of the house itself — Brock Keeling of Curbed San Francisco expects it will be “torn down for a new construction” — lays bare what’s really going on in America’s new housing affordability crisis.

People talk about buying houses, but the typical home purchase transaction in the United States actually includes two different things — a house and some land. And in the case of 280 Stanford Avenue, it’s clear that what’s worth more than $2 million is the land, not the house.

And it really is a great piece of land! It’s a convenient walking commute to either Stanford University or downtown Palo Alto and an even shorter walk to the Stanford Avenue Caltrain station. That kind of land is inherently scarce, and it’s inevitable that it would become highly valuable given the booming levels of investment in the American software and high-tech sectors and the limited amount of mass transit available in Silicon Valley. What’s really crazy about this story isn’t that a person would pay so much for that land. It’s what they are going to build on the land.

We know how to fit people onto scarce land

In the normal course of events, one might expect that land this expensive would become densely developed. But it turns out that the neighborhood in question isn’t full of large apartment towers. Indeed, it doesn’t even have rowhouses or garden apartments or triplexes. It’s all single-family detached houses.

There’s nothing wrong with a single-family detached house, and indeed, many Americans consider that to be an ideal form of living. But when you have just one housing unit per parcel of land, then expensive land translates very directly into expensive houses. It would normally be more profitable to take some of these expensive parcels of land and fit two or three families onto it. Or to combine a few parcels and build a tall building that can house dozens or even hundreds of families.

The reason that doesn’t happen is that the bulk of the land area in Palo Alto — like in all of America’s suburban counties and even many of its central cities — is set aside by law for the exclusive use of single-family detached homes.

A more-than-local problem

The United States has traditionally considered this kind of land use regulation to be a purely local issue. Each town is free to decide what it wants to be like, and if Palo Alto and other Silicon Valley towns want to be suburban-style neighborhoods full of single-family homes, that’s their business.

But what we have seen over the past 15 years is that the accumulation of local choices in favor of mandatory low density has national consequences.

Proximity to a major university, the headquarters of huge global companies, and the throbbing hub of the venture capital scene is valuable to almost anybody. Software engineers earn higher salaries in the Bay Area than they could anywhere else. But hairstylists and carpenters and auto mechanics and nurses and nannies and chefs and surgeons and everyone else who makes a living providing locally oriented services also earns a premium in the Bay Area.

The problem is that for all but a handful of specialists, the higher pay is outweighed by the higher cost of housing, forcing normal people to choose between painful commutes and decamping for lower-paid work in cheaper states like Arizona or Texas. Instead of moving toward where the best opportunities are, Americans are moving to where the land is cheapest.

State government could play a bigger role

There’s probably not much the federal government could usefully do here. But the state of California could do a lot. Stepping in to centralize more land use decisions in Sacramento would reveal that there is a strong broad statewide interest in more development. It would mean more jobs and higher middle class living standards, but also higher tax revenue and more resources available for social housing.

And, or course, it would ensure that the Bay Area’s status as the world’s premiere tech hub couldn’t be threatened by an outflow of talent or possible starvation of the startup scene.

Scott Wiener, a state senator from San Francisco, has been pushing housing legislation that would move in this direction — basically forcing cities to streamline their building approvals process if they don’t meet housing growth targets.

But in theory state governments in high-cost areas — especially California, Massachusetts, Connecticut, New York, New Jersey, Maryland, and Virginia — could go much further down this path. Historically the United States has considered land use to be a local issue and transportation planning to be a state issue, but Japan does it the other way around and has both more housing affordability and better transportation.

In some parts of the country, hyper-localism is working well enough. But people who live in places where it isn’t and housing affordability has become a problem that afflicts large swathes of the middle class should really consider looking at a change in approach.