By reducing local regulatory hurdles to new development, and by providing subsidies to low-income Americans, the free market will provide more housing that will drive down costs for everyone.

Housing costs too much in the United States because we don’t provide enough housing to meet local demand, elevating both rents and resale home prices relative to local incomes. This problem is particularly acute in California where Potential homebuyers can’t save for down payments with high rents, trapping them in low-quality rental housing for a lifetime.

Just as lenders used restricted supply to reflate the housing bubble, a lack of supply has inflated California house prices since the mid 1970s. Ordinarily, if house prices were pushed up above the cost of construction, builders would respond by providing more housing units (either rentals or owner-occupied), and the increased supply would blunt further price increases, but that doesn’t occur in California. The problem is not physical, it’s political. Unless many more dwelling units are approved, the shortage will continue, and probably get worse—and there is no sign of this changing.

The end result of these circumstances is that very few potential homebuyers have the necessary down payment, even the paltry 3.5% required by the FHA. And since renters put a large percentage of their income toward rent, even if they wanted to endure 0.2% savings interest rates, they don’t have the disposable income necessary to save for a down payment. There is no magic bullet or simple solution to this problem.

To provide housing that’s more affordable to everyone, we need more housing, period. We need more rentals to limit the growth in rents, and we need more for-sale houses to limit the increases in homeownership costs. Are there policies we could implement to accomplish both?

April 18, 2016, By Justin Fox

The U.S. has two big housing affordability problems. They’re related — and solving the first would go some way toward solving the second. But they’re not the same, and it’s important to understand that. The first problem is that some coastal metropolitan areas in the U.S. are generating lots of good jobs but aren’t building enough housing to keep up with employment growth. The main barrier to housing construction in these places is local regulation — zoning ordinances, environmental requirements, even affordable-housing rules. …

I’ve written about this many times, most recently in California housing policies devastate the lower middle class. First and foremost, the affordability problem is one of supply. California has a chronic shortage of housing. The lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain any housing at all. It’s why an income in Southern California that barely affords a condo would buy a McMansion anywhere else in the country.

The second housing affordability problem is less geographically limited, and more chronic: Millions of Americans can’t afford even the cheapest housing. Here’s Jason DeParle in the New York Review of Books: The big problem is that it costs more to build even modest housing than millions of households can pay, whether the builder is greedy or not. That’s partly because restrictive zoning and overzealous building codes drive up the price. But it’s mostly because of the inherent cost of the basics: land, interest, materials, utilities. As a rule of thumb nationwide, even an efficient nonprofit developer can’t build an apartment affordable to a household making less than about $32,000 a year. That leaves out nearly a third of American households.

Since incomes are so high and housing is so costly here in California, we rarely consider that incomes in other parts of the country won’t even cover the cost of providing any shelter at all. In California our high incomes will finance mortgage balances far in excess of construction costs, so much so that the excess becomes land residual making raw land valuable and successful real estate developers millionaires. But how can we provide housing in areas where the wages won’t finance a mortgage large enough to cover the sticks and bricks cost of construction?

In my opinion, the only reasonable answer is to subsidize housing costs for the lowest income Americans, perhaps with a tax credit. Although I loathe housing subsidies, providing more market-rate housing for low-income Americans is preferable to rent control or other wacky socialist solutions to the problem.

Now, there’s an issue with using the cost of building new housing as the cutoff point. As economic consultant Joe Cortright wrote for City Observatory in February: In the United States, we have almost never built new market-rate housing for low-income households. New housing — rental and owner-occupied — overwhelmingly tends to get built for middle- and upper-income households. So how do affordable market-rate housing units get created? As new housing ages, it depreciates, and prices and rents decline, relative to newer houses. If we built lots of new housing that poor people can’t afford, the thinking goes — and there’s economic evidence to back it up — that will make existing housing cheaper, and some of it will fall into a price range where some households making less than $32,000 a year can afford it. That’s how solving the first affordability problem can help solve the second one. …

This is a viable strategy, and realistically, it’s the only way to get the product built that we so desperately need.

Rising rents mean federal subsidies don’t go as far as they used to, while new development at least potentially threatens existing rent-controlled tenants. That brings us back to problem No. 1 — the local regulations and political forces that keep more housing from being built. Affluent residents who don’t want tall new buildings in the neighborhood probably drive most opposition to development, but low-income tenants worried about getting pushed out may be wary of it as well. …

Affordable housing in California requires ignoring the NIMBYs. The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians.

The problem is so bad that a judge had to order the city of Huntington Beach to override the local Nimby’s and provide more affordable housing.

What’s the solution? … More construction of housing, period, would certainly help. But I can’t help but think that this is a case where we may need both less government (in the form of a rollback of zoning and other housing regulations) and more government (in the form of housing subsidies for the poor). Uniting a political coalition behind those two objectives doesn’t sound easy — which I guess is why it hasn’t happened yet.

These are the two best solutions to solve the problem of housing affordability. Unfortunately, they come from opposite sides of the political spectrum.

Most Republicans would embrace the idea of less regulation and limited government involvement in the markets, so many Republicans would likely favor reducing or eliminating the regulatory roadblocks to building more homes.

Most Democrats would embrace the idea of more housing subsidies to the poor, particularly if rich Republicans end up paying for it.

Finding support for both measures means crossing party lines and recognizing both solutions are necessary if we want to have less expensive housing, a benefit for everyone.

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