This crisis atmosphere has sparked a resurgence of interest in an aggressive, direct role for government in the housing market. The notion that government can and should directly subsidize housing on a massive scale, which had steadily fallen out of vogue for decades, is back with a vengeance.

When "Market Rate" is no Longer Affordable for Much of the Market

In extremely expensive places like coastal California, the term "market rate" as applied to a new home has become an epithet for many housing activists. New-construction homes in San Francisco are currently unaffordable to all but a small, wealthy sliver of that city's population. Some of the most radical calls for massive, transformative social housing programs, unsurprisingly, can be heard shouted from the city by the bay.

Even in places where "market rate" hasn't become synonymous with "for the one percent," new buildings are hardly ever affordable to the working class. The cost of construction alone tends to preclude it. Developers borrow money to finance construction, and must be able to repay the debt out of the rents coming in once the building is occupied. This puts a surprisingly high floor on how low those rents can go. The Urban Institute has a great interactive tool which lets you play with various assumptions and simulate the cost of building affordable housing.

There's a common misconception that if developers would just settle for a little less profit, they could build working-class housing without subsidy. This is almost never true. The reality is that, much as lower-income people usually buy used cars, lower-income people usually do not live in newly-constructed homes. This was true in 1920, it was true in 1950, it was true in 1980, and it is true today. The primary source of affordable housing is older housing that has "filtered" down from a higher price point.

The difference today is that in much of America — especially wealthy coastal America — even the middle class can no longer afford a new market-rate home or apartment. Over at Shelterforce, Rick Jacobus extends the car analogy to make this point: the problem isn't that we're building new Lexus housing, it's that we no longer build very much Ford Focus or Toyota Camry housing at all.

The middle classes find ways to make it work. They sacrifice location or amenities or square footage, they double up with roommates, they live with their parents for longer in their twenties, but they make it work.

The poor aren't so lucky. Many of them just leave wealthy places like California (which offer the greatest upward mobility) for places with cheap housing but less economic opportunity. Others lose out because they're deterred in the first place from moving to cities that are prospering. This stratification between "have" and "have not" regions of the United States — the dramatic decline in the ability of Americans of limited means to move to opportunity — is one of the most troubling economic and demographic stories of our time, and it has everything to do with housing costs.

It's essential that we tackle the long-term causes of this problem. But the market-based solutions out there — reduce regulatory barriers, allow more incremental development in more places — are long-term solutions. Filtering of housing down to a lower price point is a process that takes decades. Those at risk of displacement understandably want to know how they will get homes they can afford not in five years, not in ten, but right now.

Hence the widespread interest in dramatically expanding the scope of housing subsidies. So let's talk about one way this might be achieved, and what some of the implications are.

4 Forms of Government Housing Subsidy

To vastly simplify, there are four primary ways that government in the U.S. subsidizes housing for low-income individuals: