LinkedIn icon The word "in". Email icon An envelope. It indicates the ability to send an email.

Democratic presidential candidate Sen. Bernie Sanders Chip Somodevilla/Getty Images

Business Insider

The US has a housing affordability crisis.

Sen. Bernie Sanders wants to deal with the crisis by building 10 million permanently affordable housing units.

The plan would drastically improve the health and financial well-being of 10 million low-income American families.

But the plan would also cause the cost of market-rate housing for middle class families to rise.

Daryl Fairweather is the chief economist at Redfin, where she leads research into housing trends and the impact of housing on the economy.

Visit Business Insider's homepage for more stories.

The United States currently faces a housing affordability crisis, with 31% percent of American households spending more than 30% of their incomes on housing, and 71% of extremely low-income renter households spending more than half of their income on it. An additional half a million Americans are homeless.

Many 2020 presidential candidates proposed housing policies that would partially address the affordability crisis, but Sen. Bernie Sanders has introduced the most aggressive: a multi-trillion-dollar plan that would completely transform the US housing market.

Sanders' most ambitious housing idea is for the federal government to spend $2.5 trillion to build 10 million permanently affordable housing units—enough new housing units to double Texas' entire stock of housing. Sanders also wants the government to be both the builder and landlord of these homes and to set rents below the market rate.

If implemented, Sanders' plan could not only transform housing in the United States, it could also impact the entire US economy by improving the health and economic outcomes of 10 million families.

But there is a large potential downside: It could also drive up competition and costs for private home construction and make market-rate housing even more expensive. That means middle-class Americans, who are also stretched on their housing budgets, could face higher rents and be priced even further out of homeownership.

Providing housing would improve the lives of low-income families

The 8 million extremely low-income households currently spending more than 50% of their incomes on rent would be the primary beneficiaries of Sanders' plan.

Not only would Sanders' plan put a roof over these families' heads, but it would also help their health and pocketbooks. According to the National Low Income Housing Coalition, severely housing-cost-burdened households spend 75% less on healthcare and 40% less on food than similar households that are poor but spend less than 50% of their income on rent. Families that are burdened by housing costs are also unable to save for emergencies or for their futures.

Given these improvements, the humanitarian justification for Sanders' plan is clear.

More public construction would lead to higher prices for market-rate housing

If we could snap our fingers and magically increase the current supply of housing affordable to low-income Americans, the price of a typical home in the US today would likely remain unchanged.

That's because permanently affordable housing—the kind that Sanders wants to build—is for people who currently cannot afford a typical home and often have no option but to live in substandard housing. These low-income Americans are not weighing how much money to spend on housing, they are either priced out of the housing market entirely, or are spending as much money as they possibly can on housing.

Increasing the supply of government-owned housing to extremely housing-insecure Americans would have virtually zero impact on demand for the vast majority of market-rate housing.

But there are some ways that Sanders' plan would have a large negative impact on market-rate housing supply.

In 2019, private residential construction accounted for $515 billion, or 2.4% of GDP. Sanders plans to have the government spend $2.5 trillion building affordable housing over 10 years. That's equivalent to about 50% of the current level of private residential construction.

Such a large increase in public spending on residential construction would almost certainly increase costs for residential construction.

In many cities with expensive housing, land alone accounts for more than half of home values, which helps explain why it costs $750,000 to build a modest two-bedroom apartment in California. Labor costs are high as well: in San Francisco, construction workers earn on average $90 per hour.

If the government tried to increase residential construction by 50%, competition for construction inputs —labor, construction, and materials— would also increase, driving up costs for private builders already facing thin margins.

This would force private residential construction firms to dramatically raise prices or face the reality that they are unprofitable.

The ripple effect would be limited growth in market-rate housing supply, which would drive up the price of market-rate housing. That would mean middle-class renters— 27% of which spend more than 30% of their incomes on rent) — could face higher rents.

Owners of existing homes would see their home values increase with the decline in new private construction of housing, but the increase in home prices would make it even more difficult for renters to become first-time homebuyers at a time when first-time homebuyers are facing a shortage of for-sale homes, stiff competition and high prices.

No magic bullet

When the economy faces a market failure, like an affordable housing crisis, we are forced to choose between two imperfect options: We can have the government intervene and accept the unintended consequences of that intervention, or we can continue with the free-market status quo.

Sanders has other housing plans that could alleviate some of the pressure on the middle class. But these plans unleash still more troublesome unintended consequences.

For instance, Sanders wants to implement national rent control, which would, in the short-term, protect renters from rent increases. Yet economic research on rent control indicates that in the long-run it encourages landlords to convert apartments to condos, worsening affordability and fueling gentrification of neighborhoods.

Many democratic presidential candidates have proposed middle-ground policies where the government lightly intervenes in the housing market.. These plans pale in comparison to Sanders' plan for 10 million new affordable housing units.

Voters must weigh how far the government should go to help extremely low-income Americans who are severely burdened by housing costs against the extent of the potential negative consequences to middle-class renters and first-time homebuyers.

Daryl Fairweather is the chief economist at Redfin, where she leads research into housing trends and the impact of housing on the economy. Follow her on Twitter @FairweatherPhD.

NOW WATCH: Popular Videos from Insider Inc.