Want to Solve 'Housing Crisis'? Allow More Housing & Smarter Subsidies.
Across the United States, in both rural and urban America, there seems to be broad consensus: The country is suffering from a “housing crisis.” This crisis is about prices; buying and renting a home keeps getting more difficult for people with less money. But part of the problem is that policymakers fail to see that prices themselves are not the evil so much as an impartial measure of supply and demand.
If they recognized this, they might get serious about housing costs by restoring the incentives for the market to produce more homes, fixing the regulations and money policy that feed inflation, and – for those people still struggling – implementing fair, efficient, and compassionate subsidies. In a paper I’ve coauthored for The Foundation for Research on Equal Opportunity (FREOPP), we explore real solutions like these.
My research over the years has validated what many suspect: local regulations on housing production are significantly affecting prices. A close look at high-level data from a variety of cities from Albuquerque to Boston to Cincinnati shows that when new permits for multifamily housing lag, rents rise as the ratio of new people to new homes rises.
In the FREOPP paper, we recommend loosening and even eliminating zoning rules that don’t protect health and safety and instead add time and costs to production. One way the federal government can help is to tie the dollars it distributes for housing subsidies to less local regulation. Right now, those federal dollars are essentially subsidizing local proclivities to respond to growth with more rules rather than more housing.
Money supply is another problem. As Milton Friedman once said, inflation is too many dollars chasing too few goods. When local jurisdictions limit new single-family housing at the same time that the federally backed Fannie Mae and Freddie Mac back mortgages and the Federal Reserve lowers interest rates, the housing market is flooded with dollars but not nearly enough inventory to keep up.
The bidding wars of 2021 were out of sync with market trends, leaving many buyers with dropping asset values in 2022. We may be dealing with a cooling housing market and potential recession now, but as my colleague Jon Hartley tackles in the paper, the desperation to buy fueled with easy money will likely lead to troubled mortgages over the course of a decade with already unusual economic uncertainties.
Next, let’s take a deeper look at housing subsidies, which include government-backed mortgages, low interest rates, tax credits, and funding for organizations and local governments that trickle them out to households struggling with housing costs. They almost never include direct cash payments.
The system of subsidizing “affordable” housing simply isn’t working. In California, single non-profit federal tax credit apartment unit is now costs as much as $1 million to build. That’s unacceptable. And along with the lengthy production time and costs to taxpayers that come with these units, the construction of subsidized housing usually comes with lengthy waiting lists, which advocates use to argue for even more spending on complex schemes.
A better answer is direct cash subsidies for the amount struggling households pay over the normative standard of affordability. So, if a household is paying $1,250 a month in rent when they can only afford $1000, they could get $250 now rather than waiting for years for a gold-plated subsidized unit far away from where they live, work, shop, or go to school.
The paper details these problems and solutions, but it’s really pretty simple: Solving housing price problems means allowing more housing and sensibly managing subsidies. A first step is aligning local policies with the truly affordable and available housing that local politicians say they want. They need to use the eraser end of their pencils, undoing rules and not adding more. Motivating this could include tying subsidies like tax breaks to developers with feasible rent restrictions. This would not be a mandate, but a profitable incentive that also helps people with less money find housing. Housing economics is not complex, but financing it is; so direct cash and more housing means less bureaucracy and less pain.
Let’s commit to the idea that housing providers should be able to profitably work with people with modest incomes. And for families who need a little extra, giving them cash for rent is not only compassionate, it's efficient.
Roger Valdez is a Research Fellow with The Foundation for Research on Equal Opportunity and also runs Seattle for Growth, a non-profit that advocates for residential development in Seattle.
