Mortgage rates are at their highest levels in 22 years and house prices are at record highs. Hardworking Americans cannot get on the property ladder, and retirees are struggling to sell in order to downsize. The Biden administration has done little to help alleviate the problem. This Washington Examiner series, Home Economics, will investigate how we got here, the toll on people around the country, and the alternatives people are embracing to survive the market. Part three of this four-part series focuses on the supply side problems in the housing market.
Decades of undersupply led to today’s housing crisis.
Several alternative competing explanations have been offered for why housing has become so unaffordable in recent months, including theories about demand-side factors, such as private equity firms and hedge funds buying up single-family homes or immigrants moving into neighborhoods.
HOME ECONOMICS: THE HUMAN COST OF THE AFFORDABILITY CRISIS
But economists see years — decades, actually — of chronic undersupply as the underlying problem. Any other problems in the market are like speed bumps that cause a momentary slowdown, whereas the constraints on supply are more like an engaged parking brake that is making it harder for the car to get over each successive obstacle.
THE PROBLEM
The problem came to a head this past year as mortgage rates soared even as housing prices have held near record levels or drifted even higher. The upshot has been that payments on newly purchased homes have soared, leading to a steep drop-off in home sales.
Homebuying, for now, has been pushed out of reach of many families.
WHY PRICES ARE SO HIGH
Housing prices are now as high as they’ve ever been and well above the prices seen in the housing “bubble” years before the financial crisis in 2008.
The basic problem is a lack of supply.
“We have a crisis shortage of inventory of homes to buy,” said Mike Simonsen, president of the real estate analytics firm Altos Research. He noted that roughly 1.5 million new homes are needed yearly to replace old stock and keep up with population growth. Over the past decade, the country has built less than a million a year.
Rents, too, have risen faster than overall inflation for decades and have only accelerated in recent years. That suggests it's not just speculation in real estate as an asset that has driven up prices but rather that the demand for shelter has been outstripping supply.
“Rents provide a much more direct window into the supply and demand dynamic than prices do,” said Kevin Erdmann, a scholar at the Mercatus Center at George Mason University.
The idea that the biggest problems with the housing market are on the supply side has gained currency at the highest levels of government. The last three presidential administrations have all endorsed the argument that local barriers to homebuilding, including zoning laws, building codes, and other land-use regulations, have overly constrained the construction of housing. The use of such rules by homeowners to block new development is often referred to as “NIMBYism,” with NIMBY referring to “not in my backyard.”
The Obama Council of Economic Advisers in 2016 identified local land-use rules as an impediment to affordability and published a “toolkit” for reducing such barriers.
During the Trump administration, Housing and Urban Development Secretary Ben Carson declared himself a “YIMBY” — that is, an advocate of saying “yes in my backyard” to housing. Former President Donald Trump also signed an executive order in 2019 on reducing regulatory barriers to new housing. (He later, though, executed a U-turn on policy and strongly defended existing zoning laws during the 2020 elections, accusing Democrats of a war on the suburbs.)
The Biden White House, too, has blamed poor affordability on a lack of supply and sought to reward localities that ease up on building restrictions.
HOW THIS HAPPENED
Since around 1980, certain major U.S. cities have restricted building so severely that overall prices have seen the effects. The worst culprits are along the coasts, most notably the Bay Area, Los Angeles, Boston, and New York. In recent years, the problem has spread beyond those locations.
Perhaps the best example is San Francisco, a city where the median home sale price is $1,334,000, according to Zillow.
With prices that high, homebuying in the Golden Gate City is far out of reach for the typical household. The guidance from the Department of Housing and Urban Development is that a household should not spend more than 30% of income on housing. But the mortgage payment on the median home in the San Francisco area would take up roughly 85% of the median income in the area, according to the Federal Reserve Bank of Atlanta’s affordability monitor, even though incomes in the city are very high by national standards.
Zillow also places the median rent for all types of housing at $3,378, just slightly above the 30% guideline for affordability for the median household income of just over $126,000 in 2022, as estimated by the U.S. Census Bureau.
What that means is that San Franciscans are strained to afford to stay in the city. And for much of the rest of the country, which had a median income of $74,580 in 2022, housing costs are a prohibitive barrier to moving to the city.
It’s worth noting that many people in San Francisco pay far lower prices because they have rent-controlled units or live in public housing. The median gross rent for all renters is $2,130, according to the Census Bureau, which accounts not just for market-rate housing of the kind that would be counted on real estate sites but also rent-controlled units, public housing, and other forms of affordable housing. The majority of units in the city are rent-controlled. What that means is that people who are lucky enough to have lived in San Francisco for a long time can afford to stay in their apartments, but the city is closed to all but the highest-earning newcomers.
Several local rules prevent new supply from coming online.
Most of San Francisco is zoned for only 14 to 36 units per acre. The city also has neighborhood building restrictions determined by planning code that set height limits, floor-to-area ratio limits, and mandates for off-street parking and yards.
Because almost any project will run afoul of the code, developers inevitably have to petition the planning commission for an exemption. Any plan submitted to the commission undergoes a public process that allows for comments from residents, providing a powerful veto to local neighborhood groups, such as the Telegraph Hill Dwellers and the Haight-Ashbury Neighborhood Council. Even projects that can navigate that process successfully are still subject to veto by the city’s Board of Supervisors.
San Francisco cannot build up — nor can it build out. Many surrounding areas have even more restrictive land use policies. Mountain View, for instance, where many San Francisco residents work at Google’s headquarters, is mostly zoned for single-family or two-family homes. For many years, the city has thwarted the company’s plans to house employees nearby (although it did reach an agreement for a development this year).
Since 2000, the entire San Francisco metropolitan area has only permitted roughly 950 new units a month, on average.
In comparison, the Houston metro has permitted more than 3,000 new units a month on average during that period. Houston, notably, has no zoning law. While San Francisco has some of the tightest land use restrictions in the country, according to an index developed by researchers at the University of Pennsylvania’s Zell/Lurie Real Estate Center, Houston has some of the loosest.
Houston’s population has soared from 4.7 million in 2000 to over 7.3 million.
Metro San Francisco was a similar size in 2000 with 4.1 million people, but the population had only grown to 4.7 million by 2020 before declining during the pandemic to below 4.6 million people.
Houston, a fast-growing energy hub, is an example of a city in which supply is responsive to demand, as opposed to the closed city of San Francisco, where supply is not responsive to demand and thus prices rise. The median home price in Houston is just $260,902, according to Zillow, about a fifth of San Francisco prices. The median rent is just $1,799.
San Francisco builds housing less like Houston and more like the decaying Rust Belt city of Detroit. Even though metro Detroit’s population has declined since 2000, it has issued permits at a rate comparable to San Francisco.
SO HOW MANY HOMES ARE MISSING?
The Biden White House, in unveiling its housing supply action plan last year, cited an estimate from Moody’s Analytics that the nationwide housing shortage is more than 1.5 million. An updated estimate from Moody’s provided to the Washington Examiner assesses the total shortfall of housing units at 1.8 million.
That’s on the lower end of available estimates. Freddie Mac, for instance, in 2021 put the housing shortfall at 3.8 million units.
Yet even that might be an extremely conservative estimate. The number is more like 20 million, as gauged in a report by the Joint Economic Committee’s Republican staff last year.
The estimates vary so widely because they define the shortage differently, in ways that illuminate the problem facing the county.
The Moody’s figure cited by the White House is estimated by looking at the differences between current and equilibrium vacancy rates for owner and renter housing. It would take roughly 1.2 million new units to bring vacancies back to the rates that prevailed in the 1990s — that is, construction beyond what is required just to keep up with household formation, rebuild from disasters, and meet demand for second homes. An additional 625,000 houses are needed, according to Cristian deRitis, Moody’s deputy chief economist, to satisfy pent-up household formation, mostly young people living with parents or roommates who would prefer to rent or buy their own places if they could.
DeRitis told the Washington Examiner that the 1.8 million estimate is a floor, not a ceiling.
Arriving at the 20 million-unit figure from the Joint Economic Committee takes a dramatically different approach.
The study looks at what housing in closed cities like San Francisco would cost in the absence of restrictive land-use regulations. Kevin Corinth, an economist now at the American Enterprise Institute who was one of the paper’s authors, explained that the estimates are based on research from the economists Ed Glaeser of Harvard and Joseph Gyourko of the University of Pennsylvania, who calculated building costs for the different regions of the country and then compared them with the actual prices of houses, less a fixed amount for the price of land absent regulations. The difference between those two figures, in their reckoning, amounts to a “regulatory tax” of local restrictions that drive up costs.
The authors then used estimates for housing demand to calculate how many homes would be bought if the regulatory tax came down. Summing it all up, they concluded that 20 million houses would be needed to bring housing prices in line with construction costs.
So, which figure is closer to the truth?
It depends in part on what the goal is for eliminating shortages and improving affordability.
If the goal is to get the United States back to pre-2000 levels of vacancies and housing prices, perhaps only 2 million to 5 million additional homes would be needed. A boost to housing supply of that scale would reduce the affordability problem in terms of the number of people paying more than 30% of their income on housing.
But another way of looking at the problem is to ask what housing prices would be in the absence of supply-side constraints introduced by government policies — that is, if the “regulatory tax” were eliminated or reduced.
In that case, with more like 20 million new homes, housing would be far more abundant and cheaper. Not only would fewer people struggle to pay rent or keep up with their mortgage, and not only would household formation increase, but more people would also be able to afford vacation homes, pied-a-terre, and the like. Families along the income spectrum would see their standards of living rise.
Corinth said that having a clear sense of the magnitude of the problem is necessary to pursue the scale of regulatory changes required.
“The only thing that would really address the large scale of the problem is fundamental local zoning reform, actually allowing developers to build much more densely, certainly in urban cores and potentially further out as well,” he said. “It doesn't have to be large apartment buildings everywhere, but it does have to involve substantial rejiggering.”
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Simonsen, though, noted that the laws, regulations, tax codes, and cultural expectations are for encouraging housing as an investment and protecting homeowners. Creating the conditions for the construction of 20 million additional houses would reduce the value of most families’ biggest source of wealth and require something like a cultural revolution.
“If you wanted to create a policy where we wanted to invest in our kids instead of boomers, that would be the policy,” he said.