How much housing leads to affordable housing?

January 3, 2020 10:09 AM

I live in LA. You may have read that we're in a housing crisis many decades in the making. Inside baseball: in the left-liberal circles where I travel, there's a pretty fractious disagreement about whether supply-side solutions, i.e. just building more housing, are more likely to bring housing costs down or just further displacement. Can you point me to any writing (studies, journalism, etc.) that seek to explain just what conditions in the supply side of the housing market lead to increased housing affordability?

Put another way: how much housing does a city of 3 million people need in order for rents and / or mortgages to dip below, say, 30% for the median person? Or, for a lower-income person?

I understand that the conventional wisdom will simple be that greater supply is more likely to meet demand, and so the answer is more or less "hey, as many units as possible, and every additional unit helps."

BUT, in this County of $54 thousand median household income, this conventional wisdom does not meet anyone's lived experience. New units come in as a luxury good replacing rent controlled units. New units do not ever meaningfully contribute to the housing market because of Airbnb. New buildings displace residents permanently, not from the neighborhood, but from the City or even the County. Such is the difference between the average wage and the average housing cost.

And so, I hear the conventional wisdom, and I am bothered by the sense that every new unit is a drop in the bucket, never at a scale that will meet the crisis. I'd be interested to know about the literature that suggests, "x vacancy rate leads to yz% drop in rents," or "these new units over this period of time led to xyz housing cost" or "shit! any reduction results in people moving into the city and we'll never get ahead of this thing in a speculative land market" or any such similar thing.

I'm not interested in getting into an argument about whether rent control is really stupid or really cool. Also not that interested in an argument about zoning and how long development takes in Los Angeles, unless it contributes to the main question meaningfully. Just curious about the writing on what supply-side impacts improve affordability.

posted by kensington314 to Law & Government (18 answers total)

Best answer: As you've observed, this is a highly partisan debate and you will hear answers on both sides. The fact is WE DON'T KNOW because there is no such thing as a controlled study on this question.

There is some research to support supply side solutions. There is some evidence that zoning changes alone (in the absence of building) have actually been associated with rising prices. There is evidence that rental prices most strongly associate with average salary - not housing supply. Financialization likely plays a role in the international trend of rising housing prices too.

I personally think it's 'common sense' that we need to build more housing. There are more people now, and California has high paying jobs that are absent in most other parts of the country, so naturally people will move here for those jobs. Zoning reform and urban density has additional benefits besides lowering prices, namely these reforms can support desegregation and are in my view essential for decarbonizing cities - sprawl & car commuting is a huge driver of emissions.

It strikes me as self evident though that supply is not the only factor that impacts housing prices and is not the only housing reform we need for equitable housing. Disinvestment is subsidized housing is a political choice that has a very visible impact in the form of our poorest neighbors being forced into long term homelessness.

I recommend City Lab for reporting and analysis on these questions.
posted by latkes at 10:46 AM on January 3, 2020 [23 favorites]

Have you seen reports published by the Terner Center and Brookings?
posted by oceano at 10:53 AM on January 3, 2020

I'm an engaged citizen (which is to say, not an expert) about this issue in Portland and have found Sightline to be quite helpful and applicable beyond the Pacific Northwest, where the issues are similar. Here's a piece looking at what a rent check for a fancy new building in Portland pays for it and how, in theory, that could be lower. Then they ran the same numbers for Seattle.

A few things in response to other issues you raised: in Portland and many cities (and so maybe LA), the wealthiest neighborhoods tend to be pretty good at not letting too much development in, especially of apartment buildings and duplexes and triplexes. This means that poorer/gentrifying neighborhoods tend to get the most development of new buildings... which means faster displacement and gentrification. So one argument I'm hearing is that we need to make sure every neighborhood has new development coming in, not just the poorer ones. And these buildings need affordable units.

Also, rents have stabilized a tiny bit in Portland in the past year because, after years of a housing shortage, there was finally enough new construction. Here's a local news article about the glut of new apartments and how that's impacted the local housing market. Too many high-end apartments doesn't mean that cheap apartments are suddenly cheaper, but the average price for a rental has dropped a tiny bit. That article talks about how it's not as simple as build everything and prices will come down -- so I think it talks to the complexity of the issues you've raised.
posted by bluedaisy at 11:21 AM on January 3, 2020 [6 favorites]

Its not (merely) the volume of housing, its who builds it and how their expectations to profit from it affect who lives in it and the pricing. Until we break ourselves of the boomer-fueled delusion that homes are simultaneously places to live and economic vehicles required for stability (which relies on an ever increasing value that clearly leaves a lot of folks out of the equation) we wont fix houselessness, even if we radically increased the supply of housing (without changing the model).

People who say that X new units wont actually fix the problem are not wrong, but the entire focus on a quantitative fix when its the characteristics of the underlying system that are the original source of the issue.

Phrased another way the question is "how high would you have to raise minimum wage to eliminate wealth inequality?" [answer - you couldnt]
posted by Exceptional_Hubris at 11:22 AM on January 3, 2020 [4 favorites]

Yes, but no.

WE DON'T KNOW because there is no such thing as a controlled study on this question

Right, and perhaps more instructional for your central question, we've never had (that I know of in the US) an uncontrolled scenario where enough housing units were added in sufficient time to move the needle.

Why? Typically it's because of the surprisingly large political constituency that is anti-growth.

Some people have tried to do the actual math. To their point, looking at NYC as an example (vs the US), you get about 0.5% growth in the US and .25% in NYC...in one of the most bullish housing periods in recent memory.

So there's a good chance that increased supply does actually solve issues of price. BUT doing so is about as difficult as space travel.

Also, there's the 2nd order fx that ExHubris mentions. Composition matters, substitutability matters, permeability of capital flows is huge, etc, etc.

Basically the issue with housing is similar to inequality in capitalist systems more generally.
posted by Reasonably Everything Happens at 11:42 AM on January 3, 2020

Yes, but no.

WE DON'T KNOW because there is no such thing as a controlled study on this question

Right, and perhaps more instructional for your central question, we've never had (that I know of in the US) an uncontrolled scenario where enough housing units were added in sufficient time to move the needle.

We've never done a true controlled study, but there are serious differences in construction between states, such that we can pretty clearly answer this question. To wit:
Population estimates

The median home price in Phoenix is about $250k, and Phoenix (which I will use as a proxy for AZ since there is no close by 2nd most populous city) gained 800,000 people in the past decade per the US census population numbers just released. It went from $169k to $250k (not inflation adjusted), which is less than doubling in 10 years, and per the signs in the city you can get a brand new home for that price.

Texas gained about 4 million people in the last decade, and home prices barely doubled. Dallas/Ft Worth metro alone also had more units under construction than all of California, which grew by 2million people, and was suffering a severe shortage before this decade.

So the answer is basically "Yes" you can build enough housing such that it is affordable to the median home owner.

But - here is the huge caveat - 'affordable' has to be defined, and know that housing has relatively high minimum prices due to maintenance costs, so that $250k in Phoenix may very well be the 'base' price. Also know that a $150k house would be 'affordable' to 2 minimum wage workers, so there is a higher base price to housing than you might think.
posted by The_Vegetables at 12:29 PM on January 3, 2020 [1 favorite]

You might find these piece interesting: The Bipartisan Cry of ‘Not in My Backyard’
posted by ThePinkSuperhero at 1:21 PM on January 3, 2020

Best answer: The big thing that many supply-side arguments ignore is the financialization of housing. The United Nations have a report on this issue:

Known as the financialization of housing, the phenomenon occurs when housing is treated as a commodity - a vehicle for wealth and investment rather than a social good. In her most recent report to the UN Human Rights Council, the Special Rapporteur explores the financialization of housing and its detrimental impact on human rights, in particular, the right to housing.

For example, Real Estate Investment Trusts (REITs) have been snapping up single family homes in markets with much greater supply than LA, driving up rents and prices, irrespective of supply.
posted by spamandkimchi at 1:36 PM on January 3, 2020 [7 favorites]

Best answer: This is a good podcast with a housing expert that provides accessible explanation of this issue.

To sum up: housing experts generally agree that there are really two separate housing crises going on. One, a phenomenon impacting the middle-class, where a lack of building of market rate housing has caused prices to increase dramatically in certain high-demand areas. This is the what would be addressed by the efforts to increase in supply that you mention. Two, a phenomenon affecting very low-income people, who aren't able to afford market rate housing no matter the cost. This group needs public or social housing, which is also grossly underbuilt.
posted by scantee at 1:46 PM on January 3, 2020 [5 favorites]

House flipping is one obvious example of how housing operates as an investment vehicle designed to go up and up regardless of the quantity available. Some cities have investigated anti-speculation taxes to deter this (Philly for one).

Homeowner subsidies in the form of mortgage interest deductions (MID) have also resulted in higher housing prices. If economists' complaints about rent control (state/local policy) are well-known in the corridors of LA City Hall, economists' complaints about MID (federal policy) have not really made it into the public view. Some examples: Brookings 2016 report ; Center for Budget and Policy Priorities.

I'm on deadline (why am I on Metafilter, oh yeah procrastination), but once I'm done I'll take a look at my syllabus (I taught housing policy to graduate students last year) and try to come back here and add more research/resources.
posted by spamandkimchi at 1:47 PM on January 3, 2020 [4 favorites]

"5 Reasons Why Economists Dislike the Mortgage Interest Deduction" by St. Louis Fed economist Bill Emmons.

1. It encourages larger houses
Emmons says the MID encourages the construction of bigger, more expensive homes; this can contribute to higher energy costs, urban sprawl and fewer funds deployed to non-housing business investment.

2. It’s regressive
The MID benefits high-income households the most, Emmons says. He cites Tax Policy Center estimates suggesting the Tax Cuts and Jobs Act will make the MID more regressive: Even though it’s a smaller pot of money, the 8 percent of taxpayers with annual incomes of $200,000 or more will get about 63 percent of the benefit, compared with about 54 percent of the benefit under the previous tax law.

3. It actually reduced the homeownership rate
Emmons says the MID can hurt low- and middle-income earners by driving up house prices and making homeownership less attainable. That’s because tax benefits like the mortgage interest deduction are “capitalized” into house prices, pushing them higher than they otherwise would be. Citing research published in the February 2018 American Economic Review, Emmons explores findings that the previous incarnation of the MID—before tax reform—did not encourage homeownership.

In fact, he says, it reduced the homeownership rate by about 5 percentage points. It raised house prices so much through the capitalization of tax benefits that homes became out of reach for some buyers, he explains.

4. It increases the likelihood of mortgage defaults
By enabling people to finance homes with debt, Emmons writes, the MID increases the likelihood of loan defaults when house prices drop, especially during economic downturns.

5. It’s inefficient
Emmons says that overall, economists view the MID as such because it distorts house prices and the mix of housing constructed, while encouraging greater mortgage borrowing.
posted by spamandkimchi at 1:51 PM on January 3, 2020 [1 favorite]

The mortgage interest deduction was really only ever for really upper/wealthy home owners and the new Trump tax laws have curtailed it even upper income owners, leaving it only for the wealthy. Also the MID is ok but property taxes in many places are high and few economists or housing policy advocates ever discuss how much of a cap that puts on price increases, mostly because it doesn't do much.
posted by The_Vegetables at 1:58 PM on January 3, 2020

Here's a two part blog with an economic theory about how house prices are most affected by interest rates, which I found interesting. The argument is that the price of the house is actually driven more by competing investment possibilities than anything else, including supply.

I would note that this article concentrates more on the capital cost of the house and less on the cost of living in the house (or perhaps I read it with a bias in that direction). The cost of a house is not the same as the affordability of housing since things like interest rates play into that.
posted by How much is that froggie in the window at 1:58 PM on January 3, 2020

Best answer: If you can access this paper (if not, here's a draft version), it talks about the arguments "supply skeptics" make and explains why increasing supply does improve affordability, but why it's not enough to fully solve the problem.
posted by pinochiette at 2:12 PM on January 3, 2020 [2 favorites]

Response by poster: Thanks for all the answers folks . . . I'm besting a few and not besting others based on an initial scan but all of these answers are much appreciated and I'm looking forward to digging into all these sources, especially regarding financialization, but the rest in general too.
posted by kensington314 at 2:51 PM on January 3, 2020

Oh if you decide to fully nerd out on this topic you might enjoy subscribing to the Gimme Shelter podcast hosted by two reporters who cover the housing beat. (When you're done exploring the wide world of Housing Opinions, be sure to tag yourself). And yes we should all agree the mortgage income tax deduction is a trash subsidy that favors housing the wealthy at the expense of the poor!
posted by latkes at 4:44 PM on January 3, 2020 [2 favorites]

You may find looking at other countries provides some interesting comparisons. Housing in Tokyo comes to mind.
posted by gryftir at 5:45 PM on January 3, 2020 [1 favorite]

The answer is not "5% more houses per year", it's more like "500% more."

See gryftir's link: the city of Tokyo alone has built 110,000 homes a year since 2003.

By comparison, Los Angeles built 16,525 units in 2018. San Francisco built 2600.

I wonder if progressives would do better if we adopted the notion of housing privilege. People who already have housing have almost all the power in any American city, and they do everything they can to keep everyone else out.
posted by zompist at 11:10 PM on January 3, 2020 [9 favorites]