The Housing Crisis Is a Supply Problem

Rising prices make us look for someone to blame, but the broken market has a simple cause: it’s illegal to build enough homes. 

By Christopher Freiman. Excerpts:

"Most notably, institutional investors simply do not account for most home purchases; they account for  between one and two percent of the nation’s single-family housing stock and roughly three percent of single-family rental properties. In most markets, the overwhelming majority of homes are still bought by individuals. Even in dense metropolitan areas where corporate ownership has grown, institutional investors represent no more than three percent of homes in any housing market.

Plus, there are material advantages to renting compared to buying a home. When you rent, you have the flexibility to move for a better job without worrying about selling into a bad market, avoiding the costs of a massive down payment and ongoing repairs. You also don’t have to tie up a lot of wealth in a single asset whose value depends on one neighborhood and one local market."

"Suppose demand for bread suddenly surges. Maybe a city’s population grows quickly, or a new gluten-heavy diet sweeps the nation. Whatever the reason, people are buying more bread than before. As a result, the price of bread rises. In turn, profit-driven bakers realize that there’s a lot of money to be made by baking more. So they produce more bread, pushing its price back down.

Rising prices encourage producers to produce more of a good, eventually making it more affordable. This is well-known. So why aren’t we seeing this play out in the housing market? If lots of people want to live in a particular city — say, because the jobs pay well or the schools are good — housing prices will initially rise. But you’d expect those higher prices to incentivize developers to build more housing, just as higher bread prices incentivize bakers to bake more bread. As more housing is built, the increase in supply should bring prices back down.

The reason why we don’t see developers building more housing in response to higher prices isn’t because they’re not interested in making more money. Rather, it’s because their ability to build is heavily restricted in much of the United States. For instance, large portions of many cities are zoned exclusively for single-family homes. Apartment buildings are prohibited in areas where developers might want to build them. Even when building is permitted, lengthy approval processes can delay projects for years. In San Francisco, it takes an average of 523 days to secure permits for a housing project. In New York, a lawsuit challenging the 2018 Inwood rezoning — intended to allow roughly 1,800 new housing units — held up the first project in the area for approximately three years before it was able to secure final approvals. And height limits, parking requirements, and other regulations can also make construction prohibitively expensive. Recent analysis estimates compliance and fees comprise 24 percent of new home prices.

In short, the root of the problem isn’t primarily increased demand for housing, though demand pressure is present. Rather, the problem is government-imposed restrictions that make it difficult, if not impossible, to adequately increase supply in response. Consequently, prices rise and stay high. Even if every institutional investor disappeared tomorrow, the housing shortage would remain."

"the solution is clear enough: make it easier to build more housing. Government officials should relax zoning restrictions that prohibit high-density housing and simplify approval processes that can delay projects for years. If these reforms were to happen, the same basic mechanism that works to reduce prices in countless other markets will work in housing as well."