A Solution To The Housing Supply Problem by Ed Pinto

AEI’s International Center on Housing Risk hosted two conferences last week. The first, Economical Housing by Design, explored market-rate, unsubsidized approaches for producing housing intended for service and line-production workers. The second, more general, the center’s Fifth Annual Conference on Housing Risk, focused on recent research covering mortgage and collateral risk measures and their applications.

Housing Supply

Over the course of three days a consensus emerged — expanding access to economical homes and apartments is largely a supply-side, not a demand issue. Housing being built today is not economically designed or located so as to fit the wallets of service, line-production and entry-level workers. Given these supply constraints, efforts to increase demand are self-defeating — the result is to make home prices less, not more, affordable.

Service and line-production workers’ wages average about $26,000 per year (with surprisingly little variation across the country) and nationally account for 38 percent of all public and private jobs. Entry-level workers in other parts of the economy have similar incomes.

There is strong demand by workers for apartments that rent for $600 to $900 per month (plus utilities) and are located near jobs. Yet, neither the market-rate private rental market nor the subsidized private and public rental market are meeting this demand.

In the case of market-rate private rentals, a host of unwise government policies results in minimum achievable rents that are more than (typically well in excess of) $1,000 per month. In the case of subsidized private and public rentals, the political reality is that available subsidies are overwhelmingly targeted to households that cannot work or are marginally attached to the workforce. Likewise there is strong unmet demand for homes selling in the $80,000 to $175,000 price range.

The reality is that the existing system disproportionately benefits existing homeowners, disproportionately harms workers who need economical rental housing, needlessly drives up the cost of economical rental and owner-occupied housing, makes it more difficult to launch new local businesses and expand existing local businesses, and harms the locality’s potential for economic growth. The crux of the problem is that in the United States we have tended to overregulate development — again driving costs up — and we have tended to provide poorly designed, costly subsidies so that only a trickle of economical housing can be developed.

Late in September the Obama administration issued an excellent report outlining the constraints on increasing housing supply, with a focus on the detrimental impact of NIMBY-ISM (NIMBY stands for Not in My Back Yard, a reference to opposition by residents to a new development proposal because of its proximity).

Titled the Housing Development Toolkit, the report diagnoses many of the same problems and solutions highlighted in our research. On the problem side, the United States has tended to overregulate development, and in the process has driven costs up. On the solution side, there needs to be expanded development, increased density, reduced parking, and streamlined permitting processes. However, our research goes further by outlining steps for putting the market back to work.

A two-way approach is needed: (1) cost-effective land-use regulations that provide for higher housing unit density per acre, reduced parking requirements, reduced local regulations and costs, expedited processes, and reduced fees; and, (2) for local governments to allow — and for developers to utilize — economical design, construction and management techniques.

In short, these actions would promote the production of unsubsidized, serviceable housing with low rents — similar to low-price hotel rooms and low-price cars — that are desperately needed. Only by unleashing private enterprise will the supply of market-rate housing expand, thereby allowing supply and demand to reach equilibrium at lower rents. The greatest beneficiaries would be workers.

Our hope is that local governments concerned about these workers and that want to stimulate local economic growth will embrace the policy changes suggested in recognition of the broad-based benefits of a greatly increased supply of market-rate economical housing. Those local governments that try our suggestions will succeed, that other local governments will notice, and that these ideas will spread to the extent — and only to the extent — that they work in practice.