Why Housing Is Expensive

And why this presidential election will do nothing to alleviate the housing crisis.

Oct 06, 2024

This is a Bonus Post. Welcome to Charlottesville will return this Tuesday.

Campaigning on Housing

Below is a screenshot from social media. The freeze frame shows a chart presented by CBS news. To “southpaw” who posted it, the screenshot is insane because of one of the squares, which I’ll get to, but I want to use this as a jumping-off point for why housing is so expensive. In truth, three—if not four—of the squares are pretty crazy, though a couple of them are forms of insanity many of us seem to share.

Let’s start with the upper left.

1. Trump/Vance Suggest Changing Regulations & Making Federal Land Available

Making federal land available won’t help local housing because federal land is mostly in the middle of nowhere.

Look, the problem with housing isn’t a lack of land. And nationally, it’s not even a lack of housing. In America there are already huge stocks of unrented rentals, unsold buildings, and available private land, but much of it is not where people actually live. There are plenty of apartments in Appalachia and rust belt cities. But those areas are losing population because there aren’t jobs. It’s the places people are moving to that need housing, and that sure isn’t near federal land. Trump and Vance basically want to build more housing in places where people don’t need it.

As far as regulations, presidents only oversee federal regulations and federal regulations have little impact on local housing. The regulations that matter are local and state regulations. Particularly zoning and setbacks.1

There is a lot of available space that’s zoned as “commercial” so landlords can’t rent it out for living spaces. Much land is zoned strictly for “single family homes” so landlords can’t build enough moderate-sized apartment complexes to keep people off the streets or give them housing close to their jobs or help them get a family started. (And this impacts birth rates by the way.)

So #1 is nonsense.

2. Trump/Vance Suggest Mass Deportation to Ease Demand

This is the entry that the “southpaw” objects to—CBS pretending the Trump campaign’s immigrant-bashing is some sort of housing policy. Of course Trump’s immigrant bashing is silly. Remember the last election when there was allegedly an illegal immigrant caravan coming to invade the US if Biden won?!

Remember how the U.S. media breathlessly logged its progress with helicopters and ground reports? Funny how when the election was over the caravan somehow dissolved without ever reaching the border!

In any case illegal immigrants aren’t buying houses, so mass deportations won’t affect single-family home sales one bit.

On the other hand private equity firms are buying houses, often with the massive bail-out checks mailed out by Trump during covid, and that does increase the cost of housing a lot.2

Immigrants do rent apartments, but even that doesn’t affect prices nearly as much as zoning preventing the building of apartments and rent fixing. Up to a quarter of the price of rentals is now ascribed to monopolistic practices by software firms like RealPage.3

So #2 is nonsense.

3. Harris/Waltz Suggest $25,000 Down Payment Assistance

So the Republican proposals are garbage. What about the Democrats?

Well, Harris and Walz are offering concrete ideas, but unfortunately those ideas are straight from the Reagan-Clinton playbook and the Reagan-Clinton playbook is largely what caused our massive housing shortage!

Sure, a “$25,000 down payment assistance” sounds great. Who doesn’t want some money from the government? Unfortunately, market prices are determined by how much money people spending and how much stuff they’re spending it on. So:

Add housing and keep the money supply the same and the cost of houses will go down.
Subtract housing and keep the money supply the same and the cost of houses will go up.
Subtract from the money supply but keep the housing supply the same and the cost of houses will go down. (Doesn’t happen often but after the Civil War, say.)
Add money to the money supply but not housing to the housing supply and the cost of houses goes up. (That’s inflation.)

I put the last one in bold because that’s the one that applies here. If the federal government starts kicking in $25K per house it will increase the money being spent but not the number of houses so the cost of houses will eventually go up. If we want the cost of houses to go down, we need to take some of the money out of the market (by restricting corporate purchases, say, or taxing them so they’ll have less to spend), or increase the number of houses.

We could use federal money to do that and for less than $25K per house. For example, have the federal government offer $250,000 long-term fixed-rate mortgages with $25,000 down, so if builders can build at this price point they get paid immediately. I’ll bet they would find a way to build a lot of $250K houses to get the easy money. I’ll bet banks would soon want to compete with the federal government mortgages by offering a similar product. How can I be so sure? Because it already happened! This is pretty-much how the New Deal worked. The government created the original long-term mortgages and the banks followed. Builders built the houses that would get them the guaranteed money.

But having the federal government throw in money on housing purchases won’t increase the number of houses and will increase, not lower, their cost.

So #3 is nonsense.

4. Harris/Waltz Suggest Tax Incentives for Builders

Tax incentives for builders is the first idea that could actually do something to increase the supply of housing, but it wouldn’t do much.

Actually, regulations impact buildings a lot more than taxes.4 For instance there’s a fun story that the mansard roof became a fixture of Paris because the floors of buildings were taxed but roofs were not. Actually, mansard roofs became a fixture of Paris because a 1783 law restricted the height of buildings but only measured up to the cornice (where the roof begins) so Mansard roofs allowed builders to evade height restrictions, not taxes.5

Left: Mansard roof. Right: Postward Suburb

Anyway, by the later years of New Deal consensus taxes on the rich and on business were quite high, so when Reagan started offering tax breaks it really meant something, but at this point most rich people and most corporations just don’t pay enough taxes for tax breaks to incentivize building that they’re not already doing. It can influence what they build or how they build, but not whether they build. Regulations are more influential, but no one is going to take up contracting simply because contracting becomes a little more deregulated.

Most builders are already building as much as they can. It’s just not the “missing middle” housing that we need to get people off the streets, and they can’t build that because of zoning laws and setbacks. So change regulations on apartment building and builders will build apartments, but giving anyone tax breaks is pretty weak tea.

So #4 may not be total nonsense, but it’s not going to do very much.

Who Benefits

Housing is expensive because many powerful factions in American life are incentivized to keep it expensive.

Cities and states largely rely on property taxes. These are based on assessed value, which is based on market value. So the more expensive properties are, the more the government gains in taxes.
Banks make more money off larger loans.
Builders make more money off more expensive homes.
Many home buyers approach homes as investments. They’ll live in a house for some time and sell it and move into a more expensive house, or perhaps eventually downsize when the kids go off—but in each case they want to maximize the price of these houses, which includes wanting neighboring houses to be of equal or greater market value.
Many home buyers are corporate buyers who only consider houses as investments.

If cities taxed land per square foot instead of estimated market value, owners would have all kinds of incentives to increase the amount of revenue, and therefore housing, on every square foot of land. If owners were trying to get revenue rather than turnover, they would want density not pretty single-family homes. If most homeowners were expecting to own houses for generations they would think very differently too, wanting walkable neighborhoods with stores and preschools nearby. And of course banks, builders, and corporate home buyers could be easily de-incentivized with a different regulatory structure.

A Note on Homelessness

None of our national political candidates are addressing homelessness but we have to, don’t we? You can’t take most of the “unhoused” people that I walked by on the downtown mall today and drop them immediately into MacMansions, I don’t care what jobs you give them. People need ways to get off the street like SRO hotels, which right now middle class people are too freaked out to even consider.

What Would Work

For homelessness I’d suggest cities need to “borrow” commercial real estate and empty lots that haven’t been used in over 18 months and create SRO hotels and temporary trailer villages. (They would pay the owners but not ask permission.)

Cities need to tax land instead of market value.

More than anything cities and contractors need to build lots of small and medium-sized apartment buildings, including apartments for families, and apartments with more than two bedrooms. Government needs to pass the zoning changes, noise ordinances, and vice laws for people to live close to one another. In Virginia we need some tenant protections at a state level too. Basically, in order to be fair we should “upzone” everything one level6 and make all non-industrial spaces mixed use.

We need the federal government not to give tax breaks and eliminate regulations, but to use its regulatory power if anything to force suburbs to pay for themselves, to require cities to allow missing middle housing, and to deal with homelessness and not just pass it to the next city over.

Finally, the federal government should stop insuring mortgages to corporations and mortgages that inflate prices above square foot limits. That is, implement price controls on McMansions.

But none of that is going to happen from the federal government in this presidential election cycle, and maybe it will never come from the federal government. Maybe if we’re going to house our people, we will have to figure out how to do it ourselves.

We’ll be back Tuesday with the next to last post in Welcome to Charlottesville. Thanks for reading and please subscribe and share! Comments are welcome but please no profanity, personal insults, uor ad hominem attacks.

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