Memo 9: The Rules are the Rules Part IV – Housing
We shape our homes and then our homes shape us – Winston Churchill
This is set to be the final installation of The Rules are the Rules… for now. In just 3 memos we’ve:
This week the goal is to:
4. Reimagine development, and zoning policy to restock America’s housing stock with affordable living opportunities
At first thought, this topic struck me as a bit redundant to the NIMBYism issues we discussed last week pervasive through our energy policy. Actually though, housing wraps into our civic sensitivities in a very similar manner to what we discussed in Part II – Labor Markets and Immigration. In fact, I think this merges these two previous posts in a way that perfectly rounds out this series of posts.
On the one hand, a house is a consumer necessity like food. On the other hand, it’s a cornerstone of the American Dream – in our country, owning a home is virtuous. Why is this important? Because a lot of the time, owning a home is not such a good idea. As a college professor loved to explain, during the ’08 crisis: The auto industry went belly up and autoworkers lost their jobs. These skilled manufacturers had other work opportunities throughout the country but moving for these jobs would mean having to sell Detroit homes in the middle of a housing crisis fire sale. This isn’t an isolated incident during a singular point in time. Here’s a list of 25 company towns that are now ghost towns. Not on the list but a big one is Rochester with Kodak’s fall!
Ok so here’s the problem: when a city is expanding, home prices rise, but that city also probably needs more workers, who face record-high home prices. When that city begins a decline, workers need to start looking at making a move to somewhere with more opportunity, but at the same time, home prices are falling. We have a buy high, sell low scenario that underpins the cyclicality of the American home market. Meanwhile, American workers are left immobile, and a mobile workforce is critical to a nation’s dynamism. For a nation to be productive, workers need to be able to move to where they’re needed, and owning a home can be a huge drag.
The bottom line: for most Americans (79mm), a home is their largest financial asset - in total $21 Trillion / 30% of Americans’ personal balance sheets.
So we have this volatile, highly-cyclical asset, that Americans throw their savings into, oh and also lever up to 80%. And as a society, we applaud this. Hmmm… well it naturally then follows that “good” public policy must support home values so that Americans can grow their wealth.
Hold on a minute. So for the past two decades, our government has committed to sustainably growing home values. Well, the other side of the same coin is that for the past decade our government has focused on raising home prices (which of course translates to rising rents).
A great way to make something more valuable is to make it more scarce. In our infinite wisdom, our government created a housing shortage, home prices rose faster than incomes and now:
Percent of Homes Affordable at Area Median Income
We have an affordability problem. As we just discussed I think we actually want this problem more than we want the solution, and similar to last week’s memo, regulation and particularly NIMBYism seems to be the operating culprits.
Regulation
According to the NAHB, the average home built in 2021 cost $394k to build – of that cost, $94k / ~25% was related to regulatory burdens. Want to lower housing costs by a quarter? Get rid of all the red tape – is that ideal no, but I would trade a housing crisis for a zoning crisis any day of the week.
Cost of Regulation in the Price of a Home
NIMBYism
After last week’s memo on energy NIMBYs, a close friend and follower, who at an early point in his career has chosen to specialize in Clean Energy finance out of passion wrote in a very interesting follow-up. He argues that while NIMBYism is big deal in new project development, reliability (i.e. producing solar energy at night is challenging), and cost-effectiveness more often explain why deals don’t pass the muster. Interesting point taken, but here’s the thing, throughout our economy, there are plenty of products with quality and cost obstacles - this is quite normal. What makes NIMBYism so destructive is that the deals NIMBYs attack are by design ones that otherwise would actually get built – i.e. these were cost-effective and reliable enough - that’s why they came to life, earned economic backing, and were submitted for approval.
So how does this work? If you have made any of the following arguments about a future development where you live, you might be a NIMBY (borrowing this presentation to the Minneapolis Fed).
Infrastructure (parking or traffic pattern) is inadequate to accommodate growth
Easily exaggerated
Translation: we’re unwilling to trade in stop signs for traffic lights, even if it means making our neighborhood affordable for the middle class
Growth will lead to environmental degradation
Easily exaggerated
If we relegate new developments to community peripheries people depend on cars to travel further
Growth will undermine community history/culture/character (personal favorite)
Argument most commonly used by very liberal towns that are also 95-100% white
Some other arguments that are less NIMBY in nature but still skeptical of supply:
New luxury housing won’t affect my rents
The luxury homes of today are the affordable homes of tomorrow
Empirical evidence suggests a filtering down: over half of units affordable to low-income renters in 2013 had filtered down from higher-priced rentals or owner-occupied homes
New development will make the area more attractive
This seems to contradict “ruining the character of the neighborhood”
In economics we call this an upward sloping demand curve (prices rising as quantity increases) – drawing an upward sloping demand curve is highly correlated with getting no credit on the exam
San Francisco seems to have discovered the converse: if we turn our city into a shithole, people will leave and it will become affordable again
So what’s the common thread here and why does our political system fall so short on immigration, energy, and housing. At the simplest level, think about who gets a say and who doesn’t. Immigrants don’t get a vote on whether they come to the US and start disruptive companies. Out-of-town families don’t get to vote on whether a new housing development will be approved. My unborn children and grandchildren don’t get a vote on whether the ATV enthusiasts get their desert, or we get our solar farm. Instead, we’ve given kvetchers the last word on developments, and they have weaponized our regulatory process to stand in the way of progress. For 20 years we bailed them out and achieved/accepted meager growth if only by lowering rates and stimulating the economy, but that river has run dry. The economy called, and it wants its dynamism back.