Summary: This article identifies the source of the affordable housing challenges. Then, the political and government misalignments are explored, including the economic framework for explaining those misalignments. We conclude with a call for increasing housing choice as the means to making houses more affordable. In the post-script, zoning is discussed as a bastion of structural discrimination.
I love teaching undergraduates personal finance! The students are so full of promise and energy. More so than the older generations, they possess the most important element for realizing the power of compound interest:
TIME.
I show them how to leverage their time to develop life-changing wealth. But I do have a part of my class that has become sadder for me in recent years... When I explain to them the increasing challenges of getting on the housing ladder.
I’ve been in banking for over 30 years. I’m also a real estate investor. Today, I lead Personal Finance Reimagined - a decision-making and financial education platform. I teach personal finance at James Madison University. As part of my class, we simulate homebuying. The class uses home-buying decision technology plus engages guest speakers like mortgage loan officers and real estate agents to prepare the students. My job is to help my students build decision confidence and to encourage them to make wealth-generating, long-term investments. This includes buying their first home. I encourage the American dream.
The Affordable Housing Challenge
But there is a problem, housing cost as a percent of income has dramatically increased. Today, buying a home is more difficult than ever. In my homebuying class, I introduce the students to a series of home-buying adaptations. These adaptations are helpful in the current environment when housing is so unaffordable. Those adaptations include co-ownership, making use of down payment assistance programs, living outside employment centers and mobile work, and buying and renting rooms. These adaptations were completely unnecessary just a generation ago. It seems unthinkable that in one of the richest countries in the world, I need to teach twenty-somethings how to fight through affordable housing challenges. But it is the time we live in.
I’ve come to realize that, as a society, we are shooting ourselves in the foot. I have seen the enemy and the enemy is us.
Next, I will identify those at the core of the affordable housing crisis, generically referred to as "Rich People". Rich people are a pretty broad and unassuming group. These are people who are 1) wealthy enough to have owned a home for the last 15 or so years and 2) will support a local policy that discourages homebuilding. These are usually people who give to charities and volunteer for good causes. It is interesting - if I went to a community party with a bunch of rich people and asked them if they think the lack of affordable housing is bad for society - they would say “Absolutely!” Then, if I asked them if they would support an initiative to build affordable housing near them - they would say “Absolutely not!”
The catch-22 riddle is - the rich person supports affordable housing initiatives as long as they occur somewhere else. The problem is that there is no other place to effectively impact the affordability issue - so it remains unsolved.
Plus, rich people can afford to push the affordable housing challenge somewhere else. Individually, rich people are charitable. As a group, rich people conspire to prevent millions of Americans from getting on the housing ladder. I have seen the enemy and the enemy is us.
There are two camps of rich people on point for causing the housing crisis. Ironically, these two camps are generally from opposing ends of the political spectrum. They both have enough wealth to fight the other camp. The challenge is that the poor people get caught in the middle and lose big time.
The first group of rich people is called the Nimby snobs. These are people who own nice homes in the suburbs and don’t want poor people to live next to them. To be fair, they do not directly say “poor people.” But they impact poor people by supporting zoning rules to discourage building homes that a) do not look the way the Nimby snobs want them to, b) multifamily buildings that are too tall, c) lots that are too small, or… etc. But when it comes down to it, the Nimby snobs want to keep out affordable houses and the people that live in them. Also, they are the same people from affluent school districts. Nimby snobs will fight to keep their public school district from getting re-zoned.
The second group of rich people is called the Price reactionaries. These are rich people responding to the first group of rich people by supporting price controls on housing. These are often rich people in dense urban settings. The people setting the price and rent control policies often do not live in the neighborhoods with rent controls. Why? - because they are rich and rent control housing is not nice. There is no incentive for the owner of rent-controlled housing to maintain it.
Both of these rich people groups, via their wealth–based influence, work through local governments. It is the local governments and homeowners associations that implement these rich people's policies. The housing advocacy group Up For Growth estimates an almost 4 million unit housing shortage in the U.S., with half of the shortage found in the suburbs. The suburban housing shortage has worsened in recent years because of pandemic-related migration trends.
To create a more balanced housing market, American suburbs must build enough housing to cover their deficit and then more to keep up with growing demand. Yet, in most suburbs, NIMBYism is proving effective at preserving exclusionary zoning and burdensome regulatory restrictions. Keeping up with housing demand is nearly impossible. - editors, Up For Growth
The Nimby snobs, price reactionaries, and their local governments distort the housing market, causing supply to go down, and prices to go up. So - next is a message to the nimby snobs and price reactionaries - "It’s time to lay down your rich person weapons!!" If we agree housing needs to be more affordable, there is a much better way to make prices go down. Prices will go down when there is more housing supply. So the answer is easy - stop making homebuilding illegal and allow prices to signal the market need. This starts with two mantras:
Start with a blank slate by setting aside existing zoning restrictions. As a result, housing choice is the default option. Implement land use restrictions only if there is no other way to ensure safety. Those new 'post-blank slate' zoning proposals should be evaluated by a judge with no conflict of interest - that is, the judge does not own land in the community whose land use rules they are judging. Zoning should be regularly “blank slated” as a control for zoning creep, especially since the desire to zone seems to be an unavoidable part of our human nature. The scope of zoning blank slating should be broad, including zoning commissions, local governments, HOAs, etc. responsible for policies or rule sets that somehow impeded housing construction.
Avoid price controls. Price is a great signaler of scarcity and attracts entrepreneurs to build homes when prices are higher. The price signal only works if you let it. Removing zoning restrictions effectively legalizes home building and creates a market environment suitable for the price signal. The zoning rollback has two price and supply effects: a) It will increases supply to bring down housing prices over time. And b) speed of construction increases because former zoning rules creating speed bumps and frictions have been removed.
If you are a rich person, your initial response may be, “I don’t want housing prices to go down for me. I like my riches!” The rich person does not have much to worry about. Their homes already benefit from past zoning - such as lots size, square footage, architectural style, etc. It will continue to do so. In fact, pricing of existing rich person housing stock may increase as it becomes more scarce relative to the newer, limited zoning-impacted housing.
This enlightened approach could be called the HIMBY - or to encourage building “Homes in my backyard.” If the housing supply increases, it will cause prices to go down. If you let the market do its job, let pricing signal that housing is scarce, and reduce restrictions on home builders, the housing supply will go up and housing will become more affordable. There is a common belief among some affordable housing advocates that affordable housing needs to be set aside and built with the intention of affordable housing. This is not true when zoning restrictions are reduced. All housing is affordable housing when existing housing stock is eligible for use as affordable housing. Increased supply, regardless of intention, brings down all housing prices. Older housing can be repurposed or converted to more affordable housing if it is not illegal to do so. Smaller houses or multi-family buildings are likely to be built if it is not illegal to do so.
The Political and Government Challenges
The political and government challenges are not insignificant. Government bureaucracies, also known as the administrative state, are government professionals who need something to do to justify their salary. So letting the market do its job by deregulating would be contrary to their monetary incentives. The bureaucrats' natural protective response is to hire less-than-independent policy research gurus to justify housing policies keeping the bureaucrats busy. Local governments run the risk of conflict of interest impact and self-dealing. Also - the real estate market is relatively slow to adjust. Despite having fewer regulations, constructing housing stock and waiting for market responses still require time.
Politicians, on the other hand, have relatively short terms in office. So doing the right thing by increasing the housing supply may take longer than the office term of the politician. They may see a supply-side housing policy as benefiting the next person in office, not them. Implementing a supply-side real estate policy as a politician requires not only strength of character but also the willingness and capability to shake up the bureaucracy. It is not the political easy button. Sadly, more often than not, the politicians and local bureaucrats will name-call investors - chastising them for raising prices. Nevertheless, the affordable housing challenge is caused by those market-distorting government policies, the investors are simply responding to the market incentives. If you get the incentives right, investors and the participating agents will optimize the market.
Next, shown is the economic dynamic between policy, politicians, bureaucrats, incentives, and the time misalignment:
Also, what if the politician says - "Well, to keep housing costs from going up [from time period 2 to 3], I will implement rent controls!” Unfortunately, this will not work either. People have proven to be very diligent when they want something, if prices are artificially kept down and supply is not able to adjust, they will assert transaction costs to acquire that lower-cost good. This is like the way surge pricing works for Uber, except the price surge is in the form of non-monetary transaction costs. In the case of rental housing, according to Duke economist Mike Munger, those transaction costs could be:
"So if you say that the price can't go up beyond a certain amount, there's a bunch of people who want that low-price apartment. They're going to queue up. They're going to try to make bribes, they're going to hold on to it for a long time and have illegal sublets, and so the effect of price controls is going to make it much more difficult for the market to do its work." - Mike Munger podcast episode "All Housing is Affordable Housing"
Adding rent controls on top of the demand-side housing policy is like jumping from the frying pan into the fire. We are better off letting the market work.
As an example of self-dealing, the local government gladly accepts the higher property taxes stemming from the higher prices driven by the zoning restrictions imposed by the local government. Also, local governments often have down payment assistance programs. These local government programs provide taxpayer-funded assistance to help people qualify for loans because the local government’s zoning rules lead to higher home prices. This seems like a bizarre local government works program to take money from one pocket and put it into another. Naturally, government employees receive salaries to change the money pockets!
The late, great economist John Maynard Keynes said: “In the long run, we are all dead.” The reality of housing is different. A more appropriate housing narrative is: “In the long-run, zoning causes housing to be less affordable and disproportionately impacts society’s most vulnerable.”
Now, I am an economist and most economists understand scarcity and the role of market price signaling very well. The President of the United States has the Council of Economic Advisors (“CEA”) to help develop real estate policy. The question is - does the CEA focus on long-term beneficial real estate policy and if so, does the President listen to the CEA? Alternatively, is the CEA more intended to provide the appearance of society-benefiting research but, in practice, serves to justify short-term policy helping the President get reelected? In the case of real estate policy and the timing misalignment between the politician and the real estate market, these are two very different objectives. Incentives matter - even to economists.
Conclusion
Great wealth begets great responsibility. However, wealth without responsibility gives us the ability to believe what we want to believe - and impose those beliefs on others - even if those beliefs are not fair, not true, or a matter of style.
For example, zoning by lot size or house size restrictions is a short leap to zoning designed to keep lower income, minority race people out of a community. That is not fair.
For another example, zoning by architectural type is a short leap to preventing more efficient, lower-cost architectural styles favored by lower-income people. That is a matter of style.
Earlier, we discussed the deep economic rationale for increasing individual choice when it comes to housing. Zoning rules cause higher prices, a lack of affordability, and a lack of access for all groups not on the housing ladder. Besides groups of minority citizens, this includes all young people who wish to be a first-time home buyer. It is time to change how we zone to increase choice among all housing stakeholders. Increasing choice should expand who has a say in zoning decisions from those that own homes to include those stakeholders that need homes.
Think of zoning challenges like smoking cigarettes and secondhand smoke. It’s one thing if someone wishes to smoke by themselves and create their own health problems. While not advised, that is their right. But it’s another thing entirely if they smoke around other people, imposing their will on others, and reducing others' lifespans because of their secondhand smoke. That is not fair.
Our country was built on freedom and individual choice. Zoning, beyond rules strictly enabling safety, is contrary to freedom of individual choice and disadvantages minority and economically challenged groups. Americans should be free to deploy their wealth how they see fit and within constitutional boundaries. Americans should also be free to move if they don’t like their neighbors. However, Americans should not be free to impose their will on others when their will is not fair, not true, or a matter of style.
I wish I didn’t have to teach my students how to deal with incredibly unaffordable housing. However, these are mostly college students who will graduate, get good jobs, and make enough money so they can adapt to the affordable housing challenges. Plus, these students are wise enough to take a personal finance class - they are already on their way! However, there are certainly many other Americans, more economically disadvantaged who have no political voice and little hope to get on the wealth-building housing ladder. This needs to change.
I’ve seen the enemy, and the enemy is us.
Post-script - Zoning and structural discrimination
In the appendix of the article I wrote, called The subtleties of lending discrimination, three primary theories of discrimination are described:
Taste-based discrimination
Statistical discrimination
Structural discrimination
Of the three, structural discrimination is stubborn, remains alive and well today, and can be found in many zoning rules.
When America was founded, we allowed slavery by law. Then, resulting from the Civil War, slavery was abolished by law and the 1865 amendment to the U.S. Constitution. But racial discrimination persisted. Then, in 1964, the Civil Rights Act was implemented to abolish other forms of legalized discrimination that had crept its way into the cultures, laws, and habits of American life. Today, a remaining bastion of social injustice is found in structural discrimination. This is current-day racism and other forms of discrimination directed toward groups of citizens identified in the Civil Rights Act - known as "protected classes." Protected classes include race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 or older), disability and genetic information (including family medical history).
Structural discrimination is still found in American life, deeply embedded in systems, rules, written or unwritten policies, and entrenched practices, such as the systemic racism enabled by zoning. Structural discrimination is found in zoning rules suggested earlier that are not fair, not true, or a matter of style. Whether or not zoning boards intend to be biased toward protected classes is not the point. The point is, zoning - regardless of motivation - creates disparate impact toward protected classes.
The title of this article suggests there is a “simple answer.” Zoning and related discriminatory behavior is part of our human nature. The simple answer is in a class of behaviors that we know we should do, but is hard to do. It will not be achieved unless we hold ourselves collectively accountable.
University of Texas Law professor A. Mechele Dickerson wrote in the 2021 Emory Law Journal article called Systemic Racism and Housing:
....few [Blacks and Latinos] can afford to buy homes in neighborhoods that have exclusionary zoning laws or in neighborhoods with a strong NIMBY presence.
Federal, state, and local housing policies have consistently made it easier for whites to become homeowners and increase their household wealth. These same
policies made it harder for Blacks and Latinos to buy homes or even find
affordable rental housing, particularly in high-opportunity neighborhoods.
Given how deeply embedded racism is in this country’s housing laws and
policies, Blacks and Latinos will continue to languish in housing markets unless federal, state, and local governments commit to adopting anti-racism laws and policies to remedy the harm caused by prior racist laws and policies.
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