Can politicians solve the housing supply problem?

There are still some Americans who are shocked by the fact that home prices have risen nearly 40% during the four years of the Biden administration. Much of the blame for shelter inflation goes to global central banks, but governments also often share the blame for boosting housing demand rather than creating new housing supply.

Democrats like to talk about helping low-income families buy homes, but most progressive schemes (including lower interest rates from the Fed) boost demand for existing homes. Demand-side policies only drive up prices. But when you look at the zoning restrictions in the blue states, they are among the most formidable.

Now the Fed is prepare to lower short-term interest rateswhich will further increase housing costs. As we noted in a blog post this week about our banking indexCan the FOMC be credible on inflation if home prices rise by double digits next year? Politics? No way.

‘Half of the respondents are indoors [Organization for Economic Co-operation and Development] countries are dissatisfied with the availability of affordable housing,” the Financial Times reports on a Gallup poll“A sharp increase since central banks raised interest rates to cope with the worst inflation in a generation.” But Vice President Kamala Harris is largely focused on boosting demand, rather than supply.

“On August 16, presidential candidate Kamala Harris unveiled a series of housing proposals that recycle the same failed strategies that have plagued federal housing policy for decades,” he writes. Ed Pinto and Tobias Peter of the American Enterprise Institute.

“Among the key components are subsidies for the construction of three million new housing units over four years, as well as a total of $100 billion over four years in down payments for first-time homebuyers. Experience tells us that her plan would be worse than doing nothing,” they said.

In terms of the macroeconomy, monetary policy has never tightened credit enough to drive down house prices. In the 1980s, Fed Chairman Volcker crushed the housing and construction sectors before declaring victory over inflation. But in 2008 and 2020, the political weight of the crisis made policymakers reluctant to actually combat higher prices with persistent deflation.

Even though the Fed has boosted home prices with a sharp decline in interest rates from 2019 to 2022, bank reserves are essentially where we started before the COVID-19 crisis. It is indeed the Fed’s tightening cycle this time has not even stopped the appreciation of existing homes and countries.

“It’s been a funny cycle, to say the least,” writes Bloomberg’s Simon White. “Hurt by the repo market flare-up in 2019, which put an end to the last attempt to shrink the balance sheet, the Fed’s current tightening cycle has developed along several lines. From the market’s perspective, there has demonstrably been no tightening. as reserves – a primary determinant of market liquidity – have remained unchanged since the QT interval began in June 2022.”

Alexei Alexandrov and Laurie Goodman wrote in an article for Urban Institute earlier this year (“Place the blame where it belongs“) that it is wrong to blame government policies to improve access to credit, local zoning restrictions, or institutional investors for the housing shortage. Instead, they advocate policies to make more supply available and “provide adequate subsidies so that households lower income households can afford a place to live and more renting households can afford to become home buyers.” Sounds like Kamala Harris.

“As long as the supply shortage persists, subsidies that broadly increase the number of households (e.g. various government transfers during the pandemic), rather than a shift in the composition of renters and homeowners,” Alexandrov and Goodman rightly note, “will come home . prices and rents will rise even further and will ultimately be a subsidy for homeowners (consumers and investors alike).

Unfortunately, there is no way to make cities like New York “affordable.” Costs aside, politics in blue states like New York tends to attack developers and landlords. New projects are very expensive because of the dozens of politicians who need attention. Blue states favor subsidies without new supply because it appeals to desperate consumers and is also good politics in the tradition of Tammany Hall.

Greater density in the form of bleak public housing blocks is the plan in New York, while red states focus on protecting single-family homes. The problem with such a policy in New York, where this writer has lived and worked for forty years, is that the costs of building and maintaining multifamily housing are exorbitantly high and will not come down.

The cost of acquiring land and building multi-family housing in New York City exceeds $4,000 per square foot, while construction of new residential homes in the New York City suburbs can easily reach $400 psf without the land costs. Progressive laws that restrict all aspects of housing construction and make contested loan foreclosures virtually impossible make New York one of the least attractive housing markets in the country.

Local politicians in New York have passed laws to control rents and limit landlords’ ability to recoup the costs of maintaining apartment buildings. However, these policies are self-defeating because progressive politicians have not yet figured out a way to actually control inflation. Price controls won’t make inflation go away, but they can make commercial and multifamily real estate in major cities uninvestable.

Efforts by New York State to encourage the construction of low-income housing in New York have been hampered by land costs, but financing is also an issue. Banks have repaid construction loansreports BankRegData, partly because many institutions (and regulators) see weakness in commercial real estate today and expect an eventual correction in house prices.

AEI recently explored light-touch density as a solution, which the institute defines as housing including detached single-family homes associated residential unitssingle-family homes with small plots, attached single-family homes and duplexes, triplexes and fourplexes.

“We show that the widespread adoption of zoning and other land use restrictions across the country is associated with a declining share of LTD as a share of the total housing stock,” says study authors Pinto, Peter and Emily Hamilton.

“It is time to change the status quo and allow for dense development of single-family homes, along with two-, three- and four-unit homes, to supplement the housing stock in current single-family homes through conversion, replacement or expansion of existing structures. ”, they argue.

LTD has broad appeal because it is funded by the private sector and doesn’t allow for a lot of absurd grandstanding from politicians of both parties and commercial real estate developers. It also focuses on areas in existing cities where greater density can be achieved at relatively modest costs.

But the most important question that few seem to be asking about housing costs and affordability is whether some degree of liberalization of housing policy would make expensive cities, like New York, Miami or San Francisco, truly affordable for middle-income people. Rising land prices and construction costs appear to have already ruled out this outcome.

But the best way to promote housing affordability is of course for house prices to fall. “Using the rule of ‘eights’, history suggests that 2028 will be the year of the correction – at least until COVID-19 came onto the scene,” notes Stan Middleman in ‘Seeing Around Corners’. my upcoming biography of the founder of Freedom Mortgage. “Things change, sometimes without any warning.”