Housing Affordability
Trying to deflect the blame for the growing problem of housing affordability, politicians across the country are channeling their inner Captain Louis Renault and “rounding up the usual suspects”. In this case, the usual suspects are property landlords using algorithmic software to better understand the local market dynamics.
Improved information flows are not what’s driving the growing unaffordability of homes.
The National Association of Realtors (NAR) has done a nice job documenting the huge decline in housing affordability over the past 4 years. Back in 2021, the NAR estimates that the qualifying income for the median priced home was $57,888 compared to a median family income of $85,806. In other words, the average family in the U.S. earned more than enough money to afford the median priced home.
Of course, not all areas were affordable as housing costs are an inherently local issue. Families in Los Angeles and New York City have been continuously struggling with housing unaffordability even when housing was affordable in the average city. The lack of housing affordability in these cities was caused by ill-advised policies.
Take California as an example. Overly restrictive zoning regulations, costly solar mandates, and environmental regulations that lead to crushing delays has caused a housing shortage estimated to be 3.5 million housing units. Regardless of the market, prices rise when the demand for the product outstrips the supply; housing is no different.
Overly restrictive zoning regulations are not just a California problem either. A ranking of the restrictiveness of zoning regulations found that the Washington D.C. area, New York City area, Providence Rhode Island, and Seattle Washington have the most restrictive zoning regulations in the country. Unsurprising, all these regions also suffer from large housing affordability issues.
Then came the inflationary surge of 2021. The Federal Reserve’s efforts to tame the highest inflation rate since the early 1980s also facilitated sharp increases in interest rates. This sudden rise in interest rates helped nationalize the housing affordability problems.
The combination of higher interest rates and restrained housing supply has caused the qualifying income for the median priced home to now exceed the median family’s income nationally. Worse, the qualifying income has generally exceeded this threshold for the past two years – sometimes by quite a lot.
Despite the government’s clear culpability, politicians love to blame private companies for their own failings. When it came to inflation, for instance, politicians such as Senator Elizabeth Warren blamed “the effects of corporate greed on product size and rising inflation”. Such accusations are simply inconsistent with the facts.
This rise in inflation was ignited by the combination of excessive federal spending during (and after) the Covid-19 pandemic coupled with the Federal Reserve’s willingness to accommodate this spending. This cause and effect is basic economics that economists of all stripes predicted would happen prior to the inflationary surge that harmed so many families.
Just like with the 2021 surge in inflation, politicians are blaming the private sector for the housing affordability problems that their policies created. In this case, the alleged culprit is the algorithmic pricing programs used by greedy landlords to keep rental prices artificially high.
These programs use algorithms to analyze market data and generate rent recommendations for local landlords. The data include market pricing information, occupancy rates, and lease information. This is all public information, and like other information technologies, the algorithms add value by enabling landlords to process this information faster and more accurately. It does not alter any fundamentals regarding what was already occurring.
After all, landlords have always been keenly aware of their local market dynamics, information technology just enhances these efforts. In the same way, information platforms and apps have improved the information renters have about prices and availability in their local markets. The fact that both renters and landlords have better information should be viewed as a positive, not a negative.
It is a hard truth for many politicians to accept that rental prices are rising because errant policies restrict supply and raise borrowing costs. The new technologies provide a convenient scapegoat; however, they are no more collusive, as Seattle-area state senator Jesse Salomon alleges, than the traditional resources that landlords used to evaluate the current market data.
Admitting that policy mistakes, not technology, drive the current affordability problems matters. The decline in home affordability has harmed families and made it more difficult for the next generation to leverage home ownership to grow their personal wealth.
Since the housing affordability problems are created by mistaken policies, restoring housing affordability requires fundamental policy reforms. The necessary reforms will not be forthcoming without an honest appraisal of how the current situation has arisen in the first place.
Paramount among these reforms are regulatory policy changes that relax zoning regulations and remove the artificial mandates inflating building costs. By lowering construction costs and expanding the supply of housing, policies can meaningfully improve housing affordability for families.
