Jan192016

Affordable housing requires more construction and more foreclosures

Since affordable housing is opposed to the interest of existing homeowners, policies which would truly improve affordability are shunned in favor of ineffective alternatives.

Most people in California suffer from higher housing costs than the rest of the US, putting major pressure on middle-class wage earners who often put 50% of their income toward housing. Why do we have this problem?

First and foremost, the problem is one of supply. California has a chronic shortage of housing, and the lack of supply is the primary reason prices are so high. When supply is limited, people substitute downward in quality just to obtain any housing at all. It’s why an income in Southern California that barely affords a condo would buy a McMansion anywhere else in the country.

The only way to combat the lack of supply is to allow builders to construct more housing units. The funny part is that few people seriously dispute this fact, and we even have political consensus on this issue. The problem is that nobody can agree on where these new units should go, and nobody wants more houses in their back yard — or anywhere near their neighborhood where these people will bring traffic and other social ills that go along with more people.

nimby

Want to help the middle class? More houses, please

The U.S. is building new homes at about half the historical rate, and it’s causing our cities to become unaffordable.

Glenn Kelman, CEO of Redfin, Wednesday, 13 Jan 2016

American cities … will become less affordable over the next decade.

The problem is housing.

When we talk about a city’s cost of living, we don’t mean food, transportation or clothing, which cost about the same everywhere. We mean housing.

We need a government policy all-out in favor of more, denser housing.

Housing is in short supply. For the 40 years prior to 2008, ground was broken on an average of nearly 1.6 million housing units per year. Starts over the past seven years averaged 788,000; even in 2015, a boom year, starts were only 1.1 million.

housing_starts_1968

What happened to the laws of supply and demand? From 2010 to 2013, home prices were 56 percent higher than construction costs, an increase from the 1990s when home prices were 33 percent higher than construction costs; most economists attribute this increase to zoning laws designed to preserve a city’s character and to protect home prices.

In California “preserving a city’s character” has come to mean casting it in amber so it never changes. While this may work for small enclaves like Carmel-by-the-Sea, it doesn’t work at all if implemented in every city in California. Mostly, the cries of protecting character are a red herring. It’s not politically correct to admit the real reason is to inflate the value of homes and add to one’s personal wealth, so people adopt the better-sounding notion of preservation. It’s bullshit, in my opinion. nimby-party

… the fight to preserve local character has become fraught with uncomfortable implications. In Boulder, Colorado, this fall, the rallying cry of residents who attempted to prevent any zoning changes was, “They’re coming for our neighborhoods.” The maze of NIMBYs (“Not in my backyard”), pols and community organizations a mayor has to win over to get anything built in San Francisco is so complicated, it’s now a board game.

The problems with chronic shortages, inflated house prices, and the substitution effect to lower quality housing is a direct result of the development approval process in California being 100% in the hands of local politicians. In California no State or regional entity has the power to mandate that any local political body must provide sufficient housing to meet local demand.

The only way California will ever have housing that’s affordable in a free-market, non-subsidized way is to shift some power away from local governing bodies — a course of action that will not be popular on the local level. This could take the form of direct approval override of local governments by a State or regional decision-making body, or it could take the form of mandates for development. In whatever form, some State or regional body must be given power to stop NIMBYs from lobbying local government officials to stop development that benefits everyone.

(See: Affordable housing in California requires ignoring the NIMBYs)

… this is a far cry from the all-out effort to keep housing costs low that we’d pursue if our priority was the people who need affordable housing, not the ones who already have it. As it stands today, housing is the only consumer good where any price drop is universally viewed by the government as a calamity.

The simple fact is people want higher house prices because they want the financial gain of owning an appreciating asset. Nothing more. Higher and rising house prices reduce the amount new buyers spend on other goods and services, which benefits existing homeowners at the expense of everyone else.propert_ladder_pressure

High house prices that keep rising higher certainly don’t benefit buyers who must pay higher and higher prices to own their homes. They bear all the costs but obtain none of the benefits — at least until future buyers push prices even higher.

If it’s too good to be true, it probably isn’t true or good. High and rising house prices are not the panacea everyone imagines.

(See: High home prices don’t benefit everyone)

Another factor causing house prices to be too high remains unacknowledged by most in the financial media. Banks were allowed to manipulate house prices to their advantage by changing their policies from foreclosure to loan modification in 2011. They artificially dried up the supply on the MLS and created an bogus shortage that persists to this day. If affordable housing were truly a priority, we wouldn’t allow lenders to can-kick their bad loans, and we would allow more foreclosures to push prices back down to reasonable levels.

I wouldn’t hold my breath waiting for that to happen.

So what’s the answer? Subsidized housing? This solution keeps prices high and allows them to go higher, so everyone who plays the game benefits, right?

Affordable housing subsidies fail

People who support affordable housing subsidies are well meaning: they want more people to have opportunity to become homeowners. However, by subsidizing affordable housing, they don’t increase home ownership opportunities, they merely displace one group of potential owners in favor of another.conehead

The buyer on the bubble

When I was younger, I used to watch the time trials at the Indianapolis 500. The drama of these time trials revolves around the driver in the 33rd spot in the field: the driver on the bubble. As each driver tries to earn a spot in the field, the driver on the bubble nervously watches to see if he will get bumped from the field.

The person on the bubble phenomenon occurs whenever the supply of some good or service is fixed, or limited in growth sufficiently to create a shortage — like housing availability in California. In California everyone who wants a house can’t be satisfied with the amount of housing stock available, and with growth restrictions in most California markets, new supply can’t come to the market to satisfy this demand; thus we have buyers on the bubble.

With sporting events the people who get served, including the person on the bubble, is determined by merit. In most financial markets, this determination is made by money or earnings. Affordable housing subsidies remove the focus on merit and instead put it on capricious qualification standards determined by pandering politicians.

The impact of affordable housing subsidies

housing_consumerA year ago I received a letter from the City of Santa Ana detailing a program where they provide $40,000 of down payment assistance to buyers who meet their qualification standards. Think for a moment about what this does.

First, the number of applications who want this subsidy would obviously out-pace the supply because they are giving out free money. Second, the selected applicants are essentially lottery winners who gain a house on luck rather than merit. Third, and this is the most important point, the selected applicant will outbid the current, hard-working, wage-earning buyer on the bubble and deny them their family home.

Where is the justice in that?

There is none. Affordable housing subsidies are a social injustice. If we really want to do something about affordable housing, we need to provide enough housing to meet everyone’s needs. Only then will affordability take care of itself.

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