The Solution to Expensive Housing Is More Housing

 

Finally, a book by a New York Times reporter who understands the crucial link between restrictions on the supply of housing and the price of housing! Golden Gates, by economics reporter Conor Dougherty, is a tour de force. It’s a rare book that mixes careful, nuanced reporting, painless economics lessons, interesting history of California, and pitch‐​perfect humor, but Dougherty has written one.

Dougherty, who was a housing reporter for the Wall Street Journal for a decade, must have learned a lot in that job. He knows and understands the economics literature on the connection between supply and price, as evidenced by his treatment of the pathbreaking work of Harvard’s Ed Glaeser and Wharton’s Joseph Gyourko. (See “Zoning’s Steep Price,” Fall 2002.) Furthermore, Dougherty understands that when more luxury housing is built, that frees up housing that is then sold to people slightly lower on the wealth scale, and on down. He also understands the negative consequences of rent control.

That’s not to say that I agree with everything in the book. In particular, the author underplays both the bad consequences of rent control and the good that would result from massive housing deregulation. But those defects are way more than offset by his understanding of the harm done by restrictions on building.

This is from David R. Henderson, “The Solution to Expensive Housing Is More Housing,” Regulation, Spring 2021. It’s the lead book review, an honor I rarely get.

Another highlight:

Early in the book, Dougherty introduces a number of important players. First is a colorful character named Sonja Trauss, a teacher in the East Bay who dropped out of the doctoral economics program at Washington University in St. Louis, emerging with a master’s degree. Trauss started San Francisco Bay Area Renters’ Federation, an organization that favors allowing more housing to be built. She was an early advocate of YIMBY (Yes In My Back Yard), the opposite of NIMBY (Not In My Back Yard). As Dougherty puts it, “Sonja was for anything and everything, so long as it was built tall and fast and had people living in it.” Trauss later became a full‐​time activist for the cause of more housing, and Dougherty tracks her movements carefully.

Trauss has a way with words and Dougherty has a keen ear for those words. She understands 19th‐​century writer Frederic Bastiat’s point about the unseen consequences of government regulation. At a hearing in the East Bay city of Lafayette, she pointed out that many of the people who would be affected by a decision to allow more housing “don’t know who they are yet” and that some of them are not even born. It’s Bastiat’s seen versus unseen.

One more highlight:

The book also discusses Harvard labor economist Lawrence Katz. Few people probably know — I didn’t — that when he graduated as Berkeley’s top economics undergrad, Katz devoted his whole 1981 commencement speech to one of the main causes of the high price of housing in the Bay Area: restriction of supply. He pointed out something that few of his classmates probably knew: just 10 years earlier, “California house prices were not much greater than the national median.”

Read the whole thing and read the book.

 

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One hundred years of solitude

Rarely does one see such unambiguous good news as this:

The Berkeley City Council has unanimously voted to become the first Bay Area city to end single-family zoning. . . .

Berkeley was the first city in the country to enact single-family zoning more than 100 years ago.

Opponents of single-family zoning say it was used to exclude people of color from moving into certain neighborhoods.

Who wins?

1.  Conservatives that favor local control of zoning decisions.

2.  Conservatives that favor deregulation and free markets.

3.  Progressives worried about housing affordability for the poor and minorities.

4.  Urbanists worried that suburbia creates isolated, atomistic people, unconnected to their neighbors.

5.  Environmentalists worried about urban sprawl.

Congratulations to Berkeley for ending 100 years of solitude.

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Interest rates and housing affordability

David Beckworth directed me to this Nick Rowe post:

Let’s start with land, and assume we are not living in the Netherlands. The supply of land is fixed and hence the price is 100% demand determined. If consumer preferences do not shift, then the affordability does not change at all. But the concept of “price” is tricky, as it may be a composite variable that involves both the size of a required down payment (a function of the price of land) and the annual cost of a loan to buy land.

Now assume the interest rate falls in half for reasons unrelated to the land industry (to avoid reasoning from a price change.) If the price of land were to double, then land would be less affordable for the reasons suggested by Nick. But if consumer preferences did not change, then this cannot be the equilibrium outcome. Instead, price will rise by less than 100%, and the added negative of higher down payments will exactly offset the added benefit of lower monthly loan payments (due to lower interest rates.) The price of land will rise, but the composite cost of owning land (down payment plus interest) doesn’t change.

Now let’s think about how lower interest rates affect the price of mobile homes. Assume these homes are manufactured in industries where the long run supply curve is perfectly elastic. (That’s actually a reasonable assumption.) In that case, cutting the interest rate in half has no long run effect on mobile home prices. But it reduces the total cost of owning a mobile home and thus demand shifts right, which in the long run means higher quantity sold at the same price per unit.

Now think about “housing” as a house/land hybrid. The land is fixed in supply, and the house can be produced in the long run at constant cost. Now when interest rates fall in half there is some net decline in the total cost of housing (down payment plus interest) and some net rise in house prices and house output. In Texas, the effect of lower interest rates mostly shows up as higher quantity. In California, the main impact of lower rates is to increase house (i.e. mostly land) prices.

PS.  This is not an academic exercise.  Lower interest rates are the new normal.

PPS.  Yes, it matters why rates fall.  In this example, assume the fall in rates is caused by some combination of more saving and fewer opportunities for business investment.

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It’s not just housing

Here’s a tweet by Matt Yglesias:

Is it really that “strange”?  Yes, there’s far too much government planning in the housing sector.

But housing is a laissez-faire paradise compared to America’s second largest sector—health care.

And health care is a laissez-faire paradise compared to America’s third largest sector—education.

And then there’s agriculture.  Law.  Transportation.  I could go on and on.

To be clear, America is a more free market economy than most other countries.  But how often to you see pundits claim that, “Actually, country X is not a free market economy”, and then cite some intervention that is fairly minor compared to the widespread interventions in America’s second and third largest sectors?

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