Results for “housing”
704 found

Why Housing is Unaffordable: The Elasticity of Supply

We have a great new MRU video on housing and why it’s so expensive in many dynamic cities. The video is a good introduction to the economics and also to the politics of housing supply. A highlight is a wonderful animation illustrating how increasing demand coupled with inelastic supply leads to competitive bidding among buyers, driving up prices. Anyone teaching economics should take a look.

Of course, the video pairs perfectly with our textbook, Modern Principles. Indeed, this is the initial video in a two-part series exploring the elasticity of supply, transforming a traditionally mundane topic into a relevant and fun discussion. Check it out!

Zoning Deregulation Increases Affordable Housing

Geetika Nagpal and Sahil Gandhi study zoning deregulation in Mumbai, India. As I pointed out in my video, Skyscrapers and Slums: What’s Driving Mumbai’s Housing Crisis?, Mumbai has very restrictive floor area ratio regulations (also called Floor Space Index, FSI, regulations, see the video for an explanation) which means taller buildings require more unused land. In 2018, however, FAR was liberalized for some streets:

Mumbai’s stringent FAR limits, which are much lower than those of comparable megacities, are often criticized for causing housing unaffordability (Bertaud, 2004). Despite the criticism, establishing a causal effect has been challenging because of a lack of changes in FAR regulations. The relaxation in 2018 linked a parcel’s FAR to the width of its bordering road, providing incremental FAR relaxation for parcels on roads wider than 12 meters. Parcels on narrower roads remained ineligible for the relaxation. Our reduced-form specification uses a DID design to compare developments built between 2014 and 2022 on wider roads with FAR relaxation with those on narrower roads that remained ineligible.

…The FAR relaxation results in a significant supply response, driven by less expensive, smaller housing units. Developers fully utilize the FAR relaxation, increasing the average
number of apartments in each treated multifamily development by 28% relative to the control.

…We develop a structural model of housing supply and demand that incorporates the provision of amenity floorspace and shows that average home buyer incomes are 3.18% lower post-relaxation.

GO YIMBY!

Geetika Nagpal is on the market from Brown.

The rising tide of housing quality

This study analyzes patterns of housing consumption and expenditures among social safety net recipients since 1985. For safety net recipients, including Supplemental Security Income (SSI), Supplemental Nutrition Assistance Program (SNAP) and cash welfare (AFDC/TANF), monthly housing expenditures have risen from $692 to $1,341. However, these increased expenditures partially reflect housing quantity improvements, including more square footage, more rooms, and larger lot sizes. The data also show a marked improvement in housing quality, such as fewer sagging roofs, broken appliances, rodents, and peeling paint. The housing quality for social safety net recipients improved across 35 indicators. These quality improvements equate to a 35 to 44 percent increase in housing consumption and suggest that a typical safety net recipient in 2021 experiences housing consumption equivalent to the average national household in 1985. Though relative housing consumption has remained similar for safety net recipients, this “rising tide” of housing quality may have additional benefits for the health and well being of families and children living in better housing.

That is from a new paper by Erik Hembre, J. Michael Collins, and Samuel Wylde.  Via the excellent Kevin Lewis.

Britain’s Long Timeline of Housing Decline

In 1947 the British Town and Country Planning Act made planning permission a requirement for land development; ownership alone no longer conferred the right to develop the land. A decline in construction was predictable but housing is a durable good. Even today more than a third of the British housing stock dates to before 1947. So it has taken time but, according to a new study, the act has had a slow but long-run depressing effect on construction with the result that today the average house in England costs more than ten times the average salary.

Britain has a severe housing crisis, especially in the most prosperous places in the Greater South East. Across England, the average house costs more than ten times the average salary, vacancy rates are below 1 per cent, and space per person for private renters has dropped substantially in recent decades.

This report explores the root cause of the UK’s housing problem, how policy in this area has developed over the last 75 years, and what action policymakers need to take to deliver enough homes in the UK.

…This report uses this new data and other sources to compare British housebuilding and outcomes to that in Ireland, France, Belgium, the Netherlands, (West) Germany, Austria, Switzerland, Denmark, Sweden, Norway, and Finland from 1955 to 2015. It finds that Britain’s housing shortage began at the beginning of the post-war period…

Housebuilding rates in England and Wales have dropped by more than a third after the introduction of the Town and Country Planning Act 1947, from 2 per cent growth per year between 1856 and 1939 to 1.2 per cent between 1947 and 2019.

This has been a key factor behind the UK’s long-standing housing crisis, which has led to inflated property prices and soaring rents in recent decades.

Did the Covid housing boom induce the Great Resignation?

Following the Covid-19 pandemic, U.S. labor force participation declined significantly in 2020, slowly recovering in 2021 and 2022 — this has been referred to as the Great Resignation. The decline has been concentrated among older Americans. By 2022, the labor force participation of workers in their prime returned to its 2019 level, while older workers’ participation has continued to fall, responsible for almost the entire decline in the overall labor force participation rate. At the same time, the U.S. experienced large booms in both the equity and housing markets. We show that the Great Resignation among older workers can be fully explained by increases in housing wealth. MSAs with stronger house price growth tend to have lower participation rates, but only for home owners around retirement age — a 65 year old home owner’s unconditional participation rate of 44.8% falls to 43.9% if he experiences a 10% excess house price growth. A counterfactual shows that if housing returns in 2021 would have been equal to 2019 returns, there would have been no decline in the labor force participation of older Americans.

That is from a new paper by Jack Y. Favilukis and Gen Li, via Scott Lincicome.

Fires in San Francisco Lead to More Housing

Kate Pennington looks at the effect of new housing on rents and gentrification in San Francisco.

The clear identification challenge is that the timing and location of new construction are endogenous: developers are likely to build in the same areas that are already experiencing increased rents, displacement, and gentrification (Green et al., 2005; Li, 2019; Asquith et al., 2020).

Thus, she uses a clever identification strategy.

I exploit exogenous variation in the location of new construction caused by serious building fires. Regulation and geography combine to make San Francisco one of the most difficult places to build housing in the United States (Albouy and Ehrlich, 2012; Saiz, 2010). Serious fires, like the one shown in Figure 5, increase the probability of construction on the burned parcel by making it cheaper to build there. Removing incumbent tenants eliminates the need for costly buyouts. Under San Francisco just cause eviction law, landlords who want to sell or redevelop must either wait for tenants to voluntarily leave, or negotiate a buyout agreement to pay the tenant to leave. In 2015, the median buyout per tenant was $18,000 and the maximum was $325,000.19 Serious fires also streamline the permitting and construction process. Controlling for project size, construction on unburned parcels takes nearly a year longer to complete than projects on burned parcels (p=0.007).

I know what you cynical readers are thinking! Some fires are set on purpose to drive the tenants out! Well, that happens in the movies but it’s much rarer in real life when then there are very serious penalities for arson and homicide. In anycase, Pennington looks only at accidental fires, not arsons, and she finds that that the lots on which there were fires have similar rates of rental incrase and gentrification as other lots.

Amazingly, it still takes a long time to build on these burned lots–nearly five years to get a permit approved and 7.2 years before completion! Nevertheless, burned lots are much more likely to be redeveloped than similar unburned lots. The bottom line is that burned lots are a good as-if experiment for what would happen if a random set of lots were developed.

Pennington concludes that new housing has a “hyperlocal” increase in gentrification–basically richer people move into the new housing and there’s some very local increase in things like more up-scale restaurants–but overall rents are reduced and fewer people must move elsewhere to find cheaper housing.

I find that rents fall by 2% for parcels within 100m of new construction. Renters’ risk of displacement to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km….Building more market rate housing benefits all San Francisco renters through spillover effects on rents.

The Folk Economics of Housing is Folked Up

When confronted with a puzzle, economists instintively look for an explanation based on the incentives of rational people acting within institutional constraints. The economic approach is humble–rather than assuming that something is wrong with other people, the economists begins to unravel a puzzle by assuming that there is something the economist doesn’t understand. The economic approach is respectful of other people’s preferences and the constraints that they operate under. The economic approach is egalitarian, it looks for an answer that amounts to, “ah, now that I understand this, if I were in the same position I would do as these people are doing.”  The economic approach is powerful but it can be taken too far. Sometimes people aren’t rational. As Larry Summer said, “There are idiots. Look around.” 

In Folk Economics and the Persistence of Political Opposition to New Housing Clayton Nall, Chris Elmendorf, and Stan Oklobdzija look around at the housing market and declare there are idiots. Well, they are more polite but that’s the gist. Did we really need a 96 page paper to tell us this? Well, I didn’t. I was convinced of the problem years ago when after giving a rational explanation of why it’s difficult to get new housing approved, Bryan Caplan remarked wryly “yeah, that’s all true but renters are also opposed to new housing!” What this paper shows is that Bryan was right and that it matters.

Using two nationally representative surveys of urban and suburban residents, with embedded experiments, we show that about 30%-40% of Americans believe, contrary to basic economic theory and robust empirical evidence, that a large, exogenous increase in their region’s housing stock would cause rents and home prices to rise. This finding is robust to variations in the source of the supply shock, the manner in which price predictions are elicited, and the stated assumptions about counterfactual future prices in the absence of the shock. Moreover, by comparing homeowners and renters, by relating price predictions to self-reported confidence in the prediction, by comparing the predicted effects of more- and less-popular supply-shock scenarios, and by exploiting a survey experiment, we are able to discount motivated reasoning or guessing as explanations for these responses.

The authors do have new results which I wouldn’t have predicted. People are idiots about housing especially but not about rutabagas.

Housing “Supply Skepticism” is not just a manifestation of general economic ignorance. We show that the public understands the implications of supply and demand in markets for agricultural commodities, for labor, and even for cars, a durable consumer good that, like housing, trades in new and second-hand markets. There is also overwhelming agreement about how home prices and rents are locally affected by changes in neighborhood quality, by in-migration of rich people, by expansions of employment, by demolition of affordable homes, by new construction of expensive housing next door to more affordable homes, and (perhaps more questionably) by corporate ownership.

A deep problem is that people tend to blame developers of housing for high prices, i.e. they blame high prices on the one group most responsible for lowering prices! We see the same thing in other markets, of course, but in housing this effect appears especially strong.

…we observe a very strong tendency to blame housing providers (developers) for high housing prices. Conversely, actors whose stock in trade is opposing new development (environmentalists, anti-development activists) are almost never blamed. Incumbent owners who rent out their property (landlords) are commonly blamed, whereas incumbent owners who occupy it (homeowners) are not, even though both groups have a similar economic interest in supply restrictions. The pattern of blame attribution is very similar for homeowners and renters, except that renters hold landlords more responsible and homeowners are slightly more likely to list developers in their top three.

Addendum: Lots of folks are commenting in the comments.

Factory Built Housing

Government concerns about great disparities in housing conditions, what are often called housing crises, date to at least the 1920s. These great disparities are, of course, still with us 100 years later. In this essay, we argue there will be no progress ending these great disparities until the residential construction industry adopts technology that other industries began adopting more than 100 years ago – factory production methods. There have been attempts to introduce these methods in residential construction for the last century, but they are always blocked and sabotaged by monopolies in the traditional construction sector, that is, the sector producing homes outside, on-site, using “stick-built” methods. Monopolies in traditional construction sabotage many types of factory-built homes. In this essay, we focus on the sabotage of particular types of such homes, what we call small-modular homes. These homes can be produced and sold at very-low prices, so that the sabotage of these homes has disproportionately hurt the low-income. The sabotage is the primary reason for the existence of, and perpetuation of, U.S. housing crises.

[Small-modular homes]…are blocked from most areas of the country – it’s simply illegal for a household to purchase such a home and place it on land owned by the household. In areas where they are “allowed,” they are often zoned for areas like manufacturing districts and dumps. Even then, regulations mean higher production costs for these homes in factories. They also mean the homes are financed as automobiles (with personal loans, or chattell loans) and not real estate loans. It’s clear why these homes are a threat to those constructing stick-built homes, especially in the lower-priced home market, and why monopolies in traditional construction have invested so heavily in blocking these small-modular homes. The homes are of high-quality, built to a strict national building code. They are manufactured at a cost per square foot that is one-third to one-half less than the cost per square foot to construct homes with traditional methods.

That’s from James Schmitz’s paper for the Minneapolis Fed, Solving the Housing Crisis will Require Fighting Monopolies in Construction.

Amazingly, a majority of the houses produced in the early 1970s were factory-built before these types of houses were driven out of the market. Capps at Bloomberg notes:

Manufactured homes briefly dominated the U.S. housing market during the 1960s. By 1972, these homes — not just mobile homes but small-scale modular houses — accounted for some 60% of all new single-family homes produced nationwide, according to census data. That number has diminished so much that the role of factories in building affordable housing has gone all but forgotten.

The Biden administration wants to put America’s house factories — those used to be a thing, really — back to work. A new housing plan by the White House offers a set of actions designed to close the nation’s massive affordability gap.

As Schmitz discusses at length in another paper, part of the reason economists have ignored the destruction of factory built housing is that economists came to think of the danger of monopoly as solely involving price (or, to put it the other way as Austrians do, they thought of the virtue of competition as only involving price.). In fact, monopolies reduce productivity and they use the political process to sabotage other firms. Competition isn’t just about price but about increased productivity and creative destruction.

P.S. I am in the process of building a factory-built house. The factory part was by far the easiest and most efficient part of the process.

Did Ireland really have a housing bubble?

Ireland was not a story of overbuilding caused by laissez-faire policy, or an experience that defied standard economics. Ireland built very few ghost towns – housing excesses, where they occurred, were a product of government tax policy, rather than irrational markets. And supply and demand perform very well in explaining the trends.

And:

How on earth, you might ask, has Ireland ended up with almost all parts of its policy system trying to get lots more housing built – but the key cogwheel doing its utmost to hold new housing back? The answer, ironically, is Ireland’s own policymakers falling for the myths of the last bubble. It seems that the key personnel of the OPR believe the north-west of the country built too many homes in the 2000s because of state inattention and a wayward market, rather than as the result of extraordinary state effort to bring about that outcome. Without those reliefs, there is now little risk that new homes will be built where there is no long-term need.

Here is more from Ronan Lyons at Works in Progress, volume 6.  Irish housing is for the most part very expensive today. Dublin is one of the most expensive rental markets in the world.  Here is the 2019 NYT on the housing crisis in Ireland:

Homeownership has dropped, evictions and homelessness have climbed sharply, surging demand for rental units has led to a shortage, and soaring rents are fodder for daily conversation, political campaigns and street protests.

So perhaps we should speak of the Irish housing panic of the downturn rather than the bubble of the upturn?  The full history here remains to be written.  Somehow these are episodes most commentators do not wish to revisit.

Housing Vouchers and Education Vouchers

Here’s a recent news headline, Can Biden Deliver on His Promise to Expand Housing Vouchers? The link discusses Biden’s efforts to increase housing vouchers which subsidize low-income households to help them rent a home on the private market. Housing vouchers are a solidly Democratic proposal. Moreover, as far as I can tell, there are few people advocating to replace vouchers with public housing. The progressive think tank Center on Budget and Policy Priorities has this to say about vouchers:

Housing Choice Vouchers sharply reduce homelessness and other hardships, lift more than a million people out of poverty, and give families an opportunity to move to safer, less poor neighborhoods. These effects, in turn, are closely linked to educational, developmental, and health benefits that can improve children’s long-term life chances and reduce costs in other public programs.

Here’s the Urban Institute:

The federal Housing Choice Voucher Program plays a critical role in helping to address housing needs for extremely low-income households. Its most important advantage is that vouchers give recipients the freedom to choose the kinds of housing and the locations that best meet their needs. As a consequence, many voucher recipients live in healthy neighborhoods that offer social, educational, and economic opportunities for themselves and their children….even for African Americans and Hispanics, vouchers perform better than public and assisted housing projects in giving families access to low-poverty and racially mixed neighborhoods.

Notice how often the words “opportunity”, “freedom” and “choice” appear. Indeed the testimony from the Urban Institute refers to “the freedom to choose.” Excellent.

I agree with these conclusions. Now here is what is strange. Exactly the same arguments apply to school vouchers and school choice. School vouchers give students the freedom to choose the kinds of schooling and locations that best meet their needs. Yet, while many on the left agree that vouchers are superior to public housing, which tends to freeze the poor into low-quality, poorly maintained housing in poor neighborhoods with a host of cognate problems, they are more reluctant to support education vouchers as superior to public schooling. But all the arguments against public housing also apply to public schooling. Public Housing=Public Schooling. (The right are also strangely reluctant to take credit for housing vouchers even though they have mostly worked in just the way that Milton Friedman would have predicted!)

It’s unclear to me why housing vouchers became accepted on the left but education vouchers are still regarded as suspect. Or to put it the other way, it would be useful to study how housing voucher won over the left.

I look forward to the day when a headline reads, Can the Democratic President Deliver on Her Promise to Expand Education Vouchers?

The Role of Property Tax in California’s Housing Crisis

From Paul J. Fisher, who is on the job market from University of Arizona:

California faces a shortage of housing according to politicians, activists, and residents. In his paper, I leverage differential exposure to the Proposition 13 tax laws to understand the impact of this policy on the production of housing in Southern California. Proposition 13 restricts property tax growth as long as the owner doesn’t sell or redevelop the property, which allows me to exploit differences in market conditions at the time of prior purchase to identify the effect of these property tax limits on property redevelopment. I find that Proposition 13 discourages redevelopment and sales. In a dynamic discrete choice model of land use, I find that adopting a land value tax that replaces Proposition 13 based property taxes would increase housing production by 35% generating a similar or greater amount of new housing as other policies under consideration in California.

Patrick Wolff, telephone!

Housing and the Game of Reverse Musical Chairs

The Mayor of Charlottesville recently tweeted.

Please explain how building more market rate housing will free up the housing market for low-income citizens. Which low-income citizens will be able to afford to buy or rent a home that’s going to sell to $450,000? New construction will not lower the selling price of older homes….

musical chairsFortunately, Bryan Caplan has an excellent explanation, the game of reverse musical chairs.

New housing is usually nice housing, because over time technology improves and capital depreciates.  Since richer people are more willing to pay the upcharge for nicer housing, the future residents of new construction are usually well-to-do.

So what do casual observers miss?  They miss the big picture: People who move into new construction are moving away from older construction.  When they move, those older units become available for others.  While those others probably won’t be drastically poorer than those they replace, they tend to be slightly poorer.  Think: “one rung down.”  When these slightly poorer people move, their prior dwellings will tend to be taken over by those who are a further rung down.  And so on, in a great chain reaction.  Allowing new construction really does help the whole income distribution.

Since this is hard to visualize, picture a game of musical chairs.  With one key difference.  A normal game of musical chairs starts out with one chair per person, then subtracts a chair every turn.  The result: Faster, aggressive kids push out everyone else, until the fastest, most aggressive kid wins.  In my variant game, we start out with fewer chairs than people, then add a chair every turn.  The result: Slower and more pacific kids start getting places to sit, until there are enough chairs for everyone.

Both games feature a competitive scramble.  In conventional musical chairs, however, the competition gets more and more cutthroat and in the end almost everyone loses.  In my reverse musical chairs, in contrast, competition gets milder and milder and in the end everyone wins.

What housing bubble was that again?

Value of housing market at all time high: Home equity has driven up value of US houses since 2012 to a current record value of $32.8 trillion ($11.3 trillion debt, $21.5 trillion equity) 28% higher than the pre-crisis peak in 2006

That is from David Wessel on Twitter, here is the cited research.  Of course there were local housing bubbles in Las Vegas, Orlando, and so on, but was there really a national housing bubble?  Was not the real problem an “anti-bubble” of panic in 2007-2008?  I believe Alex T. was the first to raise this point, and he remains underappreciated for this observation.

Wessel himself wrote in 2008: “We had a housing bubble; that’s now obvious.”  Scott Sumner, telephone!

New results on the housing boom and bust

We build a model of the US economy with multiple aggregate shocks that generate fluctuations in equilibrium house prices. Through counterfactual experiments, we study the housing boom-bust around the Great Recession, with three main results. First, the main driver of movements in house prices and rents was a shift in beliefs, not a change in credit conditions. Second, the boom-bust in house prices explains half of the corresponding swings in nondurable expenditures through a wealth effect. Third, a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.

That is from a recently published article by Greg Kaplan, Kurt Mitman, and Giovanni L. Violante in the Journal of Political Economy.  Here are some less gated versions.