It is widely accepted that the US faces a housing crisis. The nature, causes and potential solutions to this crisis are a matter of dispute, however.
The presidential campaign of Kamala Harris and Timothy Walz recently released an economic plan that reads like a grab-bag of leftish populist goodies. That is, of course, unsurprising. Promises of material gain to voters are the stock in trade of politicians on both sides of the aisle.
Earlier in the week, I wrote about the Harris campaign’s poor understanding of how markets and prices work in the promise to go after “price gouging” in food retail.
High prices are not caused by the greed or altruism of either buyers or sellers in a market. Price inflation is, everywhere and always, caused primarily by monetary easing and government spending.
Therefore, high prices cannot be addressed simply by forcing prices downwards; that only causes shortages. High prices can only be addressed by a reversal of the government policies that caused price inflation in the first place.
The Harris campaign’s housing plan demonstrates a similar confusion over the impact of economic policies, the nature of markets, and the value of the price mechanism.
Homeowners versus homebuyers
American homebuyers are unhappy with the high price of residential housing. This isn’t surprising, since American homeowners are delighted with rising property prices.
Homeowners are doing everything in their power – including blocking new housing construction and multi-unit affordable housing developments in their backyards – to protect the value of their assets.
Almost two thirds of US households own the house they occupy. It’s always been this way. Homeownership rates have fluctuated between 62.9% in 1965 (and in the second quarter of 2016) and a peak of 69.2% in 2014. At present, the rate is 65.6%.
The average price of a home in the US, however, has risen sharply over time. Despite the collapse of the housing bubble between 2007 and 2009, when house prices fell by 20%, the long-term trend remains strongly positive.
House prices are 31% up from pre-pandemic levels, 95% up from the post-financial-crisis low, 56% higher than the pre-financial-crisis high, and 147% higher than at the start of the 21st century.
Interest rates
Another factor in this equation is US interest rates. From 0.25% back in 2015, rates increased to 2.5% by the time the pandemic struck. Very rapidly, rates were ratcheted all the way back to 0.25%, before starting a steep ascent in 2022 to today’s 5.5%.
This makes mortgages more expensive, which makes buying a home even more of a reach, especially for younger and less affluent buyers.
Despite all this, the belief that young homebuyers are at a significant disadvantage compared to their elders is a bit of a myth.
Sure, homes aren’t cheap, and that means rents won’t be cheap either, but Generation Z are outdoing their Generation X parents in buying homes, and while Baby Boomers had higher homeownership rates at all ages, the differences between generations are surprisingly small.
Perception matters
Even so, in elections perception matters more than fact, so populist politicians need a policy that mollifies frustrated homebuyers without impoverishing the bulk of the middle class, for whom their home makes up on average more than three fifths of their asset base.
The Harris campaign says, not without merit, that there’s “a serious housing shortage”, and promises to build three million new homes as well as incentivising affordable rental homes.
That’s on top of what developers were already planning; they built 1.5 million homes in 2023, so the additional three million over four years is a hefty 50% increase.
The details of the proposal include some great ideas, some not so great ideas, and some terrible ideas.
Details
Harris proposes to pay first-time homebuyers a subsidy of $25 000, plus a tax credit of $10 000. Builders will receive tax breaks for building starter homes sold to first-time buyers.
There will be an expanded tax incentive for building affordable rental housing, as well as rental assistance for eligible tenants by enforcing an undefined set of “fair housing laws”.
She also wants to pour $40 billion of taxpayer money into an innovation fund to spur innovative housing construction, repurpose some federal land for affordable housing, ban the use of algorithms landlords use to set rental prices, and do away with tax benefits for investors who buy large numbers of residential homes for rental.
Good ideas
It is a good idea to increase housing supply. In fact, restricted supply is the primary reason why housing is unaffordable for many.
It is a great idea to repurpose government-owned land for affordable housing. It would be an even better idea to make sure that housing is sold with full title into private ownership. Governments everywhere own far more land than they need to own, and this is a drag on the economy.
Bad ideas
The first-time buyer subsidy is a bad, but not terrible, idea. It is obviously redistributive, but it also reduces inequality and keeps the less affluent population more gruntled.
There’s a cost to taxpayers to buy these benefits, obviously, but there’s another cost that Harris may not have considered: if you subsidise buyers, then sellers are going to raise prices. After all, prices are set at what the market will bear; if first-time buyers get financial aid, then sellers can usually get away with raising prices by some substantial fraction of that aid.
Policies that raise home prices contradict the policies that reduce home prices. It’s hard to say which will win out, but qua policy, this is just not consistent.
Terrible ideas
The government doesn’t need to pour any money into innovative housing construction. There’s plenty innovation going on.
It is possible to build a carbon-negative, self-sufficient, off-the-grid, fully automated, artificially intelligent home that is burglar-proof, flood-proof, earthquake-proof and hurricane-proof, but all of this innovation will cost you dearly.
The main obstacle to innovative building practices is the cost of these innovations, not the innovation itself.
Corporate landlords
Actions to disincentivise companies from buying up residential units to rent out may also have more negative consequences than benefits. Of course these companies are profit-driven, but so are the owners of just one or two rental properties. Corporate ownership of rental stock can actually make the market far more efficient.
On one hand, some studies have found that corporate landlords discriminate against minority residents, perform less maintenance on their properties, and charge exorbitant rents.
Other studies, however, directly contradict these findings. One found that corporate landlords have better access to capital, and can spend between two and five times as much on maintenance and renovations than the average homeowner, thereby improving neighbourhoods and housing quality. Other researchers demonstrated that rentals owned by corporate landlords can provide access to better neighbourhoods and schools for lower-income families.
It shouldn’t come as a surprise that some corporate landlords are excellent, and some are not. But that’s what the market is for. As long as people have a choice in who they prefer to rent from, the better landlords will outcompete the worse ones.
It makes no sense to sacrifice the potential benefits of corporate landlords merely to curb the abuses of a few. That’s throwing out the baby with the bathwater, and reinforces the idea that the Harris campaign neither understands nor trusts the market.
Rent control
Banning landlords from using algorithms to determine rental pricing is equally stupid. It is based on breathless articles like this one that considers it a scandal that landlords are using software to determine how high they can price rentals.
Of course they do. This is just markets being efficient. The owners of properties have just as much of a right to figure out how high a rent they can ask for as tenants have to negotiate them down and shop around for bargains.
Better price discovery improves markets. It isn’t a market failure.
Harris’s “fair housing laws” are poorly defined, but sound an awful lot like rent control.
Artificially depressing rents, either way, has significant negative effects. It makes it less profitable for developers to build homes for the rental market, which means fewer homes will get built. It also makes renting homes less profitable, which means landlords have less of an incentive to maintain properties in good condition.
Study after study has found that artificially capping rents leads to reduced supply of rental housing, reduced construction, reduced housing quality, reduced mobility, increased misallocation of housing, and increased rents in housing not subject to rent control.
Not in my back yard
The Harris campaign makes no mention of the underlying causes of housing shortages. The fundamental conflict between homeowners/sellers and home builders/buyers plays out in local councils on a daily basis.
Councils are largely populated by people who own homes. Once they own a home, new developments – and especially higher-density developments aimed at lower-income people – threaten the value of their homes. Therefore, once they’ve got their home, they block new developments in their back yards.
This process can become very complex and very effective. Not just do local councils have to approve building plans and local communities get an opportunity to object to new developments, but environmental laws, heritage laws, or so-called “vista” laws that protect existing homeowners’ views, can all be abused to thwart new development.
This regulatory burden is a key cause of both suburban sprawl and housing shortages in or near places of work.
Good, bad and ugly
So, while some of the Harris campaign’s ideas on housing – especially increasing supply and making federal land available for housing – are good, some others – like subsidising first-time home buyers – are bad, and several are downright ugly.
Meanwhile, the campaign is silent on the regulatory burden that blocks development of residential property.
In general, Harris’s housing proposals signal, again, that her campaign neither understand markets, nor trusts them to be more or less efficient. By implication, she is saying that she doesn’t trust individuals to make the best decisions for their own welfare.
Yet most economic indicators – such as that Gen Z home ownership rates exceed those of Gen X at the same age – all suggest that the people are quite okay without the intervention of the dead hand of the state.
On housing policy, one couldn’t score Harris better than a five out of ten.
[Image: The Painted Ladies of San Francisco, a famous row of Victorian houses painted in different colours. Photo by Jean Beaufort released to the public domain.]
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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