Affordable housing and the law of supply and demand

CC image from Thomas Hawk.

CC image from Thomas Hawk.

Some great articles on the challenges to affordable housing in high-demand cities over the past few days, worthy of some reflection:

Kim-Mai Cutler’s epic Tech Crunch article addresses all sides of the affordability problems facing San Francisco: noting that the situation isn’t unique to the Bay Area nor is it caused solely by tech-industry demand; the regulatory and political constraints to growth not just in the city but in the entire region; rent control, Prop 13, evictions, etc. After thorough documentation of this complex and multifaceted issue, Cutler circles back to the core issue of supply and demand:

[W]ithout serious additions to the entire region’s housing supply, these crisis measures just make San Francisco’s existing middle- and working-class a highly-protected, but endangered population in the long-run. With such limited rental stock available on the market at any time, what kind of person can afford to move here today when the city’s median rent is $3,350?

For the more extreme groups, you cannot logically fight both development and displacement. The real estate speculation running through the city right now is just as much a bet on political paralysis in the face of a long-term housing shortage as it is on San Francisco’s desirability as a place to live.

Cutler’s article lists a whole host of other potential actions, but concludes that any path forward must work towards adding more housing units to the region’s overall supply.Unfortunately, even this broad conclusion isn’t shared by everyone. In section #5 of Cutler’s article, she notes “parts of the progressive community do not believe in supply and demand.”

Ryan Avent notes that this denial of the market dynamics, no matter the motive, is not only misguided but also counter-productive: “ However altruistic they perceive their mission to be, the result is similar to what you’d get if fat cat industrialists lobbied the government to drive their competition out of business.” This extraction of economic rent from those that own the land and embrace tight land use regulations only aids those with capital: 

The housing dynamic in San Francisco raises the capital intensity of consumption. That contributes to an increase in the capital share of income and to the stock of wealth in the economy. Zoning restrictions are a tool of the oligarchy, effectively. I’m only one-fourth kidding. But they are; they are a means by which owners of capital extract an outsized share of the surplus generated by job creation.

Emphasis added. Yet, not everyone is convinced.

This exact denial of economics confounds Let’s Go LA:

It’s important to recognize that the “supply and demand doesn’t apply” argument is wrong, because if we don’t identify the right problems, we can’t develop solutions that work. And in fact, the housing markets in places like LA and SF are operating pretty much how you’d expect them to work if you accept the basic principles of supply and demand as constrained by the regulatory environment.

For example, why are developers only building markets for the high end of the market? Well, the zoning and permitting requirements make it difficult, time-consuming, and costly to build. Therefore, only a little new supply is going to get built every year.

This point is particularly important, because without agreement on the nature of the problem, it’s hard to even talk about potential policy solutions. And there are a whole host of potential policy solutions once we get over that hump. Unfortunately, discussion about supply constraints in cities (via exclusionary zoning, high construction costs, neighborhood opposition to development, etc) means the conversation naturally focuses on the constraint. Advocating for loosening the constraints can easily be mistaken for (or misconstrued as) mere supply-side economics, a kind of trickle-down urbanism.

This doesn’t need to be the case. Let’s Go LA writes:

Admitting that supply matters doesn’t mean you have to favor unrestrained urban development…

Admitting that supply matters also doesn’t mean you have to favor eliminating existing rent-controlled or rent-stabilized units, and it doesn’t mean that no government intervention is necessary…

Finally, this doesn’t mean that we don’t understand and appreciate the efforts of affordable housing advocates and planners operating within the current zoning and regulatory environment, trying to make sure that low income folks have at least some access to the opportunity of the city…

Another definitional problem when talking about affordability is the very term itself: are we talking about affordable housing? Or are we talking about Affordable Housing? As Dan Keshet notes, affordable housing (lowercase) refers simply to housing that people can afford at market rates – it is both relative to a household’s income (and therefore represents something slightly different for everyone) and also the kind of affordability important to the middle class. Affordable Housing, however, refers to a broad set of subsidized housing programs, ranging from rapid rehousing for the homeless to inclusionary zoning to housing units available for families at 80% of the Area Median Income ($68,500 for a family of four in DC).

Perhaps it’s because of a desire to frame these various subsidy programs more favorably (“affordable housing” sells better than “public housing” or “housing subsidies” – who would be against housing that is affordable?), but the same language that frames subsidy policies favorably can confuse the issue analytically.

The same can be said for housing supply in cities – perhaps the analytic focus isn’t a great selling point or a way to frame the issue.

4 comments to Affordable housing and the law of supply and demand

  • charlie

    Yes, absoluely the last point that the terms “affordable” is very protean.

    In terms of your other points, economicts beleive that everything is a market. They also belive in faries, forecasting and ghosts. THey are not what we call rational people.

    There was a great quote by a real estate “professional” in the post regarding flipping houses. His point that that in the end real estate isn’t a market for 90% of the population, so when things do turn south flippers will be burned by the need for liquidity.

    Along a continuum, residental real estate has market like tendancies. Zoning has an element but is nowhere near the size that Avent likes to propose. Likewise in DC the height act isn’t a huge factor.

    And when you talk markets, you have to seperate the short term vs the long term.

  • Thanks for the link, Alex. AURA, our newish urbanist group in Austin, has been trying out the language of “abundant housing” as a way of talking about supply and demand without sounding clinical, and without starting from “affordable housing.” The basic pitch is that we should have (policies that encourage) enough housing to allow everybody who wants to live in Austin (or DC) to do so.

    It’s not that we don’t believe that high prices are the result of inadequate supply to meet demand, it’s just that that’s a second-order effect. The first-order effect is: if there’s people who need housing, we should have enough housing for those people. The second-order effect is: if there’s a restriction on supply, that supply will be rationed by price and the people who end up booted out will be those that can afford the least.

    The reason I think this makes a big difference is because of the “affordable housing” vs. “Affordable Housing” issue. To address the needs of the particular people who are being booted out by lack of supply, AH really does work. But that’s just pulling the rug up on one side of the room; if there isn’t enough housing, somebody else will have to move away. But by framing in terms of “enough housing for everybody” and ignoring the price points, we pull away from saying “help these particular people” to “help everybody.”

    Indeed, think this is going to be a blog post…

  • Alex Block

    Dan,

    I like that language/framing. It seems both more honest and effective than, say, ‘workforce housing’. I look forward to the post about it.

    At the end of the day, it’s going to require a whole lot of different tools from the toolbox: upzoning and embracing new market-rate development, new subsidized housing, tenant purchases, cooperative ownership, rent control and stabilization, inclusionary zoning, expanded and improved transit, etc.

    Almost all of those policies runs up against the challenges of growth, however. Those that expand supply mean physical change in the city. Packaging a whole host of policies under the umbrella of abundant housing is an interesting thought.

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