Solving the Housing Crisis
In my last post, I discussed the current economic reality of the housing market and how the current mix of high interest rates and housing prices makes owning a home seem like an insurmountable task. However, as I also stated, this is just another economic cycle we will need to weather through and we will see some things move in favor for buyers. This includes the potential decrease in interest rates as the Fed is being pressured by the Trump administration to decrease interest rates, a move that threatens the independence that the Fed has had for decades. I do want to note, however, that is it not just the pressure from the sitting president, as current Fed chair, Jerome Powell, has remained defiant these past few Fed rate decisions, but also the weakening of the labor force which is the second half of the dual mandate for the Fed. We are also seeing the housing market swinging towards a buyer-favored market as the percentage of houses bought over asking price has decreased 4.2 points year over year and 22.1% of homes with a price drop, according to Redfin’s July data.
That being said, the housing market in the United States is it pretty rough shape. The housing supply is much lower than the housing demand, and basic economics tells us that when the demand is higher and the supply is lower, prices get higher. And that is exactly what we are seeing now, both in the home-buying market and even in rental market. Now, there has been a plethora of ideas on how to solve this crisis. For the rental market, there is rent control or housing subsidies. The difference between the two is that rent control limits the increase of rent for an existing tenant, while housing subsidies includes the government paying for a portion of the rent. The problem with rent control, is that due to the restricted cash flows for the investor, they are less incentivized to maintain the property. That then leads to a degradation of the property, and you end up with people living in sub-standard living conditions. Housing subsidies may help alleviate the cost in the short-term, however, it does also incentive the landlords to increase their prices if they know that the government will step in and cover the difference. With that, our first instinct might be to feel bad for the tenants as they are living in sub-standard living conditions, but there too, we must realize that they are economically incentivized to stay there as that is what they can afford. This realization didn’t come to me as an epiphany, I read it in Thomas Sowell’s Economic Facts and Fallacies. The point he made there was that people, typically intellectuals and politicians, feel like they know what is best for other people and want to make changes to help. The only problem is that these people are outsiders looking in, and aren’t living in the reality of the people they are aiming to help. This idea is touched on a bit more in depth in Thomas' Sowell’s Social Justice Fallacies in which Thomas points out that there is no set of knowledge that is superior to another, and therefore, the intellectuals and politicians attempting to fix a problem they themselves aren’t a part of can cause more harm that good. I am also currently exploring the idea even further in Hanes C. Scott’s Seeing Like a State as he explores the faults of urban planning and how attempting to bring order to a world of natural complexities tends to end up hurting the very people it aims to help.
That does not necessarily mean that there aren’t things that the government can do to help with the current issue. For one, we need to remove the red tape that is involved with the building process. If you look at California in particular, we have one of the most stringent building codes which makes it difficult to build new houses. Granted some of the regulation can be explained for the need to ensure new builds can withstand earthquakes, but there are also some sustainability concerns that also make it difficult to get permitting. It wasn’t until recently that governor Gavin Newsom rolled back some environmental laws that were adding difficulties to construction projects which includes new housing builds. While we are still unsure of how much of an impact this will have on new builds, it may be a step in the right direction. While I am all for sustainable construction and would like us to be more sustainable, we have to weigh the costs of these things. California is currently struggling with a large amount of unhoused people, and pouring money into the problem isn’t necessarily solving it. We can choose to have these limits to new builds in the name of sustainability, but then struggle with the issue having a market that leaves people priced out of homes. And while housing availability isn’t the only answer to bringing the unhoused population down, it definitely would help.
In summary, the housing crisis we are currently facing is somewhat fabricated by our very own policies. State and local governments needs to readjust their zoning and building laws to make building new homes easier and we may need to reconsider some of the current ways we are trying to ease the problem. While rent control and housing subsidies may be a short-term fix, we need to start looking at things longer term and address the issues at their root cause.
