Capitalism is.
I’m not saying there’s a better system for supplying homes, owned or rented, to everyone who needs them. Nobody in America wants to live in Soviet housing.
Rather, I’m reacting to an NPR article (here) which, like many journalistic endeavors, begins with an anecdote: The frustrations of a North Carolina voter named Melissa Williams. It begins,
Melissa Williams … did everything right. She has a college degree, a decent income … and no debt. Williams, who’s 38, expected to be a homeowner by now. But … she just couldn’t compete with the sudden influx of people moving to her part of rural North Carolina to work remotely. … So Williams gave up buying and resorted to renting, only to find that those costs had also skyrocketed. … Williams says something has to change, and she’s frustrated that she doesn’t hear more solutions from either President Biden or former President Trump as the November election looms.”
They don’t have any solutions, and voting for Trump or Biden won’t solve her problem. There’s nothing to choose from here. America has a nationwide housing shortage, and no president can flip a switch to create more housing. Lacking enough homes and apartments to go around, it’s a game of musical chairs, and as always in a capitalist system the highest bidders win. That’s how free markets work.
Who’s to blame? The list of culprits is long. It includes local zoning codes, builder preferences, ill-advised Republican financial deregulation, Wall Street greed, the Federal Reserve, the pandemic, technology, deglobalization and everything else contributing to inflation. I’ll take these one at a time, but first, what’s the cure? More housing. It’s on the way, but it takes time, and none of it will be inexpensive.
Local zoning codes are a long-standing barrier to more housing, especially in high-demand areas, and also raise costs. Minimum lot sizes, efforts to limit urban sprawl, and restrictions on auxiliary living units are obstacles to building more housing, especially in urban areas, and adding code requirements inflates construction costs.
Builder preferences work against affordable housing, because builders make more money from large upscale homes, so that’s what they build. Without government subsidies, there’s no incentive to build starter homes; and that’s, you know, socialism.
Republican financial deregulation enabled the subprime mortgage crisis that led to the housing crash. Wall Street marketed the dubious mortgage-backed securities whose implosion triggered the financial crisis of 2007-2008, which spawned the Great Recession. Mortgage lending froze, the economy teetered, and homebuilding ground to a halt. But the population kept growing, and that’s how we got today’s housing shortage.
The Federal Reserve, led by Ben Bernanke, whose academic specialty was the Great Depression, acted to prevent a repeat of the 1930s. They pumped cash into the economy, backstopped banks, and held interest rates at artificially low levels. This prevented an economic catastrophe, but had some undesirable side effects. For the housing market, the two most problematic were (1) cheap loans, and (2) loans couldn’t remain cheap. More about that below.
The pandemic had two big impacts on the housing market. First, it spawned the inflation we have now, which forced the Fed to raise interest rates; second, it encouraged remote work, which technology made possible. In the past people lived where they worked, and home prices were closely tied to local wage levels, but not anymore. Now higher-paid urban workers can move to small towns and rural areas, and outbid the local residents for the housing there. That’s what happened to Melissa Williams.
Deglobalization is a major factor in inflation. The pandemic disrupted supply chains, causing goods shortages; deglobalization is shortening them, and it costs more to produce goods closer to home. But even if that wasn’t happening, rising wages in China increases the cost of goods made there, would translates to higher consumer prices here.
Now I’ll come back to the Federal Reserve. Repressing interest rates made borrowing very cheap. Low-cost loans enabled Wall Street to snap up hundreds of thousands of homes, control rental markets, and charge monopoly rents. For a time, cheap money also enabled homebuyers to get 3% mortgages. Then inflation happened, and to combat it, the Fed raised interest rates.
Higher monthly mortgage payments did more than make homes less affordable; they also encouraged existing homeowners to stay put, because if they moved, they’d have to give up those cheap mortgages for more expensive mortgages. This reduced the turnover of existing homes, tightening the supply of homes for sale, and pushing up prices of the few homes on the market.
The pressure to stay put is exacerbated by remote work technology. In the past, you had to live where your job was, and people moved to climb the corporate ladder or seek opportunities elsewhere. But with less of that now, there’s less turnover of existing homes, shrinking inventories of available homes.
Now ask yourself this: Would it make any difference who the president is? Neither Trump nor Biden can magically create more housing — the root of the problem — nor can they lower mortgage rates, or prevent city folks from moving to rural areas. The housing problem is out of their hands, and that’s why they’re not talking about it.
Capitalism caused the problem, but also is the cure, because when supply and demand is out of balance, market forces bring it back into balance. There are things local governments can do to encourage more building, and lower costs, by relaxing zoning restrictions but presidents have no control over that.
Trump did away with the mortgage interest deduction. Biden’s spending contributes to inflation, prolonging the need for higher interest rates, but we need the bridge repairs, rural broadband, and electric grid upgrades his infrastructure bill pays for. There’s no easy answer here, and this election won’t end the disagreeable housing musical chairs, no matter who wins the White House or controls Congress.