Saturday, January 31, 2015

The Housing Gouging Distortion

We've got a problem in the US with housing. Overpricing, homelessness, financialization, inequality, all are affected by the shortage of real estate.

We don't usually take kindly to price gouging, defined as prices raised far beyond the cost of provision to what the market will bear, typically due to unusual circumstances like famine, natural disaster, etc. Taking undue advantage of the misfortune of others is unethical, as is forcing others into destitution by virtue of their basic necessities. Charging far more than the cost of providing a service or product is one of the primary justifications of markets and capitalist competition, and its failure raises serious questions.

However such gouging, in essence, looms large in the housing market. Land is inherently limited, and its shortage creates prices far above the cost of provision, which is, frankly, zero. Whoever has title gains value that they have no role at all in creating, that value being the network effect of everyone else wanting to live wherever there are other people, services, amenities, schools, etc. It is a classic case of incumbants reaping rewards they have little individual right to, keeping equally deserving outsiders at bay.

Inflated housing prices force everyone into an arms race of spending every available penny on real estate, housing being a necessity, after all. Those who lose out become homeless- an appalling sign of societal failure. The various incentives offered by the Federal government, such as the mortgage interest deduction, do little more than put more resources into this arms race, bidding up prices and leaving homeowners with no more money to spare than they would have had otherwise.

And the ever more dizzying high-wire financial engineering required to take on the debt involved plays right into the hands of one of our most destructive industries- the financial industry, a haven of small text, opacity, slight of hand, and offers that are way, way too good to be true. The recent financial crisis illustrates the point. Not only is typical housing debt too high, but gyrations in the housing market built on scarcity, and the mountain of credit that serves it, yield periodic crises that shake the whole economy.

The general economy is severely hobbled by this vortex of excess money going to the literal rentiers of society, and our cultural and civic institutions are particularly harmed by the lack of extra resources in the pockets of ordinary people. High housing costs are an engine of inequality and of societal decay.

What to do? It seems clear that were housing to be kept to what it actually costs to build, rather than the inflated cost of scarce land and restricted zoning, the average family would be much better off, and more housing could be built for the poor and homeless. Yet there is no way to get around the limitation of land, really, and the tendency of desirable locations to create bidding wars and price increases. Living in a very high-priced real estate market, I can appreciate that the despite all the harms, there is a natural evolution that gets us there, swathed in very politically correct talk of "preserving open space", "preserving communities", and limits of infrastructure, not to mention the interest of every single incumbant property owner in seeing the value of their land go up.

A classic proposal is a land tax that taxes away the "rent" or scarcity aspect of property values, leaving only the value of the built infrastructure to be captured by owners. It sounds very elegant, but I do not know enough about its feasibility to comment, really.

My proposal would be to force every county in the US to provision & zone sufficient land such that in those areas at least, developers can build and sell for the cost of construction, more or less. Counties would also be on the hook for infrastructure planning, making sure that the overall road and other systems are built that can support the requisite growth. In this way they can avoid rezoning and disturbing existing desirable areas. But there would be a mechanism to allow housing growth and keep a lid on area-wide real estate inflation.

In truly dense areas, such as Manhattan or San Francisco, this mandate could be fulfilled by building up instead of out, and in extremis, condeming older areas for redevelopment. But there is no reason not to have at-cost housing available all over the country, in ways that are reasonably local to every community, which would address workforce housing needs, homelessness (to some degree), and the overall rise in real estate prices.

This plan is reminiscent of the housing "project" boom in the 60's and 70's. But one difference is that it is all oriented to market-rate housing, not explicitly to free or subsidized housing, which has such problems with uncaring owners and tenants (not to mention architects). The idea is just to make sure that the market keeps up with population needs at all times, so it doesn't run away in a price spiral.

The current housing non-policy seems to function as a fundamental barrier to growth. Governments are not willing to build infrastructure, and tolerate traffic gridlock. Citizens in turn regard any mention of housing growth in this kind of restricted environment as crazy. Governments in turn get higher property tax revenues from real estate inflation rather than development growth, and so it goes in a spiral of stasis, and ultimately, sclerosis. It would take far-sighted leadership and some top-down policy to reverse the problem.

This is not to say that population, migration, and other forms of growth are automatically a good thing. Far from. But artificial housing price inflation is not a rational way to restrict what should better be restricted by other means, such as immigration control and educational development.


  • Housing gyrations whipsaw the rest of the economy.
  • Reich on FIRE.
  • As long as there’s fear, we aren’t ready for atheism: "I think the main passion of the conservative mind is fear and there’s no greater fear than that the universe is without meaning."
  • Stiglitz on the idiocy of austerity.
  • The Republican version of "middle class economics": "Gov. Nikki Haley of South Carolina proposed a gas-tax hike on Jan. 21 to offset reducing the top state income-tax rate to 5% from 7%."

2 comments:

  1. Someone living in US told me that to rebuild an old house takes double the price because of the needed papers and approvals. The same may be for new buildings, I guess. US becamed too birochratic for it's good?

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    1. Answer: Your friend sounds misinformed and may have an axe to grind. Permitting costs are modest, but meeting building codes may involve extra costs & time; they are typically there for the good of the homeowner and community. Larger developments may also involve municipal mandates or deals to contribute money to amenities, infrastructure, or low-cost housing in return for building market-rate housing.

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