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Build More Housing

When demand for housing rises and supply doesn’t keep up, prices rise.

Rising prices are causing the left to reckon with the realities of supply and demand. The White House has made its position clear: Supply shocks, not an increase in the money supply, are driving inflation. Can rising rents and housing prices be explained the same way?

A recent New York Times article lists several of the Biden administration’s theories of the case on inflation. Recently, the Biden administration has characterized inflation as “Putin’s price hike,” occurring as a result of sanctions imposed on Russia. Toward the end of last year, they said it was caused by kinks in the supply chain related to Covid-19. In a recent press conference, White House Press Secretary Jen Psaki summarized the issue in a few words: “It’s as simple as: Less supply raises prices.”

Progressives lose this clarity on supply and demand when it comes to housing. Here’s a formulation of the left’s view from a Seattle “urbanist” blog.

“To assume the market alone can solve homelessness—and the twin problem of the housing shortage in the low rent market—through supply has never been demonstrated in the real world. It’s a nice theory—a good topic for an Ayn Rand book. If it were that simple.”

Jenny Schuetz of the Brookings Institution would disagree with that assessment. She wrote that “anemic housing production in high-opportunity places is not primarily due to container ships with lumber backed up outside ports or a ‘Great Resignation’ among construction workers,” which are common reasons given for inflation in other sectors.  Schuetz argues that the real issue is supply, as “the policies that regulate land use and housing production make it extremely difficult to add more homes in desirable locations.” This restricts the supply side of the market, and as any econ undergraduate knows, drives up prices for consumers.

When it comes to housing, deriding solutions that involve “the market alone” is most often associated with the left, as is the urge to increase “affordable housing.” In practice, both phrases are code for providing more subsidies to nonprofits to build expensive housing. Dysfunctional policies at the local level are largely to blame for rising housing prices. To many progressives, however, discussing those policies is simply not on the table—even when they produce stunning examples of inefficiency.

In Los Angeles, for example, the city’s controller evaluated the progress of a $1.2 billion housing-bond measure passed more than five years ago, and found that per-unit costs of new housing built approached $800,000. So much for affordable housing.

The controller also found that the higher costs were significantly attributable to “a combination of cost factors including prevailing wage requirements, financing complexity, land use issues, project labor agreements, and building characteristics.” In other words, too many rules and regulations.

The controller recommended that the city address “longstanding challenges with timely and efficient approvals for multifamily housing,” advising it to make “improvements to its permitting processes, increase staffing, expand the scope of its existing streamlining policy, and implement public reporting requirements for relevant departments.”

These seemed like reasonable suggestions. What was the city’s response?

In a tweet quoted by ABC News, Mayor Eric Garcetti said that the program “is producing more units than promised, at a lower cost than expected.” How much did the mayor expect to pay per unit? Cue Doctor Evil: One million dollars?

One advocate, quoted in the same story, “warned the program, while a step in the right direction, represents only a small fraction of the money needed to complete projects.”

And the determination to throw money at the problem isn’t limited to Los Angeles; the Washington legislature passed huge budget increases to pour more money to supposedly solve its housing crisis. Both failed to realize that producing more housing, not blindly tossing more money at the problem, is the solution to rising home prices.

The truth is simple. When demand for housing rises and supply doesn’t keep up, prices rise. This primarily punishes people lower on the wealth distribution. The answer isn’t pouring more money into the market, but lightening the regulatory load on housing production—which is already costly and challenging to produce. It’s time for local governments to issue more permits—not more excuses.

Roger Valdez is director of the Center for Housing Economics, a non-profit housing research and advocacy organization, and a research fellow at the Foundation for Equal Opportunity (FREOPP). This New Urbanism series is supported by the Richard H. Driehaus Foundation. Follow New Urbs on Twitter for a feed dedicated to TAC’s coverage of cities, urbanism, and place.

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