It Really Is A Crisis
Many recognize that we are but stewards of God’s creation, yet remain fuzzy on what effective stewardship means. So, it is necessary to occasionally look at economic issues and ask ourselves, are we being effective stewards of what God has given us. This may be “eyes glaze over stuff” for many, but it is crucial that we have a sound, basic understanding of what makes up effective stewardship. To that end, this week and next I will focus on the housing situation in the US, and what logic, and sound economics can teach us about effective stewardship.
Much has been made of the housing crisis in the US. The political spectrum from left to right has discussed it to varying degrees. Most of the discussion has been occurring at the state and local level. Given the normal level of angst that accompanies all issues of importance, one can legitimately ask whether there is an actual crisis or not. I am normally as cynical as the next rational person, but in this case, I would agree that there is indeed a housing crisis.
According to the National Association of Realtors the US housing market is missing about 320K homes in what they call the “affordable price range” of up to $256K, which would be attainable for households earning up to 75K. In a study from Realtor.com that appeared on CNN the situation is even more dire than 320K homes. They estimated that between 2012 and 2022 15.6 million households were formed. In that same time period 11.9 million housing units were completed, comprised of 8.5 million single family homes, and 3.4 million multi-family homes. According to this study, things have only gotten worse since 2022. They estimate that the gap between housing starts, and household formations is around 6.5 million. This presents a problem that goes beyond economics and impacts politics, as well as society and the culture.
Sound economics (as stewards of God’s creation we should all understand sound economics) teaches us that when a market imbalance exists for such an extended period of time there is likely an underlying policy that causes this. We will not need to look too far to see that economic illiteracy underlies this crisis.
Zoning and Land Use Restrictions
There are two components, as there all in all economic analysis: supply and/or demand. This week we will deal with supply, which requires the lengthier treatment. Policy, primarily at the local level has seriously restricted the supply of new housing. That is by intention of course, for those that already have a home and want it to rise in value. The main means of accomplishing this restriction in supply is zoning and use laws passed by local councils and planning boards. These laws encompass all manner of restrictions. They limit the number of housing units on parcel sizes. They restrict the amount of housing in total that a jurisdiction will allow. They disallow, smaller units to be built on existing land (think an in-law room in the backyard).
Then there are the bevy of “aesthetic” laws and regulations. These mandate setbacks, and design schemes and building styles and materials. They all raise the cost of building housing and discourage builders from breaking ground. In some jurisdictions, like much of California, the surrounding “stakeholders” are given a virtual veto power over new development. A veto that they exercise with great regularity.
As a brief aside, all these laws have knock on effects. By restricting development within cities, there is incentive to build farther out in the suburbs and exurbs. This exacerbates extensive, and sub optimal land use, as well as increasing pollution from autos, and adding costs to commuters in the form of time, and gas money.
The reality is that cities themselves are some of the chief lobbyists for maintaining this power over the housing market. Their chief vehicle for this effort is the League of Cities. The irony here is that they are funded with tax dollars.
That all these regulations are having an impact cannot be gainsaid. There is a high degree of correlation between more restrictive jurisdictions and higher housing costs. Here is a listing of the most restrictive zoning locations in the US. Here is a US map of liberalized and restricted states regarding land use regulations. Now compare those maps and lists with the list of median home prices and you will see the clear correlation. Using simple logic, available to any but a trained economist, we know that this is not mere correlation, it is causation. This is so because if you restrict the supply of anything, you raise the price. We can see the result here In the Purchase Application Payment Index, which is at an all-time high.
Protectionism
Another area that is often overlooked in the restriction of supply is trade barriers for construction materials. Obviously, if you raise the price of lumber, and other building materials, you will raise the price of homes, thereby getting less of it. Trade protectionism in this space is made up of outright tariffs, “anti-dumping” duties, and various nontariff barriers. This study details the correlation between these barriers and the rise in cost of construction materials.
This examination estimated that trade-weighted tariff rates for homebuilding products from China were more than 9X higher in 2021 than in 2017. That is, in the face of an obvious housing shortage, policymakers increased trade barriers. Here is a very detailed study from 2018, also showing the connection between tariffs and rising construction costs. Again, it only takes some basic logic to connect the dots on this, and see what is causing the increase in construction costs.
Immigration Restrictions
The other main means of raising the cost (and retarding the supply) of housing is the immigration restrictions keeping out those who would take construction jobs. Even NBC News has noticed that the third of foreign born construction workers are impacted by the greater difficulty in getting to the US. The industry itself recognizes that there is a problem in finding workers. Many will assume that this is a self-serving position to take, as the industry is just trying to get cheap labor. Yet, we must remember that all prices, including wages, are set ultimately by what consumers are willing to pay for the finished product. It is beyond the construction industry’s ability to control wages to this degree, even in a clearly hampered market. In short, they cannot pay what native-born Americans want and stay in business.
So, we can clearly see that supply is greatly restricted by zoning, and land use laws, trade barriers to construction materials, and restrictions on the movement of construction workers. All these things add up to a significant drag on home building. That alone would be enough to create a problem, but when paired with artificial demand expansion, you get a full-blown crisis. Next week we will look at that demand expansion, as well as some proposed solutions.
Praise Be to God
