Tag Archives: Rent Control

Scarce, Costly Housing as if a Regulatory Objective

19 Sunday May 2024

Posted by in Housing Policy, Regulation

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Housing costs are taking a toll on many Americans. Home prices have risen about 47% cumulatively since 2020, while higher mortgage rates have compounded the difficulties faced by potential homebuyers. Meanwhile, rents are up about 23% over the same period. There just aren’t enough homes available, and the primary cause is an extensive set of regulatory obstacles to increasing the supply of homes.

High housing costs are often blamed on various manifestations of greed. Renters tend to resent their landlords, while those suffering from housing sticker-shock sometimes cast paranoid blame on people with second homes, investor properties, Airbnb rentals, and even residential developers, as if those seeking to build new housing are at the root of the problem.

Quite the contrary: we have an acute shortage of housing. The chart below shows how home vacancy rates have fallen to a level that can’t accommodate the normal frictions associated with housing turnover.

Doubts about this shortfall might owe to confusion over the meaning of one statistic: our high current level of housing units per capita. It does not indicate a plentiful stock of housing, as some assume. Alex Tabarrok, in commenting favorably on a lengthier post by Kevin Erdman, offers a simple example demonstrating that units per capita is not a reliable guide to the adequacy of housing supply:

“Suppose we have 100 homes and 100 families, each with 2 parents and 2 kids. Thus, there are 100 homes, 400 people and 0.25 homes per capita.  Now the kids grow up, get married, and want homes of their own but they have fewer kids of their own, none for simplicity. Imagine that supply increases substantially, say to 150 homes. The number of homes per capita goes up to 150/400 (.375), an all time high! Supply-side skeptics are right about the numbers, wrong about the meaning. The reality is that the demand for homes has increased to 200 but supply has increased to just 150 leading to soaring prices.”

Fewer kids have led to more homes per capita even as we suffer from a shortage of housing. In the long run, lower fertility might make it easier for housing supply to catch up with demand, but not if government continues to hamstring housing construction. Only new construction can rectify this shortfall.

That’s the message of Bryan Caplan’s “Build Baby, Build!”. Caplan has been a prominent advocate of eliminating obstacles to the construction of new housing. His book is rather unique in its contribution to economic literature because it tells the story of counterproductive housing policy in the form of a “graphic novel”, which is to say an elaborate comic book. Caplan appears in the book as protagonist, teacher and persistent gadfly.

Government obstructs additions to the supply of housing in a variety of ways: rent controls, zoning laws, density restrictions, height limits, environmental rules, and compliance paperwork. And very often these interventions are supported by existing occupants and even owners of existing homes as a matter of NIMBYism. Construction of new homes, the sure answer to the problem of an inadequate supply of housing, is actively resisted. These limitations have widespread implications for the health of the economy.

As Caplan points out, the scarcity and expense of housing limits mobility, so workers are often unable to exploit opportunities that require a move, particularly to areas of rapid growth. This makes it difficult for the labor market to adjust to negative shocks or long-term decline that might displace workers in specific locales. The mobility of resources is key to well-functioning economy, but our policies fail miserably on this count.

Rent control is an insidious policy option usually favored in dense urban areas by current renters as well as politicians seeking a visible and easy “fix” to rising rental rates. The problem is obvious: rent control destroys incentives to improve or even maintain properties. Depending on specific rules, it might even discourage development of new rental units. The result is a slow decay of the existing housing stock.

Zoning laws are an old tool of NIMBYism. The objective is to keep multifamily housing (or certain kinds of commercial development) safely away from single-family neighborhoods, or to prevent developments with relatively small lot sizes. There is also agricultural zoning, which can prevent new development along urban peripheries. It’s not difficult to understand how restrictive zoning causes rents and housing prices to escalate.

Similarly, density limits, height restrictions, burdensome filing requirements, and environmental rules all work to limit the supply of new homes.

As if crushing the supply side wasn’t enough, housing costs will come under pressure from the demand side as the Biden Administration pushes new home buying subsidies. They propose tax credits of $400 a month (at least while mortgage rates remain elevated) and an end to title insurance fees on government-backed mortgages. This would drive prices higher still. The Administration also threatens to prosecute landlords who “collude” in utilizing third-party algorithms for information in establishing rental rates. Finally, Biden proposes to dedicate billions to the construction of affordable housing, but the history of affordable housing initiatives and building subsidies is one of drastically inflated costs. This is unlikely to differ in that regard.

As wrongheaded as it is, the fact that the public is often favorably disposed to so much housing regulation is easy to understand. Rent controls prevent increases in rents to existing tenants, an easily “seen” benefit. The deleterious long-term consequences on the stock of housing are “unseen”, in the language of Frederic Bastiat.

As for zoning, homeowners are resistant to the construction of nearby “low-value” units for a variety of reasons, some aesthetic and some practical, like maintaining home values or preventing excessive traffic. “Keeping the riffraff out” is undoubtedly at play as well.

This resistance extends well beyond the limits of enforcing private property rights. It is pure rent seeking behavior in the public sphere for private benefit. Politicians and government officials tend to view the motives behind zoning as sensible, however, despite the long-term consequences of strict zoning for housing supply. Similarly, environmental restrictions sound well and good, but they too have their “unseen” negative consequences.

Most puzzling is the animus with which so many regard private residential developers, who generally build what people want: low-density suburban enclaves. Developers do it for profit, but this alienates voters who are ignorant of the economic role of profit. As in any other pursuit, profit creates a basic incentive for development activity, and to provide the kinds of homes and neighborhood amenities demanded by consumers, and to do so efficiently.

On the other hand, sprawling development inflicts external costs on incumbent residents due to added congestion, and developers and their home buyers benefit from the provision of roads that are free to users. The solution is to internalize the cost of building roads by pricing their use. Homebuyers would then weigh the value of buying in a particular area against the full marginal cost, including road use, while helping to defray the cost of maintenance and upgrades to roads and other infrastructure.

Our housing policies restrict the actions of landlords, developers, and ultimately consumers of housing. The misallocations of resources occur every time a tenant or homeowner feels they can’t afford to move in response to changing circumstances. Here is Veronique de Rugy, in an article inspired by Ryan Bourne’s “The War on Prices”, on the constraints imposed on individuals by one form of misguided intervention (my bracketed additions):

“Prices and wages [and housing rents] set on market dynamics reflect underlying economic realities and then send out a signal for help. Price [rent] controls only mask these realities, which inevitably worsens the economy’s ability to respond with what ordinary consumers and workers need.“

But our housing problem is not solely caused by interference with the price mechanism. Rather, excessive regulation of rents and a panoply of other details of the legal environment for housing have led to our current shortfall. The lesson is deregulate, and to let developers build (and rehabilitate) the housing that people need.

The Ruinous Authoritarian Impulse: Rules For Housing and Diversity

20 Friday Oct 2017

Posted by in Affirmative Action, Housing Policy, Identity Politics

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I’m following up on an earlier post with a few thoughts on two topics: the “unexpected” harms of affirmative action and the left’s unwitting promotion of inequality via restrictive housing policies in many American cities. I mentioned both policies last week without much elaboration in “American Homicide Rates: Which America?” Both are efforts by government to apply centralized decision-making to complex social issues. Both reflect misdiagnoses of the problems they seek to address. Both are coercive and dismissive of the power of free individuals to help themselves and the power of markets to solve social problems. And both kinds of policies are failures.

Whether government is prescribing the rental value of a property, regulating forms of new construction, or imposing land-use regulations, zoning, historic preservation, and environmental rules, the result is higher housing costs and often lower-quality housing for the low end of the income distribution. The effects of some of these policies are discussed by Randall O’Toole in “Bringing Soviet Planning To New York City“. Wendell Cox notes that progressive cities are home to the worst inequality of housing opportunities for blacks and hispanics. The Cox piece is a bit dry, but it is instructive. These are results that reinforce the alienation described in the “Which America?” post linked above.

Allowing government to prescribe the appropriate matching of individuals to roles based on racial or identity group status is divisive and counter-productive. This is so-called affirmative action. Decisions based not on merit, but on skin color or membership in favored identity groups are discriminatory by their very nature. Members of non-favored groups, including non-favored minorities such as asians, are penalized, despite their lack of any connection to the injustices of the past. Human capital is a scarce resource, which is why merit has value. So group preferences in hiring involve tradeoffs, subverting goals such as productivity, profit and expense control. This inflicts a cost on society as a whole. 

In college admissions, affirmative action often compromises learning. This article on affirmative action at universities emphasizes the “mismatch hypothesis”, which asserts that individuals with lesser academic credentials who are placed as a consequence of preference programs often “suffer academically as a result”. The damage includes higher dropout rates among minorities and generally less learning than if these individuals had studied with peers having more similar credentials. A further implication is that these individuals probably experience less career success. In fact, an under-qualified employee’s job performance might permanently damage his or her career prospects. There may be other consequences of group preferences such as stigmatization and alienation of individuals within the academic community or workplace. 

Whether the topic is better housing, improved educational and economic prospects, trade, drugs, technology, or any other human endeavor, the best solutions do not involve decisions imposed by government coercion. Instead, allowing individuals to interact freely, gaining valuable employment experience and access to the bounty of markets, fosters organic gains in opportunities. Individual liberties and equality before the law are the real keys to broader success. The visible, iron hand of the state tends to diminish the supply of affordable housing. Forced quotas in hiring and academic admissions often harm their intended beneficiaries and poison the social environment. When placement decisions are in the hands of public institutions like state universities, it is in the best interests of both schools and students to make those decisions based on academic credentials. Opportunities for higher education will improve only with advances at lower levels of education, which requires parental choice rather than a collection of unresponsive mini-monopolies. In addition, higher education should lose it’s cachet as an elixir for economic prospects. Many individuals, regardless of group identity, would optimize their careers through vocational skills and entering the workforce to gain experience at an earlier age than the typical university graduate.

Horizons Lost To Coercive Intervention

27 Wednesday Jan 2016

Posted by in Human Welfare, Price Controls, Regulation

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Every action has a cost. When you’re on the hook, major decisions are obviously worth pondering. But major societal decisions are often made by agents who are not on the hook, with little if any accountability for long-term consequences. They have every incentive to discount potential downside effects, especially in the distant future. Following Frederic Bastiat, Don Boudreaux writes of three levels of “What Is Not Seen” as a consequence of human decisions, which I summarize here:

  1. Immediate foregone alternatives: Possession, use and enjoyment of X is not seen if you buy Y.
  2. Resources not directed to foregone alternatives: The reduction in X inventory is not seen, compensating production of X is not seen, and extra worker hours, capital use and flow of raw materials needed for X production are not seen.
  3. The future implied by foregone alternatives: Future impacts can take many forms. X might have been a safer or healthier alternative, but those benefits are unseen. X might have been lower quality, so the potential frustration and repairs are unseen. X might have been less expensive, but the future benefits of the money saved are unseen. All of these “unseens” have implications for the future world experienced by the decision-maker and others.

These effects take on much more significance in multiples, but (2) and (3) constitute extended unseen implications for society at large. In multiples, the lost (unseen) X production and X labor-hours, capital and raw materials are more obvious to the losers in the X industry than the winners in the Y industry, but they matter. In the future, no vibrant X industry will not be seen; the resources diverted to meet Y demand won’t be seen at new or even old X factories. X might well vanish, leaving only nontransformable detritus as a token of its existence.

Changes in private preferences or in production technologies create waves in the course of the “seen” reality and the “unseen” world foregone. Those differences are caused by voluntary, private choice, so gains are expected to outweigh losses relative to the “road not traveled”. That’s not a given, however, when decisions are imposed by external authorities with incentives unaligned with those in their thrall. For that reason, awareness of the unseen is of great importance in policy analysis, which is really Boudreaux’s point. Here is an extreme example he offers in addressing the far-reaching implications of government intrusions:

“Suppose that Uncle Sam in the early 20th century had, with a hypothetical Ludd Act, effectively prohibited the electrification of American farms, businesses, and homes. That such a policy would have had a large not-seen element is evident even to fans of Bernie Sanders. But the details of this not-seen element would have been impossible today even to guess at with any reliability. Attempting to quantify it econometrically would be an exercise in utter futility. No one in a 2015 America that had never been electrified could guess with any sense what the Ludd Act had cost Americans (and non-Americans as well). The not-seen would, in such a case, loom so large and be so disconnected to any known reality that it would be completely mysterious.“

Price regulation provides more familiar examples. Rent controls intended to “protect” the public from landlords have enormous “unintended” consequences. Like any price regulation, rent controls stifle exchange, reducing the supply and quality of housing. Renters are given an incentive to remain in their units, and property owners have little incentive to maintain or upgrade their properties. Deterioration is inevitable, and ultimately displacement of renters. The unseen, lost world would have included more housing, better housing, more stable neighborhoods and probably less crime.

A price floor covered by Boudreaux is the minimum wage. The fully predictable but unintended consequences include immediate losses in some combination of jobs, hours, benefits, and working conditions by the least-skilled class of workers. Higher paid workers feel the impact too, as they are asked to perform more (and less complex) tasks or are victimized by more widespread substitution of capital for labor. Consumers also feel some of the pain in higher prices. The net effect is a reduction in mutually beneficial trade that continues and may compound with time:

“As the time span over which obstructions to certain economic exchanges lengthens, the exchanges that would have, but didn’t, take place accumulate. The businesses that would have been created absent a minimum wage – but which, because of the minimum wage, are never created – grow in number and variety. The instances of on-the-job worker training that would have occurred – but, because of the minimum wage, didn’t occur – stack up increasingly over time.“

Regulation and taxation of all forms have such destructive consequences, but policy makers seldom place a heavy weight on the unobserved counterfactual. Boudreaux emphasizes the futility of quantifying the “unseen” effects these policies:

“… those who insist that only that which can be measured and quantified with numerical data is real must deny, as a matter of their crabbed and blinding scientism, that such long-term effects … are not only not-seen but also, because they are not-seen, not real.“

The trade and welfare losses of coercive interventions of all types are not hypothetical. They are as real as the losses caused by destruction of property by vandals. Never again can the owners enjoy the property as they once had. Future pleasures are lost and cannot be observed or measured objectively. Even worse, when government disrupts economic activity, the cumulative losses condemn the public to a backward world that they will find difficult to recognize as such.

 

Minority Politics and The Redistributionist Honey Trap

22 Friday Jan 2016

Posted by in Big Government, Free markets

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Minorities are not well-served by political, big-government solutions to social and economic advancement. Joel Kotkin weighs in on this point in “What’s the Best Way Up For Minorities?” He discusses the experiences of African Americans and Hispanics with two starkly different approaches to moving up:

“Throughout American history, immigrants and minorities have had two primary pathways to success. One, by using the political system, seeks to redirect resources to a particular group and also to protect it from majoritarian discrimination, something particularly necessary in the case of the formerly enslaved African Americans.

The other approach, generally less well-covered, has defined social uplift through such things as education, hard work and familial values. This path was embraced by early African American leaders such as Booker T. Washington and Marcus Garvey. Today, the most successful ethnic groups – Koreans, Middle Easterners, Jews, Greeks and Russians – demonstrate the validity of this method through high levels of both entrepreneurial and educational achievement.“

Minorities have largely succeeded in achieving political stature, and minority politicians garnering the most support from minority constituencies have advocated statist solutions, as opposed to emphasizing individual initiative. A leader advocating for public provision of transfers or any form of “economic justice” is undoubtedly attractive to many disadvantaged voters. Unfortunately, those policies offer little more than support. They are incapable of lifting the disadvantaged out of poverty.

“From 2007-13, African Americans have experienced a 9 percent drop in incomes, far worse than the 6 percent decline for the rest of the population. In 2013, African American unemployment remained twice that of whites, and, according to the Urban League, the black middle class has conceded many of the gains made over the past 30 years. Concentrated urban poverty – on the decline in the booming 1990s – now appears to be growing.“

Kotkin notes that blacks are in worsening economic straits in cities that are considered “exemplars of black political power and redistributionist politics”, and even in more affluent but “progressive” coastal cities. And paradoxically, according to Kotkin, African Americans have achieved greater economic gains in the “old Confederacy”, and that is where they are moving. The same is true of Hispanics, though most of their population growth in the south is from immigration. African Americans are reversing an older pattern of migration to the north.

Kotkin cites statistics on minority homeownership and educational performance in the south relative to northern cities, and he compares results for Texas and California. The south wins convincingly. He emphasizes the role of education and housing policies in helping minorities overcome disadvantages, but he is rightly critical of housing subsidies and affirmative action. Bad housing policies, such as rent control and zoning ordinances, hurt minorities by limiting the stock of good housing, ultimately raising its cost. The public education system, usually shielded from competitive pressures in urban areas, has often failed minorities and the urban poor.

Unfortunately, calls to expand government support extend well beyond the optimal size and scope of the social safety net: free college education, subsidized home ownership, proportional representation in virtually any occupation, and “living wage” demands are very much a part of the economic justice narrative. Supporters of these policies among the poor, convinced that they are deserving, cannot be expected to understand the implications of Reynolds’ Law, named by The View From Alexandria blog after Instapundit‘s Glenn Reynolds:

“Subsidizing the markers of status doesn’t produce the character traits that result in that status; it undermines them.“

Higher education is not a birthright. It is for those who demonstrate sufficient learning skills, and it is often free to the most promising students. The value of education provides a powerful incentive to those possessing the “trait” of prescience. Homeownership is a choice that should follow from resources earned by hard work or from one’s long-term prospects. Representation in certain occupational categories, and higher pay, reflect “traits” (skills, effort and reliability) that must be developed or demonstrated. As Reynolds says, subsidies destroy incentives by creating the illusion of  success, a thin simulacrum revealed by long-term dependency. Subsidies do not create self-sustaining success. They do not create the real thing. And the resources confiscated to pay for subsidies punish those those bearing the most positive traits.

Minority voters, especially African Americans, placed great hope in the Obama Administration to improve their economic success. Unfortunately, Obama favors the political route to minority material gains, not the economic route. The results have been dismal (and see this) in terms of poverty, dependency, labor force participation, wages, income, and wealth:

“On every leading economic issue, in the leading economic issues Black Americans have lost ground in every one of those leading categories. So in the last ten years it hasn’t been good for black folk. This is the president’s most loyal constituency that didn’t gain any ground in that period.“

The answer to promoting economic gains for minorities lies in encouraging market opportunities, freedom and the rule of law. This includes wage and price flexibility, labor rights, choice in schools, even-handed law enforcement and criminal justice, secure property rights, low taxes, and ending prohibitions that promote black markets and crime. The political route to success undermines the vibrancy of the economy, opportunities faced by minorities, and their ability to capitalize on them.