Housing Crisis Driven By Inequality | Max Buchholz | TMR
Quick Read
Summary
Takeaways
- ❖The paper 'Inequality Not Regulation Drives America's Housing Affordability Crisis' argues that income inequality is the primary cause of housing unaffordability, not restrictive regulations.
- ❖Even with aggressive building rates, it would take decades for new supply to make housing affordable for median workers without college degrees, due to the high elasticity of housing demand.
- ❖Historical data shows current housing vacancy rates and units per person are higher than in 1970, suggesting no fundamental supply shortage.
- ❖Mean housing prices have tracked mean incomes for decades, but this average masks the reality that the top 40% of earners have seen significant income growth, enabling them to bid up prices, while the bottom 60% have not.
- ❖Proposed solutions include a more active public sector role in financing social housing, implementing national rent control, and income redistribution policies (e.g., expanded housing vouchers, wealth taxes).
Insights
1Income Inequality, Not Regulation, Drives Housing Unaffordability
Max Buchholz's paper directly challenges the 'abundance theory' which posits that zoning and land-use regulations are the primary cause of housing unaffordability by limiting supply. His research suggests that even if regulations were removed and building rates dramatically increased, it would take decades to make housing affordable for the median worker without a college degree. The core issue is the widening gap in incomes.
A simulation based on existing studies on how new supply impacts prices shows that even building at the 90th percentile rate of U.S. labor markets, it would take 'a few decades' in the best case, and 'over a hundred years' in the worst case, for a median one-bedroom unit to become affordable to a median worker without a college degree.
2Housing Supply is Not Historically Low; Demand is Elastic
Contrary to the narrative of a severe housing shortage, Buchholz points to historical data indicating that overall housing supply metrics are robust. The problem isn't a lack of units, but rather how demand responds to new supply, particularly among higher earners.
The overall vacancy rate for housing (both rental and owned) is higher today than in 1970. The U.S. has more units per person than ever before (one unit for every 2.3 people today, compared to 3.1 in 1960). Studies indicate that demand for housing is highly elastic, meaning that when more housing is added, people tend to consume more (e.g., living alone instead of with roommates), rather than prices dropping significantly.
3Mean vs. Median Income Growth Explains Affordability Crisis
While mean housing prices and mean incomes have tracked each other consistently for decades, this average obscures the reality of income distribution. The top 40% of the population has experienced significant income growth, enabling them to bid up housing prices, while the bottom 60% has seen stagnant or minimal income growth, making housing increasingly out of reach.
Mean housing prices and mean incomes have tracked 'pretty much perfectly' since the 1960s. However, income growth has predominantly occurred in the top 30-40% of the population. This segment treats housing more like a 'luxury good,' spending more as incomes rise, creating inflationary pressure across the market. Lower-income households, whose incomes have not grown, are then priced out.
Lessons
- Increase public sector financing for social housing, similar to models in Western and Northern Europe, offering low-interest loans and grants for development.
- Implement national rent control policies to stabilize housing costs, acknowledging potential trade-offs but emphasizing the need to address the magnitude of the affordability problem.
- Pursue income redistribution policies, such as expanding programs like Section 8 vouchers or implementing tax benefits for low-income renters, potentially funded by taxing higher incomes or consumption to reduce their bidding power on housing.
Quotes
"If we were building at a rate that like the 90th percentile labor market in the U.S. built at... it's a few decades. In the worst case, it's like over a hundred years, based on what we know about how new supply impacts prices."
"The housing market by historical standards actually looks totally fine today. Like there's there's nothing all that surprising. I might get some grief for saying this, but I am not convinced we have a big supply shortage at all."
"The mean is obscuring the fact that we have this huge group of people at the bottom who have had almost no income growth... and that like 40, maybe 50% of people is who are really struggling."
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