Housing

Housing affordability is a severe problem in the United States.

Trends

Housing takes up nearly half of urban land, and in the United States, consumes about 20% of all primary energy ¹. The United States, along with many other countries ², faces a housing affordability challenge.

Housing affordability in the United States as of 2017, as measured by share of pre-tax income spent on housing. Households that spend 30-50%, and more than 50%, on housing are considered to be cost-burdened and severely cost-burdened respectively by the Department of Housing and Urban Development. Source: Joint Center for Housing Studies ³.

Among wealthier countries, housing in the United States is relatively inexpensive.

Percentage of expenditures on housing include mortgage, rent, property taxes, and utilities for households, including water and energy. Source: ⁴.

On a per-area basis, housing in the United States is especially cheap; this is partially made up for with larger homes ⁵.

In most high-income countries, housing, expressed as a share of income, has gotten more expensive since 2000 ⁶, and as of 2021, the housing price to income ratio is close to the value of the previous peak in 2007 ⁴.

Cities should address all of these challenges by revising the financial incentives that incentivize low density development and the zoning restrictions that prevent high density development.

National Effect

Although zoning is typically decided at a local level, housing prices are linked nationally and across metropolitan areas ⁷. Therefore, state and the federal governments have reason to be concerned about overly restrictive zoning.

Effect of New Housing

The construction of new housing, especially market-rate housing, can be controversial in part due to the fear that, since the price of the new housing is typically above average for the city, poorer residents will not benefit. However, even if poorer residents don't move into the new housing themselves, they may move into the units vacated by people moving into the new housing, or into units vacated by people moving into units vacated by people moving into the new housing, and so on. This effect is known as filtering.

Evidence from Helsinki, Finland ⁸ and the United States ⁹ suggests that filtering does occur, and new housing disproportionately benefits people of lower incomes.

Economists also consider the price elasticity of housing, which is the value of X for which if the housing supply in a market goes up by 1%, the price will go down by X%. Several estimates of this quantity are as follows.

Sources: ¹⁰, ¹¹, ¹², ¹³, ¹⁴.

Other Policies

Aside from increasing the housing stock, there are several other approaches to deal with high housing costs, a few of which we examine below.

Rent Control

Rent control is a policy that implements price controls on rents and creates protection against eviction. Such policies help reduce rents in controlled units and increase the length of residence in a rental ¹⁵, ¹⁶, but they tend to reduce the number of rental units available ¹⁷, ¹⁵, ¹⁸, raise rents overall ¹⁷, and cause the quality of the rental stock to deteriorate ¹⁹. For these reasons, most economists view rent control as a bad policy ²⁰, ²¹.

Eviction Restrictions

Many cities have adopted restrictions on the ability for landlord to evict tenants or "Right to Counsel" regulations, which entitle tenants facing eviction with legal representation. These rules tend to drive up rents to the point where they have a net negative effect on social welfare and increase homelessness ²². Rental assistance tends to increase welfare and reduce the likelihood that renters will face eviction in the first place ²².

Public Housing

Public housing (owned and operated by the government) or social housing (owned and operated by the government or non-profit organizations) is sometimes proposed as a way of reaching people who will not be adequately served by the private market. However, land use and zoning constraints apply to public housing just as much as they to do market housing, and thus these challenges still need to be resolved ²³.

Vacancy Tax

A vacancy tax is a higher tax rate on properties that are left vacant, implemented with the goal of incentivizing developers to lease properties, reduce blight, and increase housing or commercial real estate supply. Such taxes, such as the vacancy tax that was implemented in Vancouver, British Columbia, have had small effects on the supply of housing or commercial real estate ²⁴, ²⁵, and they are not an adequate replacement for increasing overall housing supply ²⁶.

Speculation

Speculation can play a role in housing price volatility ²⁷--both on the upside and the downside--but the role of speculation in chronically high prices has been exaggerated. For example, most of the run-up in housing prices in the United States in the early-to-mid 2000s can be explained by supply constraints and low interest rates, rather than the speculative bubble that is often the narrative ²⁸. Furthermore, measures to reduce speculation generally have little effect on prices ²⁹, ³⁰, ³¹. Speculation is more likely to occur in markets facing supply constraints, suggesting that overly restrictive zoning may contribute to speculation ³².