We’re in a National Housing Affordability Crisis Overregulation CausedJavonni Brustow
We all remember the man with the handlebar moustache that created the Rent is Too Damn High Party, right? Well their founder Jimmy McMillan just may have been on to something. After all, he did receive tens of thousands of votes in a longshot campaign for New York Governor in 2010 so he’s resonating with someone. Rent in relation to percentage of income is at a historic high of 29.1% compared to the rate of 25.8% from 1985 to 2000. Housing affordability has dropped to a 10 year low in the third quarter of this year to its least affordable level since Q3 2008. Approximately 3 out of 4 American households believe the country is facing a housing affordability crisis according to a National Association of Home Builders survey and the majority of respondents believe the problem exists at their local and state levels as well. On top of that a whopping 73 percent of respondents believe a lack of affordable housing is a national problem while 54 percent say home affordability is a problem in their neighborhoods.
So just how did we get to this point in time where so many Americans are concerned about affording a place to live both as renters and homeowners? Rugers University Economics professor Jason M. Barr describes the law of supply and demand as just as relevant and true as gravity itself yet cities and countries across the world ignore it at their own peril. The more restrictions placed on builders the greater the cost of the property effectively pricing people out of the area. Economists Joseph Gyourko and Raven Molloy have stated that “the vast majority of studies have found that locations with more regulations have higher house prices and less construction.”
There’s currently a decline in builder confidence where they feel that the homes they build won’t be purchased according to National Association of Homebuilders Chairman Randy Noel. “Builders are cautious to add inventory as housing-affordability concerns are causing consumers to pause on making a home purchase.”
The situation has become so dire that Congress is taking notice. A study by NAHB and the National Multifamily Housing Council shows how government regulation makes up 32% of multifamily property development. “It results from local, state and federal mandates,” Steve Lawson, Chairman of NAHB’s Multifamily Council stated. “It includes the cost of applying for zoning and subdivision approval, environmental mitigation, and permit, hook-up, impact and other government fees paid by the builder. In many cases, these projects become financially infeasible and, therefore, are not built.” And these zoning and other regulatory fees affect over 90% of multifamily developers that include payments to local, state and federal agencies just to get projects going. “Multifamily builders and developers are seeing strong demand, but there are headwinds that have impacted further development,” said Lawson. “Some developers have had difficulty getting projects off the ground due to regulatory burdens and neighborhood opposition in certain parts of the country.”
Inventory for starter homes is currently 48.6% lower than 6 years ago and prices are 57.9% higher according to Cheryl Young, Senior Economist at residential real estate website Trulia. And areas where it would make sense to purchase a condo as rental increases there are currently 4x the national rate have equal problems with condo affordability due to their own city regulations. If it’s investment you’re looking to purchase a condo for you can forget that in Seattle as there’s a 5 year limit on converting to condos. Developers and banks consider condos the most risky of projects due to the severe overregulation placed on condos there. One such regulation is the ability to sue a developer for construction defects with the word defects being used quite liberally. If so much as a nail pattern isn’t as the county code suggests you can sue the developer and very likely win whether it affects the structural integrity or not. These lawsuits can continue for several years after the project has been created. The end result is that today when new condos are built in Seattle, people camp outside for at least a day for these extremely rare units.
Another common misconception of both legislators and everyday people is that rent control equates to affordable housing. It in fact does the exact opposite. In California, landlords began converting apartments to condos to avoid having to deal with rent control law once it went into effect in 1994. The rental stock has gone down 15% in that time period and resulted in 25% less people in rent controlled housing now compared to in ’94. Rent control, which is only found in about a handful of states actually has an affect on the nation’s larger economy. Restrictive housing policies such as rent control have lowered U.S. GDP by 13.5 percent of what it would have been otherwise according to Berkeley economist Enrico Moretti and University of Chicago economist Chang-Tai Hseih. Rent control comes with decades of bad news for landlords and developers, so much so that so much as threatening its implementation is a guaranteed way to get projects canceled. Just ask Ontario what they think about rent control. New rules on rent control lead to 1,000 new rental units to be developed canceled.
A common form of affordable housing development today is inclusionary zoning. That’s an often used local law requiring new developments to include a percentage of the units as affordable. It’s essentially a tale of math. As explained by Yale professor and legal scholar Robert Ellickson in a 1981 article titled The Irony of Inclusionary Zoning, requiring developers to create affordable housing within their properties ultimately leads to higher prices for all adjacent units and the region as a whole. It’s rent control for the affordable units and a tax on the rest. Some developers have even said it serves as encouragement to build more luxury housing just to pay for the below market units. Montgomery County, MD has had inclusionary zoning laws for 40 years and in that time period only 1 below market unit has been created for every 100 residents. That doesn’t sound very effective.
Between 1973 and 1980, the average sale price of a single family home in Los Angeles rose 183% compared to 92% for Southern California and 117% nationwide, largely having to do with legal events of the 70s. Decisions by the California Supreme Court allowing more land use regulations, judicial decisions to allow heavier taxes on new development and the reassurance that this new uptick trend in zoning regulation would be constitutional helped this higher than usual spike in housing prices take place. Similarly in 1973 the average home in LA was only 17% higher than the national average. By 1980 it had grown to 52%. A 2012 piece by Tom Means of San Jose State University’s Department of Economics and Edward Peter Stringham of Trinity College; American Institute for Economic Research showed that the parts of California with inclusionary zoning saw their housing supply reduced by 7% and prices increased by 20% due to their policy.
For recommendations on lowering the cost of building thus making the American housing market more affordable, the National Association of Homebuilders put together a checklist for policymakers below:
- Consider the cumulative effects of regulatory requirements to determine whether a new mandate is necessary to protect the health and safety of the public, or if it is simply a means to achieve a policy goal;
- Remove barriers to production of multifamily housing;
- Ensure that energy codes and standard are cost-effective, affordable and have a reasonable payback period of 10 years;
- Enact common sense updates to Davis-Bacon wage determination policies to help builders construct more affordable housing;
- Call on the Trump administration to resolve issues related to lumber and steel tariffs, which have needlessly raised the price of building materials; and
- Maintain and properly fund federal rental assistance and multifamily production programs to serve very low- and extremely low-income Americans.
Part of the allure of Donald Trump as president, for those that voted for him is his background in real estate. If there is anyone who understands the government burden in regulation that impedes real estate development, it would be him and hopefully during his tenure in office we can see some of this addressed.
Photo Credit: William Wright
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