The
“affordable housing” movement advocated by politicians on both sides of the
political isle, contributed, in part, to the housing bust of 2008. Aside from
the use of the nebulous phrase by federal government politicians of “affordable
housing”—making an exact definition elusive—also created a national problem
where one did not exist. Moreover, the blame was placed on the market, rather
than a myriad local laws in specific housing markets that restricted land
use and perverted the economic incentives for people to create more housing.
Based
on the subjectivity of the term “affordable housing,” reduces it to an
arbitrary term by eliding any sort of individual scale. For example, what is
affordable to some is not necessarily affordable to others. Taken in the
aggregate, the general accepted measurement for calculating the affordability
of the housing marking in a specific geographic area, is by comparing what
percentage of an average income one must pay towards their average rent or monthly
mortgage payment. By this measurement, around one-fourth to thirty percent of
income could be considered “affordable” (Demographia , 2008, p. 30 ).
Another way to tabulate
affordability is by comparing the total cost of an average house in a given
market with the average annual income of the people who live there. These
measurements exist to create a broader relative picture of what markets are
more affordable compared to other markets throughout the country. Noted
economist Thomas Sowell interprets the data in order to create this picture:
…The
median home price in Youngstown, Ohio, has been found to be roughly double the
median income in Youngstown. The median home price in Las Vegas has been about
six times the median income in that city and, in Sand Diego, the median home
price has been ten times the median income.” (Sowell,
2009, p. 32)
This type of
measurement is very useful to gauge what is, and what is not affordable in the
aggregate because, as noted earlier, to the individual, affordability is
subjective. Regardless of what the median home price is in a given area, there
are cheaper alternatives for those who cannot afford even the most affordable
homes by comparison. In short, those who cannot afford a home can rent, rent
with one or more roommates/relatives, or can rent a room.
Historically
speaking, at turn of the 20th century (1901), housing in the US has
typically been about one-fourth (23 percent) of total consumer
spending and increased to about 33 percent of a much higher portion of consumer
expenditures in 2003 (Dolfman, McSweeney, 2006). This hardly presents housing as
unaffordable when the 50 states are taken as a whole. This is not to discredit
the fact that housing in some local markets were/are less affordable than
others, this is just to make evident that the need for “affordable housing” was
not a national phenomena. In reality, housing prices were in fact falling, not
rising. The New York Times, in late 2005 reported that despite the prevailing
wisdom that “real estate has never been more expensive,” it was now possible to
purchase a home for a smaller share of one’s income only a “generation ago” (Leonhardt,
2005). The article goes on further to elaborate on the areas where the housing
prices were lower as a percentage of income, including “almost every place outside of New
York, Washington, Miami and along the coast of California” (Leonhardt, 2005).
Other
studies have found that since 1985, the country as a whole, homebuyers have
never paid more than the accepted 25 percent of their incomes for housing (The
state, 2008). Moreover, a comparison of the median income as a multiple of the
median priced home in the United States of 3.6 was more affordable than that of
Britain, Australia and New Zealand at 5.5, 6.3 and 6.3 times the median income,
respectively (Demographia, 2008 pg. 11).
The
contributing factor to exorbitant home prices in specific areas—not only in the
United States—can be summed up by Dr. Donald Brash, former Governor of the
Reserve Bank of New Zealand, in his conclusion of the 4th annual
Demographia International Affordable Housing Survey in 2008, “the affordability
of housing is overwhelmingly a function of… the extent to which government
place artificial restrictions on the supply of residential land” (Demographia,
2008 p. 1). The economic principles of this conclusion are fairly basic. The
increased values of the homes create market incentives, through prices, for
developers and investors to build and invest in housing in these specific
areas, increasing the supply and bringing down the prices. Home prices become
more “affordable” as the market itself pushes the prices towards equilibrium.
This market mechanism is perverted by land use restrictions, creating an
artificial dearth that inevitably always leads to higher prices.
One
of the areas, coastal California, which was mentioned earlier, is a lucid
example of how the artificial scarcity of land can drive up the prices of
existing homes at the expense of those that do not already own one. Among the
“growth-management” restrictions attributed to the artificial scarcity of land
were promulgated for the purpose of preserving “open space,” “saving farmland,”
“protecting the environment,” and “historical preservation,” these, among other
local zoning laws with the same effects. Further evidence on how land use
restrictions affect price is the rate at which home prices have risen in California
since the 1970s, the decade that saw a sharp increase in laws restricting the
use of land for housing (Fischel, 1995 pg. 232-234). In San Francisco for
example, the median home price was 765,000 dollars, more than three times the
national average (Johnson, 2005). In San Mateo County, adjacent to San
Francisco, home prices in March 2005, were rising at a rate of 2,000 dollars per
day, and peaked at over one million dollars for homes less than 2,000 square
feet in 2007 (Simmers, 2007). Prior to the 1970s, a home in San Jose, CA was
2.2 times the median income, in 2005 the median price of a home was 7.5 times
median family income there.
These
conditions for rising prices were not unique to the bay area but were causing
the same hikes in prices all along the coast and to a lesser degree, in the
interior valley’s as well (Sowell, 2009). Economist Dr. Thomas Sowell,
concludes that affordable housing and its effect on the housing bust, was far
from a national problem, and explains that, “its [the busts] origins tended to
be concentrated in particular places with unusually high housing prices…”
(Sowell, 2009 p. 15) While home
prices rose nationwide by 13 percent from 2004-2005, the range was from 4
percent rise in Michigan to a 35 percent rise in Arizona (OFHEO, 2006, p.
1,2,15,16).
It
is often mistaken that the rise in home prices is due to an increase in
population (demand) alone, as coastal California is more desirable place to
live. Furthermore, it may be possible that rising income may have an effect on rising
home prices in some areas over others. However, during the decade of the 1970s
when home prices began to dramatically increase, income was rising less in
California compared to the rest of the country (Fischel, 1995 p. 232-34).
Moreover, in San Francisco, population was growing nearly identical to the
national average, and in Palo Alto, just south of San Francisco, home prices
quadrupled while population fell by 8 percent (Hagler, 1982). Thus, an increase
in income and population are inadequate explanations as to why the home prices,
in these particular areas, were so disjointed compared to the national
averages.
A
study of housing prices across the nation conducted in 2006, concluded that
overall housing prices have risen over the previous 6 or 7 years, “but this
increase has not been uniform across the nation… regions with growth-management
planning have seen prices increase 4 to14 percent per year. Regions without
such planning have only seen an increase of 1 to 3 percent” (O’Toole, 2006 p. 6).
The same study, placing most of the blame on growth-management policies, found
that in areas with the most egregious land-use restrictions such as California,
people paid a penalty ranging from “$70,000 per median-value home in
Bakersfield to $875,000 in the San Francisco metropolitan area” (O’Toole, 2006
p. 6).
In
contrast to other cities, such as Houston and Dallas, paints a clearer picture
of the effects of limiting supply and perverting the economic incentives to
meet demand. The housing market in Houston is one of the fastest growing cities
in the country, and is a perfect counter-example to the regulations of markets
in coastal California, as it does not have growth-management or zoning laws.
During the period of its most rapid growth of nearly a million people from 1990
to 2000, it has also remained one the most “affordable” housing markets, by taking
a smaller share of income compared to median home values (O’Toole, 2006 p. 33).
In Dallas, while experiencing nearly the same growth rate over the same time
period, also maintained among the most affordable housing in country (O’Toole,
2006 p. 33).
Much
of the impetus for land-use restrictions and growth-management policies come
from environmental groups at the local level who claim they are trying to
mitigate over-development and destruction of the environment, when in actuality
less than 10 percent of the land in the United States has been developed; in
the US, more than six times the area of all the towns and cities in the country
put together, are covered by trees (Bruegmann, 2005 p. 143). Furthermore,
increased restrictions on the supply of housing also protects and benefits
those that already own property, helping to maintain and increase the value of
their own homes at the expense of others. Localities will utilize zoning laws
in order to restrict the supply of housing for these purposes. In short, the
vast majority of the country was not suffering from a lack of “affordable
housing” rather, government at the state and local levels were restricting
land-use without considering the economic impacts on housing costs. It was a
clear cut case of the triumph of political rhetoric over economic principles, a
lack of political incentive to think beyond stage one.
The
misconception that the free market failed to produce affordable housing, and
the political rhetoric thereof, in part, helped to spark the federal
governments involvement in the housing boom and bust. The federal government
was essentially trying to fix a problem created by state and local public
policy/regulations with more public policies and regulations at the federal
level. The hard evidence shows that where there was little government
intervention, the market provided more affordable housing than those with
land-use restrictions. The subsequent creative financing schemes in those areas
where prices were skyrocketing only hastened the problem, leading to financial
calamity. Based on the empirical evidence that has since been acquired,
hopefully it’s a mistake we will not make again.
Works Cited
Bruegmann,
R. (2005). Sprawl: a compact history.
Chicago: University of Chicago Press.
Dolfman,
M., & McSweeney, D. (2006, August 6). 100 Years of U.S. Consumer Spending:
Data for the Nation, New York City, and Boston. U.S. Bureau of Labor Statistics. Retrieved May 4, 2014, from http://www.bls.gov/opub/uscs/home.htm
Fischel, W.
A. (1995). Regulatory takings: law,
economics, and politics. Cambridge, Mass.: Harvard University Press.
Hagler, T.
(1982). Land Use and Housing on the San Francisco Peninsula . Stanford Environmental Law Society, 9,
85, 89.
House Price
Appreciation Continues At A Robust Pace. OFHEO
House Price Index, 1,2,15,16. Retrieved May 4, 2014, from http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2005Q4_HPI_N508.pdf
Johnson, J.
(2005, October 16). Making Ends Meet: Struggling in Middle Class. . . Retrieved
October 16, 2014, from http://www.sfgate.com/bayarea/article/MAKING-ENDS-MEET-Struggling-in-middle-class-2564563.php
Leonhardt, D., & Rich, M.
(2005, December 28). 20 YEARS LATER, BUYING A HOUSE IS LESS OF A BITE. The New York Times. Retrieved May 4,
2014, from http://www.nytimes.com/2005/12/29/realestate/29afford.html?pagewanted=all&_r=0
O'Toole, R.
The Planning Penalty. Independent Policy
Report. Retrieved May 4, 2014, from
http://www.independent.org/pdf/policy_reports/2006-04-03-housing.pdf
Simmers, T.
(2007, August 16). Median home cost over $1M. InsideBayArea.com. Retrieved May 4, 2014, from http://www.insidebayarea.com/sanmateocountytimes/localnews/ci_6637402
Sowell, T.
(2009). Expensive Housing Markets. The
housing boom and bust (Revised Edition ed., ). New York: Basic Books.
The State
of the Nation's Housing 2008. (n.d.). (Publication
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