Property-rights and housing-affordability advocates were surprised and elated that the chair of President Obama’s Council of Economic Advisors, Jason Furman, gave a speech blaming housing affordability problems on zoning and land-use regulation. They shouldn’t be: while Furman is correct in general, he is wrong about the details and the prescriptions he offers could make the problems worse than ever.
There is no doubt, as Furman documents in his speech, that land-use regulation is the cause of growing housing affordability problems. Yet Furman fails to note the fact that these problems are only found in some parts of the country. This is a crucial observation, and those who fail to understand it are almost certain to misdiagnose the cause and propose the wrong remedies.
Citing Jane Jacobs (who was wrong at least as often as she was right), Forman blames affordability problems on zoning that “limits density and mixed-use development.” Such zoning is found in almost every city in the country except Houston, yet most cities don’t have housing affordability problems. Thus, such zoning alone cannot be the cause of rising rents and home prices.
The State of Oregon should change its name to Denial, as state and local leaders seem to be living in that state most of the time. Although Portland Mayor Charlie Hales has declared the region’s housing crisis to be an emergency–one that contributed to his decision not to run for re-election–no one wants to get serious about fixing the problem.
The latest is that Metro, Portland’s regional planning agency, has decided that there is no need to expand the region’s urban-growth boundary as there is plenty of room to accommodate the 400,000 new residents that region is expected to gain in the next two decades. Metro’s plans calls for housing 80 percent of those new residents in multifamily housing primarily located in downtowns and along transit corridors.
Downtown Austin today houses about 10,000 people.
As Texas transportation official Mike Heiligenstein pointed out at the American Dream conference in Austin two weeks ago, the idea that huge numbers of people can live downtown is absurd. Downtown Austin today seems to be a forest of high-rise condos, yet only 10,000 people live there. He pictured what it would look like with 20,000 more residents and it seems impossibly dense–yet 20,000 is less than 5 percent of the region’s anticipated growth. Most Americans simply don’t want to live in Manhattan, and given the nation’s wide-open spaces, they shouldn’t have to–yet planners in both Portland and Austin think they should.
Portland columnist Steve Duin laments that the city is not doing more to make housing affordable. He proposes to either tax new homes and use the money to build affordable housing or to mandate that developers to sell or rent a certain percentage of their new homes at below-market prices (inclusionary zoning).
The problem with either of these policies is that they create a few “affordable” homes by making housing more expensive for the vast majority of renters and homebuyers. Taxing new homes obviously makes them more expensive. But like the rising tide lifting all boats, it also raises the price of existing homes because sellers of those homes see that their competition–new homes–is more expensive so they can ask for more too.
Research has shown that inclusionary zoning leads developers to build fewer homes and then to sell the market-rate homes they do build for higher prices to make up for the losses on the below-market homes. Since inclusionary zoning pushes up market rates for new homes, that same rising tide makes all other homes less affordable as well.
The Antiplanner’s recent coverage of housing affordability has focused on single-family homes. But a recent article by Andrew Jakabovics points out that rents are also rising, both in dollars and in the percent of people’s incomes that it consumes. “About half of all renters live in housing considered unaffordable,” meaning they spend more than 30 percent of their income on rent, Jakabovics says. Since 2000, the share of renters spending more than 30 percent of their incomes on rent has grown by more than 40 percent.
Unfortunately, Jacabovics never discusses the real cause of this problem or the great geographic disparities in rents. A close look at the data (American Community Survey table B25071) reveals that renters are hardest hit in Florida, Hawai’i, California, and Oregon, all states with strong growth-management laws. (Florida weakened its law in 2011, but few if any regions have weakened their growth-management plans since then.) Meanwhile, rental housing is still very affordable in states such as Texas, Utah, and Wisconsin.
Hawai’i and California aren’t surprising, but it is a bit surprising to see Oregon near the top of the list. Oregon’s “smart-growth” policies were supposed to avoid this problem by building a lot of multifamily housing in place of the single-family housing that has been made unaffordable by the urban-growth boundaries around every city in the state. But this clearly hasn’t worked.
Someone has calculated that it would be less expensive for San Francisco workers to rent a two-bedroom apartment in Las Vegas and commute by air than to rent a one-bedroom apartment in San Francisco. They reasoned that a one-bedroom in San Francisco is about $3,100 a month while a two-bedroom in Las Vegas is about $1,000 a month, and four-day-a-week airfares would be about $1,100 a month. Even with local transport, Las Vegas is less expensive than San Francisco.
While most responses focus on the quality of life in Las Vegas vs. San Francisco, the point is that the latter is so terribly overpriced that some software engineers are actually living out of their cars.
The smart-growth mantra is “build up, not out,” but that’s clearly not working out. Between 2000 and 2010, the area of land in the San Francisco-Oakland urbanized area grew by zilch (in fact, according to the Census Bureau, it declined by 0.6%), and developers only managed to build 14 percent more units of housing. Meanwhile, Las Vegas-area developers built 52 percent more housing units as developed land expanded by 46 percent.
A couple of decades ago, the planning mantra in Oregon was “don’t turn Portland into Los Angeles,” meaning don’t make it more congested. So planners were a bit chagrinned to discover that their plans actually aimed to turn Portland into Los Angeles (see p. 7), meaning a dense urban area (L.A. is the densest in the nation) with a low number of freeway miles per capita (L.A. has the lowest of the nation’s fifty largest urban areas). Since then, Portland-area congestion (measured in hours of delay per commuter) has reached the Los Angeles’ 1985 level.
Today, the mantra is “don’t turn Portland into San Francisco,” meaning an extremely unaffordable housing market. So it should be no surprise that Portland planners are following exactly the policies that will turn Portland into San Francisco.
“We have a crisis of housing affordability in this city,” says Portland Mayor Hales. But expanding the urban-growth boundary is not the answer, he claims. “It’s not true that new housing at the edge is affordable,” he argues. “Maybe it once was when there was cheap land, cheap money and cheap transportation. That’s not true anymore.” Yes, but the reason it isn’t true is the urban-growth boundary. Get rid of the boundary and associated planning restrictions, and vacant land becomes cheap, and new homes built on the urban fringe will cost a lot less. In turn, that will force prices down throughout the city and region.
The progressive’s “preferred two-pronged housing approach . . . is government-owned real estate plus restrictions on private-sector developers,” notes Reason magazine’s Matt Welch writes in the Los Angeles Times, but this strategy will only “make a bad problem worse.”
Though California cities spend hundreds of millions of dollars trying to subsidize “affordable” housing, Welch notes, that money has only helped build 5 percent of the new homes constructed in the state. This is a mere “a rounding error in the total supply of housing stock.”
Meanwhile, high developer fees, lengthy permitting processes, rent control, and statutory limits on housing growth in some cities all do far more to make housing unaffordable than subsidized housing does to make it affordable. Welch cites Paul Krugman saying, “The analysis of rent control is among the best-understood issues in all of economics, and — among economists, anyway–one of the least controversial. In 1992, a poll of the American Economic Assn. found 93% of its members agreeing that ‘a ceiling on rents reduces the quality and quantity of housing.'”
Portland and San Francisco are not the only urban areas with housing affordability problems. Where the 2013 ratio of median home prices to median family incomes was 7.0 in San Francisco-Oakland and 3.8 in Portland, it was a wallet-busting 9.6 in Auckland, New Zealand.
In response, Chris Parker, the Chief Economist for the Auckland city council, has published a report that correctly identifies the problem as “excessive planning constraints” and a “limiting supply of greenfield land.” Unfortunately, his timid recommendation is that the city seek to reduce the value-to-income ratio to 5.0.
That’s like the Federal Reserve setting an inflation target of 50 percent. A 50 percent rate of inflation sounds pretty good compared with Zimbabwe’s peak inflation of 79.6 billion percent, but as a way of life, 50 percent inflation is still pretty awful.
Housing has once again become a big issue in many cities. No wonder: as the spreadsheet posted last week by the Antiplanner shows, non-inflation-adjusted prices in many urban areas have reached or exceeded what they were at the peak of the housing bubble last decade.
Portland prices have reached the point where a home will go on the market and sell in a few days for significantly more than the asking price because so many people bid on it. More controversially, Portland and Seattle builders are buying homes, replacing them with several skinny homes, townhomes, or condos.
Last week, the Antiplanner posted a spreadsheet with metropolitan area home price indices and graphs. To complete the set, here is a similar spreadsheet for state. One difference is that the graph only shows inflation-adjusted indices, which are more useful anyway.
To graph different states, simply enter the two-letter abbreviation of up to six states (in caps) in cells BH167 through BM167. If you have autocalculation turned on, the graph should update automatically. If you want to change the years shown in the chart, click on the chart to select it, then scroll down to see the years selected (currently cells BG248 through BM329). Drag the upper right corner up or down to change the beginning year and the bottom right corner up to change the ending year. I hope you find these data useful.