It looks like the supply side is being hit by a triple whammy of adverse supply shocks
These are problems with funding, land and labor supply.
I think that the problem boils down to land in a few cities, like San Francisco, Los Angeles, New York, and Boston. And we know that the land scarcity is artificial, due to regulation. Public policy is to subsidize demand and restrict supply. My guess is that as the problem of housing scarcity becomes more apparent (there was a rather uninformative article about it in the WaPo last week), the politicians will work on subsidizing demand.
Which politicians? Those cities are all deep blue. The federal government is not going to send huge amounts of rent subsidies to the non-poor in those places.
So the action will be local, which can’t afford cash subsidies. Instead, they’ll impose rent controls and require all new projects to set aside a portion of new units for “affordable housing”.
But, those cities already do these things, so there isn’t much extra juice to squeeze from turning up these policies.
And these cities are effectively one-party jurisdictions, where Democrat incumbents ate comfortably confident in thei security of their positions and have little to fear unless things get catastrophically bad. A complacent class, if you will.
So things will just keep getting worse until a local crisis forces their hands on relaxing building restrictions. But by then it may be too late to avoid real trouble.
“The federal government is not going to send huge amounts of rent subsidies to the non-poor in those places.”
Income tax benefits to home ownership amount to rent subsidies for homeowners. The White House estimates total subsidies at about 25% of the BEA’s estimate of total net rental income + interest expense. Since these are highly regressive, the effect on high priced home values is probably something well over 30%, which is confirmed by the relative Price/Rent ratio of high end homes over low end homes. The Federal government is more than capable of providing regressive demand subsidies.
Higher minimum wages.
This isn’t a real problem though. There are plenty of other low cost areas. Oh, you want a job with that? Tough. They are blue because blue works. All the most successful areas are blue. Meanwhile red blames their failures on blue and fret over not being red enough so they can fail more.
Blue only works in the sense that blue policies (including higher minimum wages, housing restrictions, etc.) drive up the cost of living to the point of driving away the poor.
There is a net migration of people (especially poor) from blue to red states, from high minimum wage to low minimum wage states. The main reason red states are poorer than blue states is because you can’t afford to be poor in San Francisco; but you can in Houston.
If you control for cost of living, correlation between income and state political affiliation disappears.
Seems to me this is a terrible way to distribute wealth in an economy. The main idea is that wealth is at least partially a proxy for good decision-making and therefore capitalism gradually allocates wealth efficiently. Here in NYC, a huge portion of the wealthy i know simply bought a home many years ago…and frankly, make terrible day-to-day decisions. And yet they are influential. Not sure capitalism works very welll when land/housing is the main wealth-creation vehicle.
“You didn’t build that,” but applied to homeowners. Which would actually be true, but politicians aren’t about to say so.
If you build a business and you’re an employer, you’re the enemy, you’re a target, you’re a source of revenue and paid parental leave and a rise in the minimum wage and every new mandate that politicians want the credit for.
If you own a house, on the other hand, you’re the salt of the earth. You’re a paragon. Because there’s some mysterious nobility to asset price inflation.
Maybe the problem is there are more homeowners than business owners so the former make a far more effective lobby. If only renters would band together to combat such policies.
We spend way to much time fretting about land scarcity/development restrictions in a handful of cities (San Francisco et al) that account for quite a small fraction of the U.S. population. Anyway, what’s happening in those cities is not certainly not driving an overall low level of housing starts nationally.
My guess is the main problem with low housing starts is construction labor scarcity. I know a few people who are trying to get houses built and/or remodel jobs done and are having a hard time finding contractors or are getting very high bids (of the ‘I don’t really have time, but I guess if you’re desperate enough to pay *that* much, I’ll squeeze you in). I suspect the ‘self-deportation’ of millions of Mexicans since the housing bust combined with Trump’s immigration actions is important (they left and now they can’t come back or are afraid to try). Undocumented workers were doing a lot of roofing, drywall hanging and other semi-skilled tasks on construction sites.
And then running up huge bills in Medicaid, etc. We all know paying Mexicans peanuts under the table is a great way to externalize your business costs onto society at large through state financed welfare subsidies.
Perhaps “very high bids” are simply the actual cost when you aren’t getting your workers welfare subsidized by the state. There are no jobs that Americans won’t do. There are wages Americans won’t work for. Pay me what I make now to swing a hammer rather then put up with infuriating meetings and HR nonsense and I’ll take it.
Thanks for pointing this out.
Sure, Americans would work for high prices, but at that point the projects don’t get done.
If people don’t want to pay for something at a price that covers its externalities, maybe it’s not worth having.
Do you have studies showing that fot immigrants? Because I heard otherwise.
Republicans should introduce a bill saying illegals don’t get welfare and let Democrats talk their way out of it. There is no law that says only democrats can be smart at politics. Is welfare even an externality?
If aliens are coming into the country to get low-paid work and then become entitled welfare, I think it’s fair to call the welfare costs of those immigrants an externality of their low-paid jobs. It’s different if the low-paid workers were already here, those people are our problem anyway.
Cutting of low-paid immigrants’ access to welfare is not a viable strategy in today’s legal and political environment. And if you keep pouring in immigrants, you’re just reinforcing that politlcal and legal environment.
Considering how people went crazy over Trump being anti-immigrant, I suspect specific bills targeting entitlements for illegals will be better received by moderates.
There are already limitations on legal immigrants’ eligibility for entitlements for some time period after they arrive; and if a person is capable of holding a job for a few years in a new country they probably aren’t going to be a welfare queen. And illegals in general underuse entitlements. Because, after all, they’re here illegally, which makes it more difficult to get said entitlements.
We’re not just talking about illegal aliens. The courts pretty severely limit the ability of the government to deprive aliens (including illegal aliens) of welfare. And illegals get plenty of welfare spending – do you think they send their kids to private school? Do you think they don’t get AFDC? Do you think they don’t end up in public hospital ERs?
If we don’t want to spend money on these people, we shouldn’t let them in. Sorry to disappoint the guys at the Cato Institute, but going back to the level of government safety net that existed in the 1840s is not going to happen, for aliens (legal or illegal) or anyone else. But fantasize if you wish.
“And illegals in general underuse entitlements. Because, after all, they’re here illegally, which makes it more difficult to get said entitlements.”
It makes it more difficult to get certain kinds of cash based assistance, but that is a small part of welfare. In any table of immigrant versus native welfare use its always the one category where the relationship flips.
But Medicaid, education, etc. The really expensive stuff. That’s where Latinos use more then whites and pay less in (because they earn less). A simple look at median per capita income or poverty rates (good proxy for Medicaid rates, etc) should make it immediately clear these people don’t pull their own weight.
Or, we could let them in, tax them, and cut eligibility to entitlements.
“cut eligibility to entitlements”
Does this have any track record of happening?
“cut eligibility to entitlements”
“Does this have any track record of happening?”
Some. Probably more politically viable than mass deportations.
Over at marginal revolution, Peter Schaeffer is fond of pointing out that if you divide all health care expenditures by all hours worked, you get something like $12/hr. Think of the implications of a number like that. If one doesn’t earn much higher wages than that over ones lifetime, then one is a lifetime net beneficiary of a lot of coerced redistribution.
Borjas has also pointed out that there is so much net redistribution to the bottom half of earners, that’s it’s completely implausible that new cheap workers won’t be net beneficiaries of our welfare systems. After all, the whole point is that they are cheaper, right? The cheaper they are, the more expensive for the welfare system.
That’s why proposals like high income floors in excess of $100k for visa applicants make sense.
I hate to say it, but the reason some people make $100k is because of cheap labor and customers.
IMO the solution is cheaper healthcare, not deportation. It is insane that the poor get healthcare too expensive for the rich. There are very few humans made too expensive by rational entitlements programs.
“land scarcity is artificial, due to regulation”
People keep saying this, but its a distraction. San Fransisco hasn’t built new housing to match demand since 1941. Either regulation isn’t the problem, or regulation is such a problem its insane to think we are going to solve it now after failing to do so for 75 years.
Is there a plan for affordable family formation beyond libertarians bitching about NIMBYs for another few decades while the same dynamics play out that did so in the last few decades? What new political economy insights do libertarians have to break the cycle?
I have one game changing idea, but it is proprietary. Otherwise, what kind of miracle would you like?
Not causing housing bubbles?
Tiny homes, which also have regulators to reckon with. But now that all your entertainment can fit in the palm of your hand, nice, mobile houses combine job mobility with frugal living.
If there’s only one solution to a problem and it’s not politically viable, does it really help to start pretending it’s not the solution?
But there really is only one solution. You can only reduce prices by increasing supply or decreasing demand. I guess you could say decreasing demand is a hypothetical second solution. I guess that would entail either convincing rich people that it’s cool to live in studio apartments or killing off large numbers of people.
People look at house prices and put off having kids.
A couple years go by, and suddenly it’s as if there’d been some epidemic that swept through the coastal cities, and the survivors, curiously, seem to be living at least ten feet above street level.
Land value taxation (Henry George), but progressive (only approx), and only starting on houses that twice the national median price (say ~$200k times 2, $400k).
A 1% tax on the value the market (selling price) of the whole house, minus the $400k deduction. So the vast majority of US houses pay no National Real Estate tax, but the (mostly blue) cities with high prices do. Maybe Warren Buffet’s Omaha house would be less, but most rich folk, including Trump, would be paying quite a bit.
This would encourage greater sprawl of the Silicon Valley folk around Palo Alto / Mt. View, and also NYC & Boston; LA has long been sprawling.
Just as many Dems need to be told that “Trump supporters are not the enemy”, it’s also important to note that successful Dem-supporting companies and rich folk from those companies are not the enemy.
Getting prosperity back outside of the cities is not likely to be easy, nor quick, tho more successful small mfg companies would be helpful.
The thing is is that we don’t want sprawl. At least at WTF is up with LA traffic levels. Little Rock, Arkansas can do whatever, but even take Atlanta and grant that that’s non-ideal.
So at that level, we want giant condo buildings hooked up to mass transit systems that avoid jobs/housing mismatches.
Which amusingly means that we want the value of the land itself to get even higher. And then get divided by the 30-story condo building sitting on top of it.
Is there really a housing shortage in San Francisco? Here is a map of rent within 15 minute vicinity of BART station. There is a lot of cheap housing in San Francisco along BART, it’s just on the Oakland side. From West Oakland through Pleasanton the rents are OK. This confirms what housing experts always say, that the US has plenty of housing, it just isn’t necessarily in the best neighborhoods.
https://www.trulia.com/rent-near-sf-bart/
The #1 obvious, effective, and impactful change for urban real estate would be breaking the NAM political machines that control half our major cities. NIMBYs aren’t the problem, they are the solution. Stop requiring them to channel legitimate desires through price and let them be openly political about it.