A Housing Crisis Q&A
By Matthew Quinn, Vice President
America has a housing crisis. The root cause is a shortage of homes and apartments, which has been exacerbated by land shortages, high construction costs and barriers to new supply – including entitlement delays, parking regulations and environmental regulations, among other factors. Below are a few commonly asked questions about the housing shortage and brief answers.
We hear a lot about the housing shortage in America – how big an issue is this? America is short on housing, although the estimates of the magnitude of the shortage vary widely. A recent study by the National Association of Realtors put the number of immediately needed housing units nationwide at 5,500,000 while a 2021 Freddie Mac study pegged it at 3,800,000. This “shortage” includes what is needed to sustain household growth (i.e. we need the kids to move out of the basement), replacements for units at the end of their useful life, second home demand and vacant units to maintain an efficient marketplace. Meanwhile, Americans are building about 1,500,000 units per year. So even if demand magically halted – which it won’t – it would still take three years to build enough homes to meet today’s need and by then we’ll be further behind.
If demand for housing is through the roof, why don’t developers just build more homes? For starters, home building is expensive. Land in desirable areas is scarce and prices are high. Material costs are at all-time highs and there is an historic labor shortage. It can take years to get the necessary government approvals and entitlements – especially in places where demand for housing is particularly strong – so a homebuilding venture is inherently speculative and margins for homebuilders can be razor thin. For many real estate investors, there are easier ways to make a profit, including buying and renovating existing homes.
Why doesn’t the government step in and make it easier for developers to get housing permits? There are about 80,000,000 homeowners in the U.S. and a meaningful portion of them don’t want more housing, especially affordable units, in their neighborhoods. This unofficial lobbying group known as NIMBY’s (not in my backyard) is big and boisterous and rears its head at community planning hearings and city council meetings. And because of their numbers, they make it difficult for elected officials to create laws aimed at solving supply issues like increasing density, building government subsidized affordable housing projects and reducing environmental red tape.
How do we overcome pushback on densification from existing homeowners? Since governments can’t seem to convince these NIMBY’s to accept higher density, they’ve started forcing their hands. In California, where owners of million-dollar homes are stepping over homeless people on the sidewalks, the state legislature has realized it’s a humanitarian crisis and in September passed three statewide housing densification and permit streamlining statutes to boost construction. To no one’s surprise, the rebellions began immediately and cities and neighborhood groups are pushing back with numerous lawsuits already filed.
Do other countries have this problem or is it unique to America? Unfortunately, this is a worldwide problem that has been exacerbated by a reduction in construction due to the Covid-19 pandemic. The problem exists in both democratic and authoritarian countries where low inventory and high demand have caused skyrocketing rents and home prices. Politicians in these countries have suggested a wide range of potential remedies including nationalizing private property, converting vacant office/retail into residential housing, banning foreign homebuyers, expanding tenants’ rights, increasing density in suburban areas and rent control, to name a few.
Some solutions have been proposed – which of these fixes are good policy? Policies aimed at artificially controlling pricing like rent control and rent caps have been proven to make the problem worse by disincentivizing future development and further reducing supply. Given the choice, a developer will build apartments in an area without rent control so the areas with rent control see less development in the long run. Rent control can also create a mismatch between tenants and apartments (i.e. once a tenant secures a rent-controlled apartment, they may never leave even if they need less space/fewer bedrooms in the future) and a decay in the quality of rental housing as landlords become disincentivized to improve their properties or make necessary repairs.
The only real solution for America’s housing crisis is increasing supply and the supply-side policies aimed at solving the problem – increasing density, building more affordable housing, speeding up approvals and removing environmental roadblocks – are among the best long-term solutions. The recent densification and permit streamlining laws passed in California are a big step in the right direction and policy makers around the U.S. should be taking notes.
Matt Quinn is Vice President at Pathfinder Partners, focusing on asset management activities. Prior to joining Pathfinder in 2009, Matt worked with a San Diego-based firm which consulted on mergers and acquisitions and with the Wealth Management division of a California regional bank. He can be reached at email@example.com
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