The latest report from the Joint Center for Housing Studies of Harvard University says:  "Overall progress since the housing market crash has been modest, particularly in light of the strong economy.  With rental demand on the rise, the number of cost-burdened renters is just short of record levels and millions higher than in 2001. And while the overall homeless population has fallen for five years, unsheltered homelessness has ticked up, especially in the Western states with the highest housing costs.  The inability of so many individuals and families to secure affordable housing reflects the fact that increases in rents and existing home prices have continued to outrun income growth.  In addition, the prices of new housing are largely affordable only to households with substantial incomes.  Today’s tight housing market conditions also represent the cumulative impact of years of inadequate federal funding for rental assistance.  While states and localities have begun to devote more (and, in some cases, considerably more) resources to affordable housing, their efforts do not come close to the scale of the problem."  Read the entire report here.

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When the Bank of England studied 254 American metropolitan areas, they found that ballooning home prices no longer stimulate new construction as would typically be expected.  As a result, there is no corresponding increase in housing supply, which will ultimately cause a bubble.  This is decimating housing affordability.  As concerning, the study unveils what this is doing "to wealth inequality, particularly intergenerational inequality":

 

"The combination of high house prices and a tight supply of homes makes it difficult for young people and households with little liquid assets to become homeowners.  This may have a direct impact on household inequality, by favoring existing homeowners, which tend to be older and wealthier, as their housing equity increases.  Despite the recent findings in the literature about the economic costs of regulation, local zoning laws have actually been 30 tightening across the country, and this has reduced supply elasticities.  The biggest challenge in relaxing local housing restrictions comes from existing homeowners not wanting more affordable homes, as higher house prices mean that the value of their asset goes up.  In addition, existing homeowners also want to protect the amenities in their city, as new housing brings in more people, creating a congestion in access to public goods, such as crowded schools and roads."  Read the entire report here.

 

Across America, cities and other localities are in desperate need of rental housing.  But often red tape and bureaucracy (i.e. zoning, building codes, approvals, etc.) get in the way of making that happen.  California is a great example.  On the campaign trail, California governor hopeful Gavin Newsom (who ultimately won) announced an aggressive plan to build 3.5 million new homes by 2025 to help solve what is now a full-blown affordability crisis in California.  

 

Unfortunately, that is easier said than done.  In February 2019, a study from the University of California, Los Angeles (UCLA) revealed that "not only do we find that California’s housing capacity falls short of the 3.5 million units proposed in Newsom’s gubernatorial campaign, we also find that much of the planned capacity is located in the relatively lower demand, more rural parts of the state.  The limited new housing construction in California in the face of increasingly high rents and prices presents a challenge: high demand communities do not plan for or permit housing and planned capacity in low-demand areas remains unbuilt."  Read the entire report here.

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California is the perfect case study for housing.  According to the Economist, "the state with the largest share of people in poverty is California.  As the most populous state, it also has by far the largest number of poor people, 7.4 million."  But it goes on to say, "California is not only America’s poorest state.  It is also among the richest.  According to the Census Bureau, its median household income in 2016 was $11,500 above the national average."

 

Hmmm....so what's up?

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The Economist again:  "(In California) poverty is not a result of economic decline or lack of jobs.  California’s GDP rose 78% in real terms in the two decades to 2017, overtaking Britain to become the world’s fifth-largest economy. The number of people with jobs has grown almost without interruption since 2011.  In September unemployment stood at just 4.1%.  But the gains from growth have been distributed unequally...The big problem in California is not the stagnation of low incomes per se.  It is stagnation relative to costs – in particular the cost of housing.  As a rule of thumb, in rich countries household budgets come under strain once housing accounts for more than a third of income. California’s poor are far beyond that.  According to the California Budget and Policy Center, 56% of those living below twice the federal poverty line (that is, below $24,280 for one person) are spending more than half of their income on housing."  Ouch. 

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Clearly reform is needed, but the federal government has limited control over state and local land-use policy.  So, the federal government should incentivize cities and states to ease up on land use restrictions and other undue regulations, modernize zoning laws and code requirements, streamline permitting processes, and provide a broader and more affordable range of housing options to alleviate tight housing market conditions.

 

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Evidence:

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"The State of the Nation's Housing 2019."  Joint Center for Housing Studies of Harvard University. 

Knut Are Aastveit, Bruno Albuquerque and André Anundsen.  "Changing Supply Elasticities and Regional Housing Booms."  Bank of England.  3 Jan 2020

Paavo Monkkonen and Spike Friedman.  "Not Nearly Enough: California Lacks Capacity to Meet Lofty Housing Goals."  UCLA Lewis Center.  February 2019

"Why One of America’s Richest States is Also Its Poorest."  Economist.  27 Oct 2018