This commentary originally appeared in Forbes on June 19, 2015.
“The rent is too damn high,” but, not to worry, your government is on the case, seeking to remedy problems largely of its own making with more market distorting rules that will drive housing costs even higher.
But expecting government to make housing affordable is akin to expecting government to make college affordable—how’d that turn out?
A pending U.S. Supreme Court decision on the federal Fair Housing Act of 1968 (Texas Dept. of Housing and Community Affairs v. The Inclusive Communities Project) may collide with a vigorous new push from Pres. Obama’s Department of Housing and Urban Development (HUD) to increase its central planning powers over America’s housing market. Specifically, HUD is compelling wealthy neighborhoods to build subsidized housing for poor minorities and then ensure the poor move in, whether they want to or not.
Marin County, California is of the communities targeted by HUD for its lack of minority housing. Marin, a wealthy, largely liberal county just north and across the Golden Gate Bridge from San Francisco, is known for its rolling hills and green space. But, much of this green space exists because political power prevents property owners from developing their own land. This is textbook NIMBYism (Not In My Back Yard) where residents who already have their slice of heaven engage government power to infringe on the property rights of their neighbors who own land and would like to develop it.
HUD isn’t the only party clashing with Marin—Darth Vader’s father, George Lucas, is as well. In 1987, Lucas wanted to expand his studios adjacent to his Marin ranch (walking to work beats flying 400 miles down to Hollywood). But, for 25 years, Marin County elected officials blocked Lucas’ construction plans at the behest of outraged community activists who somehow thought that they had a right to tell Lucas what to do with his land. But Lucas wasn’t done. In 2012, he lined up a developer who wanted the land to build affordable housing. But, this project has stalled as well. Now Lucas has decided to finance the 224-unit affordable housing development himself, saying, “We’ve got enough millionaires here.” If Lucas wins the right to build on his land, the affordable housing could be in place by 2019, some 32 years after Lucas’ original development plans were launched.
California employs a wide arsenal to fight development: fees, taxes, environmental restrictions, water permits, restrictive zoning, carbon dioxide emission considerations, union pressure, and property owners who use political connections to restrict the supply of new product for the market so as to drive up the value of their own property.
Developers who do business in both states said that getting permission to build a strip mall in Texas takes about four to five months while permission to build a similarly-sized development in California takes four to five years.
This red tape comes at a cost: California’s housing market is inelastic, as developers can’t build supply as quickly nor as responsively to meet demand. This is reflected in the latest first quarter 2015 cost of living index from the Council for Community and Economic Research which shows California’s housing index at 203 percent of the national average, a big jump from 176 in 2014.
And this resistance to allowing the market to meet demand doesn’t just affect housing; it can force business to consider out of state options as well. In Bee Cave, Texas, a suburb of Austin, consistently America’s fastest growing large city, a developer is following through on plans to build the largest movie studio west of the Mississippi outside of Hollywood. What George Lucas tried to build in his backyard in 1987 and gave up trying a quarter century later, was presented to the city council and approved in 13 months in Texas.
Inflated costs for homes, offices, and factories driven by government regulations hurt the middle class and the working poor the most. High prices for shelter rob families of discretionary income, shrink the rest of the economy, and drive up poverty.
There is a pattern to housing costs: states with heavier regulatory burdens tend to have higher housing costs than do states with lighter regulations. The Fraser Institute’s annual Economic Freedom of North America study ranks states for their economic freedom. Fraser’s report details taxation, spending, and regulatory burdens, among others, with the data showing a strong correlation between housing prices and heavy regulation in a state.
Ironically, high housing costs caused by layers of government rules that make it difficult for developers to respond to market demand lead to, you guessed it, calls for more government rules—and so on in a vicious circle.
California’s response to high housing costs mirrors the federal response and is typical of the hyperstate model: more rules and more subsidies to address the lack of housing supply caused by the rules in the first place. But government rules and subsidies can only provide a tiny fraction of the demand for affordable housing with governments across America holding lotteries to select those lucky enough to live in below market rate housing.
If California epitomizes the hyperstate model, Texas’ embrace of freedom is the antipode.
Housing costs more than twice the national average in California, the third-highest in the nation. But the average cost for shelter in Texas was 86 percent of the national average in the first quarter of this year.
Houston, America’s fourth-largest city, and, by some measures, the nation’s most diverse city, doesn’t even use zoning.
The vastly different approaches to land use regulations in the two biggest states where one in five Americans call home greatly affect the poverty rates.
The traditional official poverty measure is unaffected by housing costs—in fact, the nation’s official poverty gauge ignores the reality of the cost of living and sets the poverty threshold at the same level in the 48 contiguous states, treating San Francisco (average rent: $3,803) the same as Houston (average rent: $1,752). This is ridiculous, of course, but, it’s government.
The U.S. Census Bureau’s new Supplemental Poverty Measure takes housing costs into account, as well as a wider array of government benefits, costs and taxes. Under this more comprehensive measure, California has the nation’s highest poverty rate, 23.4 percent, giving urgent meaning to the phrase “house poor.” Texas, meanwhile, had a poverty rate of 15.9 percent, matching the national rate.
California and Texas are two of America’s four majority-minority states (Hawaii and New Mexico being the others). California renters, mostly minorities, are likely paying a premium of at least 30 percent above California’s so-called “good weather tax”—the extra price people might be willing to pay for living in a temperate climate. If California’s jobs recovery continues, it is likely that the percentage of poor in the state will remain relatively unchanged, or even rise, as the demand for housing remains unmet in the face of a regulatory thicket.
The best thing the bureaucrats at HUD—or local elected officials for that matter—can do to improve the quantity of affordable housing is to allow the market to work while resisting the urge to play the part of real estate developer.
As a wise economist once said, “…striving for equality by means of a directed economy can result only in an officially enforced inequality…” –Friedrich Hayek