The Surprising Reason American Housing Is So Expensive

US housing is expensive. The average house costs seven years of the median household’s income. And, as a result, nearly half of Americans spend more than 30% of their income on rent.

That’s why, in today’s post, I want to go over a recent academic article that attempts to explain why this is the case.

The basic reason for these housing prices, they argue, is pretty simple. In the places where people want to live, regulations make it difficult and expensive to build new housing. Since the supply of housing is artificially restricted but the number of people wanting to live in it only increases, the price of housing skyrockets.

To fix this issue, policymakers need to make it so that it’s easier to build housing. They need to make zoning laws less restrictive so that more, denser, and taller houses can be built. They need to modify construction regulations so that housing can be built faster and more cheaply. And, they need to reduce environmental regulations so that housing development can’t be so easily challenged.

Unfortunately, they rarely do this. One study found that, between 2006 and 2018, not a single one of the most restrictive municipalities in California reduced its housing regulations.

This explains why it costs 2.3 times as much to build a square foot of housing in California, where housing is restricted, compared to Texas, where it’s built freely.

The traditional story for why this occurs, they explain, is called the “homevoter hypothesis.” The basic idea is that, because homeowners are financially tied to their houses, they have a strong incentive to keep housing expensive.

If they learn that parts of their neighborhood may be developed, they become concerned that such development could devalue their housing by making the neighborhood uglier, noisier, and busier. To combat this development (and to protect their investment), they unite together to pass laws and regulations that make housing more difficult to build.

Because renters are often newer to neighborhoods and lack membership in homeowners’ associations, they’re unable to gather enough political power to fight against such laws.

This narrative is compelling, but it doesn’t seem to tell the whole story.

For one, there’s no evidence to suggest that high homeownership rates correlate with restrictive housing policies. This suggests that merely owning a home doesn’t cause people to support restricting the housing supply.

For two, both homeowners and renters have been found to have similar levels of support for housing development.

And, for three, when policymakers do pass laws to increase housing affordability, they rarely create policies that actually enable more development, instead focusing on policies that keep the housing supply the same while artificially modifying prices, which, of course, does not effectively reduce prices long-term.

Given this, the authors offer another explanation for why US housing is expensive - Americans don’t understand how housing markets work.

When 6,500 Americans were surveyed, only 31% were able to accurately state that when the housing supply increases, rent will decrease. And, when a sample of these respondents were asked to take the survey again, their answers to this question were so inconsistent that it was almost as though they were randomly guessing.

Similarly, when asked who was to blame for the cost of housing, the majority of Americans blamed landlords and housing developers, despite the fact that economists mostly blame anti-development activists, homeowners, and environmentalists.

And, as a result, when surveyed, Americans overwhelmingly favor rent control, down-payment subsidies, and the development of affordable housing, despite the fact that these solutions don’t fix housing affordability long-term. (In case you doubt that this is true, here’s some important facts: Only 2% of economists believe that rent control on high-density apartments will make the middle class better off. And, when the housing supply is low, housing subsidies can actually increase both the cost of housing and the cost of rent.)

So, what should we do about this?

Well, the writers of the article suggest two approaches.

First, they argue that we need to inform more people that building more houses actually makes rent cheaper.

One way to do this, they suggest, is by bringing more attention to the success of these policies in real life.

For instance, in New Zealand, upzoning the city caused massive amounts of development and, as a result, a twenty to thirty percent reduction in rent compared to a control city.

And, similarly, a 1.4% increase in new housing in Sao Paulo, Brazil led to a .4% to .9% decline in rents.

Second, they argue that we should implement more policies like those of Israel and South Korea.

In these countries, condo owners are able to vote to redevelop their own properties and to reap some of the profits. Since this gives them a financial incentive to support redevelopment, they end up doing so. Even if they still fail to understand the macro picture of how housing markets work, their behaviors are now, at least, aligned with the interests of the general public.