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The United States is in the grip of a housing affordability crisis, especially in its high-productivity cities like San Francisco, Seattle, and New York. In addition to harming individuals, this is also having a deleterious effect on the country’s economic growth. But what is behind this problem, and what can be done to remedy it? Lynn Fisher recently joined me on my podcast to discuss.
Dr. Fisher recently joined AEI as a resident scholar and co-director of the Center on Housing Markets and Finance. Before this she served on the faculty at Washington State University and the University of North Carolina, and was director of the Housing Affordability Initiative at MIT.
Below is an abbreviated transcript of our conversation. You can subscribe to my podcast on iTunes or Stitcher, or read our entire discussion here.
Is there a long-term systemic problem with housing in America right now, or is it more a short-term thing as we continue to get our bearings after the Great Recession?
No I think there’s a very fundamental and very long-term issue and it’s something unfortunately that’s not going to be easy to fix. And that is: we’re not good at building new supply. We’re not good at letting our cities transform themselves, remake themselves over time. We tend to use rules. We tend to have all sorts of land use regulation, zoning, et cetera, that locks in our city.
So what’s built is there and we like it. People who occupy it say, well, I don’t want my home to change. I don’t want my neighborhood to change. And so our cities become ossified. They’re not allowed to be redeveloped or to change over time.
I was just doing a little bit of research on condominiums, and because I’m familiar with it I’m using a Boston data set. And if you look at downtown Boston, the median condo was built in 1905. This is stuff that’s right downtown. It’s right by Boston Garden. It’s beautiful. It has all sorts of great amenities attached to it. But we haven’t redeveloped any of that into higher density to provide more housing, and to do other things. Maybe it should be office space now. I don’t know. Cities evolve. We have all these rules, all of these desires really to keep things as they are. And that’s not going to work out so well.
When people hear I work at a think tank they sometimes ask me, “Are we going to have another housing crisis? That’s kind of what it sounds like — lots of lots of credit out there, housing prices going up.” Is there a risk that we’ll have another big drop?
My concern right now is that house prices — for whatever reason, I think it’s a combination of the supply then adding additional mortgage credit to a constrained supply — are accelerating again, which is kind of weird this far into the recovery. We might have expected the fast house appreciation early in the recovery, but then slow down a little bit. And so if you look at all of our house price models and forecasting, every model keeps predicting a slowdown and yet it doesn’t happen because we keep just incrementally adding more credit. We’re doing this pro-cyclical mortgage credit thing that we like to do.
The thing we’ve been watching a lot lately is debt-to-income ratios. So for every dollar of income people have, we allow them to have a little bit more debt, so they can pay more for a house and in a supply constraint place that’s immediately capitalized into house prices. And so the Federal Housing Administration, you can go up to a 57 DTI, you can pay nearly 60 percent of your income toward housing, which does not sound sustainable to me in any way, shape, or form. About 20 percent of new lending out of FHA has DTI greater than 50 percent right now. So that’s scary that we’re allowing that much.
Some politicians say we’d like people to own homes: It’s good for communities, there’s all these spillovers, people still want to own homes, and we should try to get that number back up. Economically, is it good if a lot more people own homes?
We as a society have believed that homeownership is good. That’s just part of the US belief system. But we certainly proved that we can push that too far over the last crisis. Having stable communities, having people be invested in their neighborhoods — there’s a lot of good stuff that comes out of that. Investment in our kids, providing them stability and a neighborhood, etc.
But surely you can push that too far. I think the big piece that I’ve taken a look at over time is mobility; we definitely know that homeowners are less mobile than renters. Now, part of that’s by choice. You choose to settle down, have kids, and do your thing. But you can certainly push that too far and make it difficult for people to chase a new opportunity, to go find a better way or a better situation for them. Where that perfect spot is I don’t think is perfectly obvious. Like I said, 64 to 65 percent seems to be something sustainable.
If you’re the housing tsar of San Francisco, what do you do?
It’s not clear that you can actually build enough housing there to do it, but I think you have to start allowing just higher density by right. Cities have accrued a lot of bargaining power over time relative to home builders and developers. We used to create a zoning map and the map says you can have this many units of this land use type and that was by right.
Now a lot of that stuff’s conditional, meaning that there’s a lot of bargaining that happens that increases the cost of supplies. So I think you have to have more by right zoning, which means you don’t have to bargain for it. It’s a right of the landowner. Whoever has control of the land can say you can build 20 units per acre, say. You don’t have to go in and bargain over that and give things away and basically bargain part of the surplus from doing that away.
And so even if it’s just incremental density at this point, allowing townhomes and duplexes and places that were originally single family homes to be redeveloped into 20 unit buildings, I think you would see the market take care of itself.
To what extent is this really kind of a federal issue versus a local issue?
There’s huge tension here. At least in the US it has fundamentally been a local issue because localities have largely had the ability to determine land-use regulations, zoning, et cetera. And in some places that’s more of an issue than others. Some places are super highly fragmented like New Jersey where you have tons and tons of cities over a very small land area. In California, it’s more county oriented, so it’s bigger based and you have a little bit more thoughtfulness about some things.
But the tension of course is that for the federal government to tell local communities how to zone would be a disaster. I mean, people would really I think be quite up in arms about that kind of oversight. And that’s certainly one of the reactions we’ve seen with some of the affirmatively furthering fair housing proposals: this concern that the federal government is starting to try to dictate in some ways what happens at a local level.
State governments ostensibly control who has the right to zone and enact land-use regulations. I think the trick to that would be allowing locality’s to figure out how they were going to respond to a mandate for more housing, to allow them to figure out here versus there and not micromanage it — not require a lot of planning, not require a lot of bureaucratic responses to rules that people can game.
If I was tsar for the day and said, here’s how we’re going to create more housing, I would think that the new housing that was created would have to serve a greater distribution according to income than it does right now, which means you would have to rethink things like how California now wants to require solar on all new houses. Some of those things would have to be rethought and there would have to be some minimal amount of housing that will be built.
Pick whatever carrot or stick that you want but I would say you have to build more housing, and we’ll come back in five years and see how you did. We don’t want to create something terribly rule oriented.
“We as a society have believed that homeownership is good. That’s just part of the US belief system. But we certainly proved that we can push that too far over the last crisis.”
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