Acknowledging the Majority’s Pain

The financial crisis of 2008 -10 illustrated the immense danger of a malfunctioning housing market. According to The Economist, between 2000 and 2007, America’s household debt rose from 104% to 144% of household income, and house prices rose by 50% in real terms. San Francisco and other large metropolitan areas in the U.S. are experiencing rents that represent 40% of the average person’s earnings. Housing is too expensive, damaging the economy and poisoning politics.

The Great Recessions was a symptom and reminder that the next crisis was yet to come. And here we are again bearing the large costs of the COVID-19 crisis in terms of health, lives lost, and efforts by individuals, private institutions, and governments to mitigate those health impacts. Once more a wave of unpaid rents and loan defaults, accompanied by massive unemployment led to a recession.

The housing shortage mixed with strong buyer demand since the pandemic is prompting home prices to rise rapidly. According to the National Association of Realtors, the median existing-home price for all housing types in February 2021 was $313,000, up 15.8% compared to a year earlier.

The housing shortage is most prominent among entry-level homes, and it’s making it more expensive for first-time buyers to enter the market. It is a recipe for frustration for the Millennial generation’s housing aspirations as a benchmark of economic stability. Costly housing is also bad for the growing population of renters, forcing them to spend less on other goods and services. And finally, it is unsustainable for an economy that relies on homebuyers taking on large debts. So how did we arrive, once again, at this precarious state of affairs?

There are three major culprits. First, current property taxes reduce the profitability of investments, discouraging developers, and entrepreneurs willing to invest in low-income neighborhoods. When we think about the specific challenges facing less affluent neighborhoods and those overcoming decades of neglect and conflict, it becomes even more clear why traditional property taxes are a barrier to needed progress. 

Second, overlending and cheap lending, makes households bid up house prices to unsustainable levels. This situation has naturally led to extremes. Potential buyers compete for an already limited supply of housing units, most of them at a price they can not afford unless they borrow more. Banks, in turn, see the value going up and lend even more in a vicious speculative circle leading to systematic overvaluation.

Artificial supply restriction, our third culprit, has made global house prices quadruple in real terms over the past 70 years, according to The Economist. Overtight land regulations are the root cause of high house prices. Landlords and homeowners have, collectively, created a housing shortage. This has been achieved through a series of ordinances preventing the construction of new buildings or limiting land use through height restrictions on building and parking ratios. Common land-use regulations across America include zoning rules which allow only single-family houses and prevent the construction of apartments.