Senate Banking Hearing on Housing Roadblocks

It is great to see the housing issue get some attention. Yesterday the Senate Banking committee held a “Hearing on Housing Roadblocks: Paving a New Way to Address Affordability”.

I haven’t watched the entire nearly 3 hours, but I’ve caught much of it. The panel is hit and miss.

Ed Glaeser from Harvard had some great comments.

Our nation is poorer as a result of this because we move to places where it is possible to build rather than places in which people would necessarily want to live and that means that our overall GDP is lower than it was. That means fewer tax dollars. That means less ability to meet our foreign policy requirements. All of that weakens us fundamentally as a country. I believe that we are also a country that has less upward mobility because we particularly regulate those communities that are really good at turning kids of poor parents into middle income adults. Those are the areas that are most restrictive when we look across areas. I’m relying on my colleague Raj Chetty’s data on upward mobility you really see this in the data. It’s really tragic. There are some parts of America that are just great at turning poor kids into middle income adults. We should be trying to make sure that as many kids manage to get there as possible and yet we don’t because of local land use regulations that just say no. And it is precisely because these local rules have national consequences that I think it is appropriate for your committee to take up this issue. This is no longer just an issue for one town or one area. This is an issue that in fact impacts all of us. It impacts the intergenerational accumulation of wealth… Its redistribution across space and it just makes us less dynamic than we could be. (2:28)

When housing worked, private capital went to provide housing where demand was highest and you certainly see this in the data. You see this in the 50s, 60s, and 70s. Both across metropolitan areas and within metropolitan areas. We built housing in places where demand was higher, where prices were higher. And that building process helped those prices come down. That building process took care of demand. That really ceased… The places that are expensive don’t build a lot. The places that build a lot aren’t expensive. And that’s because the regulatory differences across space are determining where private capital is going. Not the demand. Not the economic core of what makes one place more valuable than the other. Not the sort of fundamental need for opportunity in one place. And so these local regulations are shaping our country. They’re shaping where private capital goes. They’re shaping where we get new homes. They’re shaping where we get new businesses. And they’re all being decided at a hyper local level. I love federalism in lots of different ways. I love individual choice. But none of these local town councils… is making decisions saying what would be best for America... And that’s, again, why I think it is so valuable that your committee is taking up this topic. That we sort of need a national voice on this. (2:33)

Glaeser’s comments are an excellent description of a certain problem, and of its consequences. He’s talking about a city like New York City, and in Figure 1, you can see that New York City has very low housing production.

It is a place where poor kids can become middle class adults. It is also a place where poor adults can access public and private services better. Cities are helpful places for poor families for both reasons. In the 20th century, we made cities illegal. We made them illegal for the reasons Glaeser outlines - we gave locals too much power to object to changes in their immediate area.

That’s why I don’t think it’s an accident, or a coincidence, that “we particularly regulate those communities that are really good at turning kids of poor parents into middle income adults.” Cities have lots of economic potential and services for poor families because there are a lot of people there to be of service. They stopped approving housing when we gave locals too much power for the same reason - there are a lot of people there to object.

This was a nationwide trend, so there are a few cities, which grew before zoning, that serve a wide range of their residents in the way that cities always have. And there are a lot of cities that became cities in the 20th century that are especially difficult places to live if you are poor, don’t have a car, and would be served well by being near lots of people where many public and private services were accessible.

Austin is in Figure 1, and it is a city that appears to be succeeding in turning back - in allowing itself to densify and become a place where rich and poor families can aspire and be served. It’s housing production is both high and increasingly multi-family and infill.

That’s what New York used to be, and should be.

But, I think that the consequences Glaeser describes are actually only the third most important problem that the housing crisis has created.

The lack of construction in cities like New York has gotten so bad that existing residents have to move away - by the tens of thousands every year. By the numbers, the largest problem the “Closed Access” cities create isn’t that they block geographic mobility. It’s that they create it. People have to move away because staying there was forcing them into poverty. The 2000s housing boom was created by the migration into places like Arizona and Florida that resulted from that displacement.

So, I would say that Glaeser is describing a minority of the problem. Before 2008, we were generally building enough homes, but a few places created mass displacement. The homes were built in other places. Home prices in the Closed Access cities had to rise to the level that would induce millions of families to leave for economic reasons. It’s sort of backward to think of it in terms of high prices forcing them out. A certain number of families must be forced out, and prices will necessarily rise until that number is reached.

I would consider that problem to be more damning and more of a crisis than the problem that some families choose not to move into those cities. Actually, I think most of the families that would move into those cities still do. They make compromises in the type of homes and neighborhoods they move into there in order to make the move. And, the families that move out are the families that have run out of those compromises.

Those problems were at crisis level by 2008, and are still problems, but since 2008, they have been much smaller problems than the national supply crisis that was created by the mortgage crackdown.

First, note in Figure 1 that there was only a brief downturn in housing construction in New York City after 2008. It has been back up to its (paltry) pre-2008 levels for a decade.

Next, look at Alabama. Like almost every other region, it had a housing production rate before 2008 that was much higher than New York City’s. But, it was flip-flopped. Alabama annually approved about 5 single-family homes per thousand residents and only about 1 apartment. The mortgage crackdown in 2008 permanently collapsed single-family construction in Alabama, so for the 17 years since then, housing production has been roughly half what it was. In recent years, total housing production in Alabama has been near the rate of building in the 1990s, which wasn’t a particularly strong decade for homebuilding. But, even if Alabama is finally nudging back to a sustainable construction rate, it isn’t hard to add up a gap in housing supply from the post-2008 depression that accumulates to 5% of the state’s housing stock or more.

Since 2008, building in Alabama hasn’t been much higher than it had been in New York City.

Most of the country looks like this. Since 2008, households don’t move out of New York City into homes built in other places. Now, households move to other places that also aren’t building enough homes, and so the rents rise everywhere.

Everyone at the hearing seemed to agree and reiterate that the housing affordability problem is now everywhere - urban and rural.

Senator Elizabeth Warren has a housing bill, with some decent pieces in it, but that broadly misses the point. She wants to throw money around to incentivize states and cities to build better.

Now, surely, Birmingham and the other Alabama metropolitan areas suffer the same disease as the rest of the country. They made dense city building largely illegal, and more infill housing would be constructed if they hadn’t. But, other than Birmingham, there isn’t a single metropolitan area with more than 500,000 residents. Zoning isn’t that binding on total construction activity at that size.

All the cities in Alabama didn’t suddenly change their land use rules in 2008. And, they sure as heck didn’t suddenly change their land use rules to obstruct single-family housing.

Alabama doesn’t need federal subsidies or sticks and carrots. Under current conditions, there isn’t a lot Alabama could do to induce more homebuilding.

And, since everyone seems to agree that the problem is now universal, and not just in the few cities that Glaeser focuses on, then it should be clear that Glaeser and Warren and the rest of them are missing an obvious point. A universal housing affordability problem that reaches into rural areas cannot possibly be a land use regulation problem. It has to be something else. Something universal. Something that would leave New York City’s housing production relatively unchanged after 2008, but would collapse most of Alabama’s single-family housing construction market for a decade.

That cause is the mortgage crackdown. But, more directly, regarding the focus of the hearing, the cause definitely is not the things they were discussing.

Don’t get me wrong. The things they were discussing are problems. New York City needed to approve more housing in 2005, and it still needs to approve more housing today. City-building needs to be legal again. We need to be able to build new New York Cities where cities can provide value. That was true in 2005. It is true in 2025. It will be increasingly true in every city across the country that continues to grow under the constraints of 20th century zoning regulations.

But, over the past 20 years, rents and prices have been rising everywhere, and nothing anyone said at that hearing has much to do with fixing it. That hearing was about problems that predate 2008, but the 20 million unit national shortage of housing is entirely due to all the places like Alabama where single-family housing construction collapsed.

The solution to that problem is entirely within the purview of the federal government. Reverse the overzealous mortgage regulations that Senator Warren championed after 2008.

There is a universally self-imposed moratorium on discussing the actual problem. There was actually a panelist who is a mortgage executive. Lee Jelenic from United Wholesale Mortgage. He focused on innovations in streamlining underwriting. And, nothing he said sounded wrong. They all seemed like good ideas. He said, “There are opportunities to provide alternatives where you don’t increase the systemic risk, don’t increase the lender risk, don’t increase consumer risk. But you’re just leveraging modern day technology and innovation…to reduce costs.” (1:50)

That’s great. But, notice how the window of what can be discussed and the actual solution to the problem is a Venn Diagram with two non-intersecting sets. Jelenic had to set his recommendations within a set that doesn’t include the thing we need. We need more systemic risk, more lender risk, more consumer risk, in mortgages.

This is why I am afraid that it is more likely that the problem will get much worse, by banning large-scale single-family rental construction, than it is that the market will be allowed to heal with more generous mortgage lending. There isn’t a universal self-censorship about banning single-family rental investments in mixed company. At most city council meetings or legislative hearings on the topic of housing, you’re likely to hear that demand made. You certainly wouldn’t go nearly 3 hours without someone daring to mention it.

In fact, you can see the seeds of that direction even in Warren’s bill meant to increase housing supply, “The American Housing and Economic Mobility Act”. One of its planks is, “Limits the role of private equity in the housing market.”

Another plank of the bill has seeds of the solution. “Holds financial institutions accountable for providing access to credit for all Americans. Obligations under the Community Reinvestment Act (CRA) to provide credit to low- and moderate income communities are too weak.” That sounds like a step in the right direction. The main impediments to low- and moderate- income mortgage lending are the CFPB, and the FHFA. If they supported those mortgages, nobody would need to be “obligated” to originate them. “The calls are coming from inside the house.”

The silver lining is that there were big problems in housing in 2005 that are bound to get worse until we fix them, and it’s nice to see the Senate grappling with them. But, unfortunately, we managed to make much bigger problems since then, and it would be nice if those were in the universe of things-which-can-be-spoken before 2045.