The Housing Shortage Is Larger Than You Think: Part 1

Joseph Lawler has an article in the Washington Examiner that does a good job of surveying the potential scope of the housing supply shortage. He notes the wide range of estimates about the number of additional units needed to reclaim a reasonable level of affordability, citing estimates from as little as a couple million to as many as 20 million.

Vacancy Benchmark

One problem with the low estimates is that their estimate of a neutral vacancy rate is invariably too low. Vacancies for rents are like an unemployment rate for wages. When vacancies are higher, rents remain low. Excess rent inflation has been endemic for at least 30 years. It would take 5 million vacant units just to get back to mid-2000 vacancy rates that might have been associated with moderating rents, had they been allowed to persist. Most vacancy benchmarks are too low, and are benchmarked to a housing market with rising rents that was not being sustainably supplied.

Filtering. It’s always filtering.

Lawler makes another good point. He writes:

So, which figure is closer to the truth?

It depends in part on what the goal is for eliminating shortages and improving affordability.

If the goal is to get the United States back to pre-2000 levels of vacancies and housing prices, perhaps only 2 million to 5 million additional homes would be needed...

But another way of looking at the problem is… with more like 20 million new homes, housing would be far more abundant and cheaper. Not only would fewer people struggle to pay rent or keep up with their mortgage, and not only would household formation increase, but more people would also be able to afford vacation homes, pied-a-terre, and the like. Families along the income spectrum would see their standards of living rise.

This is an important element of getting back to affordability. I have touched on this issue before. The housing market, from top to bottom, is interconnected. Families are in a constant state of flux, moving geographically and through lifecycles - earning more or less income, kids being born then moving on to start their own households, going to school, working, retiring, buying second homes, time shares, retirement homes, etc. We all have a foot in various parts of the housing market at different times in our lives. When a butterfly flaps its wings in a New York basement studio apartment, the rent changes on a retiree’s mobile home in Boca Raton.

When there is a shortage of a basic human need, we naturally become very stingy about its use and judgmental about its distribution. And, it is the most socially desirable uses that we count when we try to add up from the bottom how many homes we need.

For a start, we don’t need high tier homes above, say, $500,000. There are plenty of those. And, those families don’t need our concern. So, most of the new homes that are getting built today wouldn’t make our bottom up list of necessary supply.

Since filtering is the most powerful source of affordable housing, those are millions of homes that would be critical elements of any return to reasonable affordability. But, if you’re explicitly building a bottom up count of “homes we need” you just can’t say, “We could use 5 million luxury 3,000 square foot homes for wealthy families.”

You also can’t include pied-a-terre or city, country, or vacation homes. Though, surely, if LA permits enough new homes that working class families can return to a norm of net migration into LA, other types of families will also be more likely to return. And, most of those families won’t exactly be straight out of a Dorothea Lange photo.

So, you can say that LA has lost, say, 2 million working class families through regional displacement, and that adds another 2 million homes to your bottom up model of how many homes we need. But, what if 2 million homes would really help LA, but it would lead to an inflow of a million working class families and a million other families?

How are you going to make sure your 2 million new homes go to the families that qualified for your socially desirable list of needed housing? That’s basically what failing cities do today. I mean, they don’t actually permit 2 million homes to reverse decades of regional displacement. No. They debate whether this condo building is too luxury, or whether that workforce housing is in just the right location, or whether those subsidized apartments will bring crime to the surrounding neighborhoods. They try to carve out special housing for teachers and police officers. And, all that noise doesn’t solve the problem. In fact, it is the actual problem.

As I have written about before, the price trends of inadequate housing portray a systematic set of behaviors. The richest households compromise down. The poorest households eventually settle into the worst housing they can stand to live in and keep paying higher rents until rising rents finally force someone to be the next marginal family that is displaced. Every family exists on a scale between those two extremes.

How do you add that up to come up with the “number of homes” we need? LA needs to improve and expand its high tier stock so that families shift up to better homes and low tier rents decline. At the margin, the thing that would prevent 100,000 working class families from being displaced this year from LA isn’t a new place for them. The thing that will keep them there is if the rent of the place they live in finally stops rising 5% a year. Maybe someday new homes that poor, rent-burdened families could move up into would be a part of a housing abundant LA, but for now, they are losing 100,000 families annually. Just keeping rents level for those 100,000 families, in the places they live now, would be a huge success. That requires building homes for other families.

Maybe it will take building 300,000 more units to get those 100,000 families to stay. Then that’s what it takes. Those 300,000 units will involve a lot of families who weren’t on the brink of regional displacement expanding their housing footprint. If that seems unfair, I can assure you it is more fair than any plausible scenario that involves building less than 300,000 units.

It is a lot harder to direct the consumption of 140 million families according to your sense of egalitarian justice than it is to make a list of “needed homes”. And, these lists that count up a shortage of 2 or 4 or 6 million homes sort of presume that you can do both. It’s a sort of presumption of omission - neglecting to consider that new homes will not be consumed in the order you have morally approved of them. It’s sort of the housing equivalent of stocking grocery stores according to those dysfunctional food stamps programs with overbearing rules about what food and beverages can or can’t be purchased, based on a diet that nobody shopping with their own money follows.

“We estimate that we currently have a grocery shortage of generous amounts of raw vegetables, no sugary drinks or chips, and a moderate amount of lean meat and bread.”

Categories in the real world aren’t as clear as the archetypes in your list.

Finally, what about second homes, homes owned by foreigners, etc.?

First, it is troublesome how common it is to see housing stress lead to anti-immigrant sentiment. These are hard-working families just trying to make a better life for their children by coming to the country that famously provides that opportunity, and, in fact, provided it for the ancestors of most everyone reading this post. One would normally expect these families to have a foot in the door on the list of socially acceptable categories of housing demand. On the other hand, maintaining the American dedication to immigration has always been a bit of an uphill battle, especially in times of need - even contrived, self-imposed need.

Immigration has been down by millions since the Great Recession. Any continuation of earlier trends would have included millions of homes that would currently be shelter for immigrant families. You think you’re going to put those on the list of “homes we need”? Good luck. But we should build them. We need to build them. We would have built millions of them already if we hadn’t broken our housing market and our economy in 2008.

What about second homes? This brings to mind Saudi princes in 5th Avenue penthouses. But, for every Saudi prince, there are a thousand retired Midwestern farmers and school teachers who have a mobile home in the south that they travel to every winter. My grandparents’ summer farmhouse still had a functioning outhouse when they bought a mobile home in Florida.

Imagine how confusing that bottom up list of homes that we need or don’t need is going to get when you get to the point of deciding whether the homes on the list include seasonal second homes on chassis in a drained swamp with a tricycle and a golf cart in the car port. Surely second homes aren’t part of the 5 million homes we “need”. So, do we count the new units in the mobile home court outside of Orlando in our construction target? Do we even allow them?

And, I hate to tell you, but a lot of those park models are used by foreigners. Not the Saudi prince, but school teachers and farmers from Alberta. So, what happens if we plan an extra million units to meet our quantified shortage, and 100,000 of them are park models claimed by retired Albertan farmers and school teachers. Do we kick them out? Do we pass a law that Canadian farmers aren’t welcome here because we had a plan to fix our million home shortage and they are messing it up?

The irony is that, currently, the only way to get a mobile home park approved in Arizona is to promise that it will only be filled with the likes of Midwestern and Canadian retirees living there part of the year.

Anyway, my point is, it is simply impossible to imagine and determine the appropriate use of each home, and if you think you counted 5 million of them, it will almost certainly require 15 million or 20 million to refill all the reservoirs of housing demand that have been compromised along with the homes that make the list. And, if you think you can divine a strict set of rules to make sure that the 5 million homes you identified are only built for their intended use, then you actually will not have changed our dominant housing policy framework a bit. You’ll just be one more voice among the din demanding deprivation, in practice.

The models that claim to identify “x million” specific units that we need to build to address the shortage are NIMBY models. They aren’t necessarily intended to be. But they are. They are either substantial underestimates of the construction needed to create the units they have identified, or they would have to be commitments to the gatekeeping process that has created our historically peculiar problem.

Those added up estimates seem more concrete than the 20 million unit estimate that the Congressional Joint Economic Committee Republicans arrived at with more abstract models. Models can be very wrong. But in a case like this, the concrete counts almost certainly are.