This weekend I published a commentary based on a new paper by UC Davis Law Professor Chris Elmendorf and some colleagues. Elmendorf argues that laws of supply and demand apply to housing and they find that the public can be educated on this point.
The discussion turned to an interesting question: if we build more housing now, does that mean that the cost of housing in Davis would decline?
I’m pretty sure the answer to that is no—for a number of reasons.
First of all, any housing we build is going to be a mere pinprick in a much larger system. It’s just not going to alleviate enough pent-up demand regionally and statewide to have a huge effect.
That’s one reason why some have called for a more regional approach to the housing crisis and in some ways that is justified. But, at the same time, that’s what SACOG and RHNA are supposed to address—they address Regional Housing Needs and then create a formula to determine the fair share for each community.
I think we are seeing that this is a long and slow process, but that’s the thinking behind RHNA.
The second problem is it really is not in the best interest of builders to flood the market with housing and drive down the costs of housing.
But that doesn’t mean that market influences are not there.
Indeed, I agree with the commenter who argued that “if you were to add that much housing next year it would have a moderating effect on housing prices. Whether that translates into lower prices or smaller increases in price the law of supply and demand informs us that this is how markets work.”
That’s basically accurate. What you want to do is flatten the upward trajectory of housing so that, at the very least, the cost is not increasing much faster than inflation.
That’s probably the best you’re going to do using market forces.
So what do you for those who cannot afford to enter the market now? That’s where I think you need to go the government route—either through the building of starter homes, affordable by design, or through various subsidies. Basically you want to allow people to enter the market at lower levels, build equity, and move up in the market and free up the starter homes for the next person.
Here I think we have been failed by two forces. First, the cost of building housing makes it difficult to build those starter homes and, second, the government has not come up with an appropriate funding mechanism to fund significant affordable housing.
I do not agree with those who argue that we have enough market rate housing (i.e. “unaffordable”) in Davis. There are plenty of homes in Davis that are very expensive, but most of them are not on the market and thus do not impact pent-up demand.
When housing gets onto the market, it doesn’t stay there very long and typically sells at around the median housing cost or above.
Clearly that is not a sign of a healthy housing market in places like Davis. We need more median housing, market rate housing, because we simply lack the supply. Moreover, without building at least some market rate housing, it decreases the incentive for developers to build housing—and I know in Davis, the word “developer” is a four-letter word, but if you need housing, someone has to get it approved and build it.
Where I agree with many is that we also need significantly more “affordable housing” —whether it is small “a” affordable or affordable by size and scale and design or subsidized, the market alone is not going to supply that housing.
Unless you have significant government subsidies, you have to rely on market rate housing to help subsidize more affordable housing.
That is another area where I think the market can help—building more market rate housing allows for more affordable housing to be built through a number of different mechanisms.
I was really disappointed that the Bay Area regional bond measure was pulled off the ballot, because that seemed like a promising mechanism to help fund more affordable housing on a regional level that could have become a model for other regions, outside of the ten Bay Area counties that would have been funded.
At the end of the day, I see supply as the main hurdle for getting sufficient housing to help stabilize the housing market. It’s not going to lower prices by itself, but it can slow the rate of growth—and with sufficient funding of affordable housing, we can start to chip away at this longstanding problem.
