A new paper this week from UC Davis Law Professor Chris Elmendorf and some colleagues explores whether housing supply skeptics learn – the answer they posit is yes, they do, “And when they do, they become *much* more supportive of market-rate housing development.”
On a local level this is of critical importance because so many people locally disregard laws of supply and demand when it comes to housing and take the approach that we do not need more market rate housing, we need to focus on “affordable housing.” Moreover, they do so without grounding their arguments in data or recent studies.
While Elmendorf, et al, focus their study on whether housing supply skeptics can learn, on a local level, I find the introduction fairly informative.
The problem as economists and policy analysts see it: “(concern) about housing-supply shortages in major metropolitan regions of advanced economies.” As a result, “Elected officials have started to wrestle with the problem, urged on by a nascent “Yes In My Backyard” (YIMBY) movement” and we have seen a series of “(i)ncremental reforms (that) have been enacted in a number of U.S. states and cities.”
But they note, and certainly we have seen, “the prohousing movement also faces headwinds.”
As Been, Ellen and O’Regan (2019) explain, a cadre of “supply skeptics” insist that “the best medicine for escalating housing costs is strict rent control and prohibitions on building market-rate housing on sites that could in theory be developed for subsidized affordable housing.”
Sound familiar? We see this at the local level – and this debate has been playing out for a number of years now with various skeptics.
Elmendorf, et al., note: “Nationally prominent politicians on both the Left and Right are scapegoating large investors rather than attacking local restrictions on housing development… find overwhelming public support for putative “solutions” to high housing costs that would probably further constrain supply: rent controls, property-tax controls, affordability conditions on new development, and limits on so-called “Wall Street” investors.”
Key point: “The mass public appears to have little understanding of the relationship between housing supply and housing prices.”
In three surveys of U.S. urban and suburban residents, Elmendorf, et al., note “that while nearly all renters and even a majority of homeowners say they would like home prices and rents to be lower in the future, most respondents do not believe that a substantial exogenous increase in their metro region’s housing supply would reduce prices or rents.”
They argue, “This result seems to reflect uncertainty or confusion rather than well-formed beliefs, as respondents gave much less internally consistent answers, within and across surveys, to questions about housing supply shocks than to questions about supply shocks in other markets.”
One question that the Vanguard has long pondered – and is invaluable to the policy space – “whether ordinary Americans’ housing-market beliefs and policy preferences are responsive to new information about the effect of supply liberalization on the cost and availability of housing.”
They answer that they find is yes.
They test four “informational interventions” with each one conveying the same basic economic proposition in somewhat different ways.
The proposition is that “an exogenous expansion of the stock of new, expensive housing units in a metro region would reduce competition by affluent consumers for “second-hand” housing, enabling middle- and lower-income consumers to buy or rent older units at lower prices.”
This is an important finding because as I have long argued the public has recognized in places like Davis that housing affordability is the most urgent problem facing the local community, but there has not seemed to be a local consensus about how best to address the problem.
On the one hand, the voters have repeatedly elected at least moderately pro-housing councilmembers and largely and overwhelmingly rejected “slow growth” candidates.
On the other hand, that largely hasn’t translated into more housing or even community support for peripheral housing projects.
We have also noted repeated warning from the council that the city will not be able to address its housing needs into the future with just infill. And therefore, there needs to be an educational process.
The paper from Chris Elemendorf and colleagues points the way for both the city and community groups to begin educating the public on housing markets and how they impact prices.
Take a look at their paper here.
I’ve been making this argument for almost 20 years that it’s a supply and demand issue. Of course many of the usual posters have disagreed with me and they have been wrong for decades.
I believe most of us in California accept the premise that a slew of regulations and citizen actions have restricted the supply of housing and that is primarily the cause of the affordability crisis. But it doesn’t necessarily mean skepticism that simply opening the floodgates will solve the problem is unwarranted or needs to be taught otherwise. Take Davis—does anyone believe that if all the housing that has been recently proposed for expanding our city limits (Village Farms, Shriners, On the Curve), including several that were either defeated (DISC) at the ballot box or withdrawn (Pioneer) were built next year the prices of our “older” single family houses would decline?
I admit to having only read the abstract of Professor Elmendorf’s study, so perhaps such local or micro-market situations are addressed, but the tenor of Vanguard’s summation reinforces the oft-heard view that the “invisible hand” of the free market could bring down prices in Davis if we would only get out of the way. I don’t know how to calculate the impact of a given supply of new housing, but my guess it would take many thousands more units than have ever been proposed to affect our city’s prices. And even then, our “older neighborhoods” would likely more than hold their value because the amenities of mature trees and proximity to services will not be quickly, if ever, replicated in major expansions of our city.
While I don’t believe the affordability crisis can only be solved by subsidies and public housing, perhaps there are market-based solutions that still require some regulatory measures to be realized. For instance, I believe stipulations that minimized the numbers of detached single-family houses in favor of denser forms like duplexes and townhouses would result in lower prices—attached housing is always viewed as less valuable than detached. Would such measures simply further the suppression of new housing? I don’t know, but in pursuing a supply side strategy to lower housing prices I think it’s perfectly reasonable to question exactly what is being supplied and not simply leave it to the market, which could easily produce a line of products that doesn’t move the needle at all.
“Take Davis—does anyone believe that if all the housing that has been recently proposed for expanding our city limits (Village Farms, Shriners, On the Curve), including several that were either defeated (DISC) at the ballot box or withdrawn (Pioneer) were built next year the prices of our “older” single family houses would decline?”
What I believe is 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.
Here’s an article in Reason Magazine on the article.
https://reason.com/volokh/2024/09/14/new-study-on-how-to-address-public-ignorance-about-housing-policy/
Here’s a working link to the journal article: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4955033
Here’s an earlier article on the related topic about what voters prefer for state housing policies:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4811534
Ya know, I’ve never thought much of Elmendof’s research. So he (and Glick) believe the public doesn’t understand basic supply and demand? I’d counter that he doesn’t understand the home building industry. They don’t build just to build. They do it for MONEY. Now I’m not going to go off on some rant about greedy (for profit) developers and being in it for the money. They are. And that’s fine. That’s their role. It’s called FOR PROFIT for a reason. So let me tell you guys once again as someone who’s job it was in the past to identify new housing markets…that (SHOCKER) home builders don’t go into stagnant or shrinking markets. Let me shock you again, they go into growing markets. Markets that attract out of town buyers that drive up the price. Builders build houses with new amenities to draw those out of town buyers into the local market (hint that usually exasperates the gentrification problem). Now does add supply to the market? Sure. Does that lower or at least stabilize (to a degree) housing prices? No. No builder is going to build to the extent that it impacts prices. That’s one of the reasons homes in large master planned communities are released in phases (the other and primary reason is to mitigate risk/costs). No, if I’m doing my job right, I’m driving up the prices. The alternative is that in a growing region a community chooses not to grow. Their home prices stay high (but not as high as if it had newly built homes) and people go to live in neighboring communities like Woodland. The only way the increased supply of market rate housing would make any difference to the market rate price of housing is during a downturn when an area stops growing or shrinks and it’s left with even more extra houses. But then you’re banking on an economic or some other type of downturn to in which case the community has bigger problems then the housing market.
Bottom line is that new home construction is just too expensive and risky to just build on a massive production scale (like the old Levitt Towns) that could impact housing market prices. The only institution that could do that is the US, States and local governments. They could create a floor to impact both supply and housing prices by creating a massive amount of government market rate and workforce housing that would be used to subsidize affordable housing. I don’t advocate putting severe restrictions on market rate housing. Let the market pay itself out as it will. But the market can be manipulated while those with the most need can be addressed through direct government development of housing.