A Matter Of Debate: Cutting Through The B.S. On Housing Fixes

It is terrific that housing is increasingly taking center stage in political discussions nationwide. But we have a long way to go regarding intelligent dialog about our housing problems. While taking at face value that both national parties would like to improve housing affordability, the national government cannot fix this problem, which is at it is core a local land-use, which is to say, a local political problem.

Recently proposed solutions from the respective candidates are fraught with red herrings and fallacies:

Tax credits for buyers. You cannot fix a supply problem by increasing demand. You are just making affordability worse, not better, by creating a bigger buyer pool. It is a sugar high that will not last.
More affordable tax credits. If this is not paired with more approved land than would otherwise exist, you are just converting some units that would have been market-rate into capital “A” affordable. This would subtly drive up the price of the rest, as those not eligible because they make too much move on to their next best option. Those that more affordable tax credits help are visible; those they hurt are larger in number, diffuse, and unknown.
Money for cities to plan/approve more housing. Very few – if any – municipalities do not approve enough housing because they cannot afford the planning involved. It is a question of political choice and infrastructure.
Lower interest rates. Leaving aside that is something else the market should set, not bureaucrats, it amounts to marginal help at best. Plus, it is harder to manipulate the 10-year treasury than short rates. A little cheaper capital will help the next phase of apartment building when we get through this delivery cycle, but I doubt it will materially impact getting more for-sale projects off the ground. Any fall in mortgage rates will likely just juice demand from buyers, and here we go again ...

The American public has also been distracted by memes that feel good because we would like to blame someone other than ourselves:

Institutional ownership of housing units. The institutional ownership percentage is insignificant at a 2% national share of single-family home ownership. If you doubt that, you would still have to acknowledge that if it has driven up the price of homes, it logically drives down rents (more supply of rental). I have seen no study that shows institutions are worse landlords than individuals. There are good and bad of both.
The market has failed. The market allocates scarce resources by balancing supply and demand and then signaling to producers what new supply is needed. That part works fine. Where it breaks down is there is no free market in land-use approvals. We do not build what we want or think the market needs; we build what we are allowed to. This is a political problem, not a market problem. This meme suits those who want new housing built by non-profits rather than by for-profit builder-developers. Changing who builds units does not create more or cheaper build costs.
The Great Financial Crisis broke the housing markets. Correlation, not causation. Wrong and dangerous. The boom before the GFC was, in retrospect, the last gasp of the free market where developers could, in most markets, meet demand. Then, the crash and ensuing long, slow crawl-out distracted the public from the fundamental changes in land-use approvals that had been taking place. The pandemic laid bare the result, but it has been building due to politics, not the GFC. "The GFC broke the housing market" is a dangerous meme. Why? Because it plays into the idea that something is wrong with the market and/or industry, requiring the public sector to step in. Rather, the public sector must step up with approvals and step back from interfering with markets.
Builders became too cautious after the crisis and preferred to under-build while there was insufficient capital to create lots. Please! I love the industry and the people in it, but too cautious? And we have more capital in housing today than ever before. Public builders are awash in cash, and land bank funds, debt funds, equity funds, etc., are all desperately looking to invest. While some individual companies are having trouble accessing capital, that is primarily a problem of not having compelling opportunities, rather than a lack of willing funders. The industry is creative, aggressive, and optimistic – and desperate to be unleashed to its full potential, if just given the chance.
The concentration of public builders has harmed markets by reducing competition. Public builders have the cheapest cost of capital in the sector and have wholly embraced sales velocity over a holding-onto-a-price mentality. Competition is fierce for land and to get home sales. They have not been shy about offering consumers very large and costly mortgage incentives to manage affordability. Are we going to blame those producing the most housing, competing fiercely, and emphasizing pace over price? Does that sound like a cartel? No.

I could go on, but the point is that we keep blaming convenient scapegoats and proposing symptom treatments (rent control, inclusionary housing, tax credits, etc.) instead of tackling the real issues.

I equate the proposals to spiking the punch. It is fun; everyone enjoys it, at least until the inevitable hangover comes. Fixing supply is more like telling people they really do have to eat their vegetables.

Real-world Solutions

The only things that matter are:

Approving 20%-to-50% more housing of all types (especially medium density) than we currently approve, depending on the jurisdiction. There are no magic bullets to fix the problem without way more supply.
How we finance infrastructure.

Over the last few decades, cities, counties, and states have set aside less and less of their budgets for basic infrastructure – roads, water and sewer capacity, schools, etc. What once was a core function of government is now often considered a developer's problem. Growth should “pay for itself.” That is fine as a sound bite, but it is highly problematic.

First, it fails a basic fairness test. When growth must pay its own way, in practice, that means putting in all the infrastructure it needs, fixing some past problems, and often upsizing work to facilitate other property/municipal priorities. Then, our buyers either pay more for their houses to make this work or have special tax district payments on top of regular property tax. Their property tax burden that supports existing development infrastructure is not reduced. So, it looks like growth is not just paying for itself. Rather, we expect buyers to pay for their own impact plus a share of existing homeowners' impact. That is not fair or equitable.

Second, it is extremely cost-inefficient. Two concepts should be clear and indisputable:

Infrastructure is cheapest when built in bulk. This can only be done by municipalities facilitating regional growth. Yet we require builders to do portions at a time. Then, wait an indeterminate time for reimbursements. How much would the savings be if we did it correctly at scale? I would guess more than 15%, but even if that was all it was, the dollars are monumental in total.
Long-term assets are best financed by those with low capital costs. Yet we have builders and developers with a higher cost of capital financing improvements, not municipalities with lower borrowing costs. Even using special tax districts, the rate for this approach vs. direct municipal financing is at least 7% vs. 4%. Over a 25-to-30-year period, that adds up to a lot of money.

So, we have chosen lack of scale and high cost of capital over the reverse. It's not surprising our costs keep increasing, and fewer deals pencil out. More and more, while the land cost matters, the real question is, what is the infrastructure and land development cost to get it open? And the more burden put on that by our backward approach, the harder it is to do: More equity, higher peak capital, tougher return hurdles because the risk increases, etc.

This is not a recipe for attainable housing.

In a logical world, municipalities would look to their growth needs in a coordinated regional effort to keep up with jobs and in-migration and determine the best location for substantial development. They would do that by looking at a Venn diagram of job growth, existing infrastructure, and suitable land. They would identify the most effective growth areas, develop infrastructure estimates, and work backward to minimum densities along that corridor/area that would be efficient to support. Then, those municipalities would issue long-term bonds and build them. They would be paid for through growth in property taxes, utility use fees, and perhaps small PSF fees (not per unit, if you want small attainable units).

This would also have the benefit of returning to logical "paths of growth," whereas today, as a practical matter, it's "the path of possible." No wonder the public is befuddled by an illogical hopscotch development pattern.

I was heartened last week while participating in the HBA of Metro Denver’s annual bus tour for elected officials and staff in the region. Our attendees showed knowledge of the problem, interest in alternative solutions, and a passion for understanding further what they/we can do.

We need to take the next step by talking plainly with the public so that they will have real choices in creating attainable housing rather than hiding behind memes.

It's time to eat our vegetables.