We’ve got some interesting news to share with you about the housing market. You know what’s great? All housing is affordable housing!

That’s right, if we focus on building more affordable housing options, it will have a positive impact on the prices of all homes except the super luxurious ones. But here’s something interesting: even building more luxury housing can help lower housing prices overall by reducing the pressure for gentrification and tearing down existing homes.

Now, let’s talk about solving the housing crisis. The key is to make it legal to build more housing. In well-functioning markets, price signals play a crucial role in conveying information to different actors. When there’s scarcity, prices rise rapidly (if allowed), and that leads to three outcomes:

1. consumers buy or use less,

2. producers make more (if allowed), and

3. entrepreneurs come up with substitutes (if allowed).

Unfortunately, this system isn’t working in the housing market because building housing is effectively illegal, blocking producers from making more and discouraging innovation. The regulatory agency Freddie Mac estimates that there’s a shortage of around 4 million housing units in the US, and that’s not even counting the number of people who want to move to larger or more convenient locations. So, why isn’t the price mechanism working? The simple answer is that it’s practically illegal to build housing, preventing the market forces from operating freely. This scarcity-driven approach is the only “solution” offered by city governments across America. But there’s a growing consensus that we need to change this and make it legal to build housing.

But wait, how can building new housing be illegal, you might wonder? Well, according to the housing advocacy group “Up for Growth,” intentional restrictions imposed by 23 US states between 2000 and 2015 prevented the construction of more than 7 million new dwellings. And even for the units that were built, regulatory uncertainty and time-consuming processes caused as much as 30% or more of the final cost. These include waiting for approval, submitting repeated reports, and jumping through various regulatory hoops.

So, what exactly makes building new housing illegal? There are several factors at play, including

• restrictions on minimum unit size and maximum number of units,

• height limitations,

• setback and lot size requirements,

• demanding concessions for greenspace,

• and even the need for off-street parking, even in low-income neighborhoods with access to public transportation.

These restrictions result in a need for larger plots of land, a significant portion of which must be allocated for parking, and they create unnecessary bottlenecks that drive up costs for land, labor, and materials.

To give you an idea of the impact, let’s do some quick math. In cities with burdensome regulations and high land prices, the cost of building a new unit can exceed $250+ per square foot. That means a 1,000-square-foot apartment would need to be rented out for at least $2,750 per month for the developer to break even. Now, typically, “affordable” housing is defined as costing 30% or less of the renter’s income. But let’s stretch that a bit and consider 40% of income as affordable. To afford our hypothetical new apartment, a worker would need an annual salary of $75,000 before taxes.

But the issue goes beyond just making housing illegal; it’s also a driving force behind gentrification. Wealthy neighborhoods can use their influence to prevent the construction of market-rate housing, which pushes newcomers or current residents to seek more space to look for homes in poorer neighborhoods. This influx of wealthier residents into affordable housing areas contributes to the skyrocketing prices. However, interestingly, a recent study suggests that building new market-rate housing in poorer areas can reduce costs for renters in those areas. Unfortunately, the high cost and lengthy approval processes for building new multifamily units make it prohibitively expensive.

The whole system seems to be hypersensitive to local concerns, with prolonged and expensive petitioning processes and a requirement for public comments that further delay housing projects. This unpredictability is a significant issue for developers who are unsure about the number of hearings they’ll have to attend and the costs they’ll incur. It’s a frustrating and inefficient process that needs to be reformed.

Now, let’s address a common misconception. Some believe that constructing market-rate homes in disadvantaged areas causes gentrification and displacement. However, that’s not entirely true. Even Mayor Karen Bass from Los Angeles seems misinformed. She pointed out that in her old neighborhood, where houses were purchased for around $150,000, the introduction of market-rate housing would increase the prices to nearly $1 million. But here’s the catch: the existing homes in the neighborhood are already worth more than $1 million. So, it’s not the market-rate homes that are causing prices to skyrocket; it’s the overall rising prices in the area.

But what about the belief that building more housing leads to higher rents and home prices? Surprisingly, about 30%-40% of Americans hold this view, even though economic theory and empirical evidence suggest otherwise. Research indicates that increasing the housing stock in a region puts downward pressure on prices. But many people associate new construction with rising prices because they’ve seen it happen in their cities. Exposure to research findings and discussions with experts can help change these misconceptions.

So, what’s the bottom line? Building more market-rate housing isn’t a magic solution to make housing instantly affordable for everyone. It won’t solve the issues of income disparities and eviction protections. However, it’s crucial to understand that building more housing doesn’t cause prices to rise; rather, it can alleviate the pressure on prices and create a more balanced market. It’s essential to challenge counterproductive policies and focus on strategies that address the root causes of housing affordability challenges.

We hope this post has shed some light on the housing market and the need for reforms to make building housing easier and more affordable. Remember, all housing is affordable housing, and by making it legal to build more housing, we can work towards a brighter future for everyone.