Housing Scarcity is a Force Multiplier for Other Problems

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Is a shortage of homes the number one problem with America's housing market? 

If so, does that mean that it's the only problem that matters?

Is it all just Supply and Demand, Stupid? Or are you on team The Real World Isn't Like Econ 101, You Idiot?

Every day is Groundhog Day in America's housing discourse, which Fast Company called "the shoutiest debate on the internet." But it's not just the keyboard warriors on social media who are making it that way: mass media contributes by tending to report thorny, multifaceted housing issues in simplistic, either-or framings. Is Wall Street ruining the housing market? Is it NIMBYs, instead?

Much of the actual reporting that uses such framings, when you get beyond the headline, is good. Some of it isn't. Regardless, the cycle of hyped-up pronouncement, then backlash, then backlash to the backlash, and so forth, is good for clicks.

In reality, the answer is almost always "Yes, and...." (And by the way, people who work with these issues on the ground largely already get this. There's something about trying to solve real people's real problems in the real world that forces you to grapple with nuance.) 

The most interesting question is not "Does housing scarcity matter?" but rather, "In what way does it matter?"

I'd like to propose one way of thinking about it that I think is compatible with most YIMBY policy prescriptions, but also doesn't stop at the simplism of the "build build build build build build build" crowd:

a) Not every problem associated with housing is directly a supply or scarcity issue.

However,

b) Housing scarcity is real, and it tends to make just about all the other problems associated with housing worse.

Basically, housing scarcity is a force multiplier for other problems.

This makes perfect sense if you think of the housing market as a complex system. In a system of interconnected parts, when you break one thing, other things tend to start to break as well. The dysfunction puts more stress on them.

That applies to the myriad of ways in which people can struggle to find safe, decent, affordable, secure housing. Let's explore.

How Scarcity Makes Other Housing Issues Harder to Solve

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Scarcity makes Wall Street investors a bigger problem. The most prominent housing-related topic in the media in 2021 has been the startling role of big investment firms, who now account for over 20% of all sales. In some cities you'll find real estate investment trusts (REITs) buying up single-family homes en masse—or even whole, brand-new subdivisions. This has elicited alarm both among home buyers fearful of being priced out of the market, and among renters and their advocates worried (with good reason) about the unaccountability of a faceless, corporate landlord that views you as a number on a spreadsheet.

What's less often understood is that Wall Street didn't just suddenly decide to throw its muscle around in the housing market on a whim. The whole game that investment firms like the infamous Blackstone (through its subsidiary Invitation Homes) are playing only works as long as home price increases tend to outpace the performance of other investment assets. After the 2008 market crash, new construction cratered and still hasn't recovered. Meanwhile, a large number of households moved from owning into renting, creating a flood of demand for rental homes due in part to the foreclosure crisis. Since then, an unprecedented period of low interest rates has continued to juice the real-estate market, while depressing the returns of more traditional, safer investments.

All this makes for the perfect environment for Wall Street REITs to cash in—but only as long as housing is just scarce enough to keep the price high and rising.

But don't take it from me. Take it from their own financial statements. In Invitation Homes’ 10Q filing, the company states, “We operate in markets with strong demand drivers, high barriers to entry, and high rent growth potential, primarily in the Western United States, Florida, and the Southeast United States.” In another SEC filing (Form S-11), a similar REIT, American Homes 4 Rent, includes a section disclosing business risks, in which it states, “The continuing development of apartment buildings and condominium units in many of our target markets increases the supply of housing and exacerbates competition for tenants.”

These acknowledgments reflect the fundamental difference between a landlord and a developer. The developer profits from creating more supply, but the landlord (even when the landlord is Wall Street) doesn't—it's in no way in their interest for there to be more homes out there that they don't own.

Scarcity makes small-time investors a bigger problem. It's not just Wall Street. I live in a neighborhood that is one of the very last reserves in my city of what housing policy people euphemistically call "Naturally Occurring Affordable Housing" (NOAH). This refers to older homes that tend to be small, a bit outdated, and in less desirable locations, and thus relatively inexpensive. When my wife and I bought our house in 2016, we were one of 40 offers. Most of the 40 were from investors who intended not to live in the neighborhood, but to flip homes for resale or operate them as rentals. Most homes sold in my neighborhood are on the market for only a couple days, and according to our realtor, over 60 percent of sales are to buyers paying cash (no mortgage), who are often able to close a sale very quickly. All this was in 2016 and is only more true now.

These small-time investors are taking advantage of a decades-long decline in the prevalence of modestly sized starter homes. They are often laser-focused on working-class neighborhoods with smaller, cheaper homes that aren't a punishingly long commute from the center of the city. Meanwhile, almost all new construction is high-end (for a predictable set of reasons) and generally larger. And if you venture further out into the suburbs from where I live, you will invariably find yourself paying more for a bigger home on a bigger lot in a less walkable neighborhood.

If we had an abundance of "Naturally Occurring Affordable Housing," competition from investors wouldn't be such a problem for prospective owner-occupiers looking for their first home.

Image via Flickr.

Scarcity makes short-term rentals a bigger problem. AirBnB is another favorite scapegoat for housing affordability problems. While short-term rentals are not a substantial share of the housing market as a whole, there are select locations, such as beach towns, where a considerable share of property owners might be choosing to list units as short-term rather than long-term rentals, thus increasing housing scarcity for permanent residents. Research suggests AirBnB contributes modestly to rising rents. Cities have experimented with bringing the hammer down on short-term rentals to various degrees, but regulating it doesn't eliminate the demand for affordable, low-key places to stay, or the very pragmatic reasons someone might want to participate either as an owner or a renter.

What is true is that if housing were sufficiently abundant, the stakes of the short-term rental issue would feel much lower. Neighbors might still complain about nuisance behavior, noise and litter, but they wouldn't perceive every AirBnB as being in zero sum competition with housing for their long-term neighbors.

Scarcity makes bad landlords a bigger problem. Perhaps the best barometer we have of which way rents are going to move in the near term in a given city is the rental vacancy rate. I've written about this before, but essentially it's because vacancy determines who has the market power in the transaction: the landlord or the tenant, the seller or the buyer. It's very similar to how the unemployment rate (and thus the number of job seekers) affects the power dynamic between employees and employers.  

When a landlord has their pick of many tenants and knows they will be able to re-rent a vacated unit quickly, they may feel a lot freer to engage in abusive practices. They may be slower to address maintenance issues, quicker to evict, more likely to make unreasonable demands or require a massive security deposit. Knowing that if you lose a tenant who pays the rent on time, you might not find another one quickly makes you a lot keener on maintaining a good relationship with your tenant.

Scarcity makes housing discrimination a bigger problem. Who is more likely to discriminate against a prospective tenant or home buyer for being of the wrong race, or class, or for using a Housing Choice Voucher (more commonly known as Section 8)? A landlord who knows there are other prospective tenants lined up around the block? Or one who actually has to compete for tenants or risk letting the apartment sit empty?

Particularly in wealthier and more suburban neighborhoods, "No Section 8" is an all-too-common refrain. In some places it’s legal to refuse to rent to voucher holders, but it happens even where it isn’t, such as in New York State. Vox’s Jerusalem Demsas recently reported on a lawsuit filed in New York against 36 landlords and realtors for housing discrimination. Demsas describes reforms to the Section 8 program itself that might make landlords more inclined to participate, but also emphasizes that a key reason housing discrimination remains pervasive is the immense power imbalance caused by a dire shortage of affordable housing. 

Image via Flickr.

Scarcity makes evictions a bigger problem. Being evicted is an all-too-common and frequently traumatic experience: a 2018 study estimates that 1 in 7 children born in large American cities in 1998–2000 experienced at least one eviction for nonpayment of rent or mortgage between birth and age 15. Among those born into deep poverty, the figure is 1 in 4.

But the lasting consequences of an eviction might be very different depending on what city you're in. When I spoke in early 2021 with multiple housing researchers in Cleveland about the expiration of COVID-era eviction bans in that city, they expressed little concern that a tsunami of evictions would result once the moratorium was lifted. Why? Cleveland has thousands of vacant homes and a weak property market, so if a large fraction of the city's landlords were to suddenly evict their tenants for nonpayment of rent, they wouldn't exactly find replacement tenants ready to move in. The most common experience in a city like Cleveland with a slack housing market is that renters who have lost their home cycle around through a series of similar homes in or near the same neighborhood.

Note that this is still hugely disruptive to their lives and finances! More housing supply won’t address the reasons—stemming from poverty and neighborhood decline—that eviction is so prevalent or so devastating in a Cleveland or Detroit or Milwaukee. But it poses a different set of problems than it does in, say, San Francisco, where an evicted renter might struggle to find anything remotely comparable nearby, and the landlord might see an easy opportunity to raise the rent and bring in a higher-income tenant.

A recent Mercatus Institute report observes that “[s]urprisingly, data gathered by Princeton University’s Eviction Lab show that the rate of eviction did not increase during the Great Recession, even as the unemployment rate spiked above 10 percent. This suggests that landlords take broad market conditions into account before evicting tenants who miss rent. An otherwise-responsible tenant who pays rent inconsistently is better than an unfillable vacancy.” 

Scarcity makes gentrification a bigger problem. I've written about how the national discourse on gentrification is heavily influenced by a handful of very expensive coastal cities in which a lot of elite media figures happen to live and work. Gentrification in a place like New York City is a fundamentally different phenomenon from gentrification in your average Midwestern metro. Being priced out of a rapidly transforming neighborhood in an expensive city is an existential threat to established communities. The more common scenario in a city not experiencing severe housing scarcity, on the other hand, is that there may be one or two neighborhoods where a significantly wealthier mix of people are moving in and sort of colonizing the place, but it's not a citywide phenomenon. Low-income people in Indianapolis or Milwaukee or Dallas are not in danger of being pushed out of the city entirely.

The Supply Shortage is A Crucial Part of the Elephant

I often liken understanding housing to the story of the Blind Men and the Elephant. This Indian parable describes a group of blind men who set out to determine the nature of an elephant, but arrive at vastly different conclusions. One man, touching only the trunk, concludes that the elephant resembles a large snake. Another, reaching out and finding the elephant's ear, concludes that it is more like a fan; the man who touches the leg likens it to a tree, and so forth. None of them produces an accurate mental picture of the whole animal.

Most people have some piece of the truth—access to some part of the elephant. None of the observations in this article mean that all problems with housing affordability boil down to supply. But in my experience, the number of people actually claiming that is a lot smaller than the number of people claiming their opponents are claiming that.

What is true is that a supply shortage takes all the other problems and turbo-charges them. It makes it harder to redress racial inequality in housing. It makes it harder to protect vulnerable renters from catastrophic disruption to their lives and finances. It takes conflicts that could be resolved by abundance—existing residents versus new arrivals, short-term renters versus long-term owners, investors versus residents—and turns them into ugly zero-sum battles.

Recognizing that the housing market is a wickedly complex system gives me all the more reason to want it to be something that can adapt, respond to feedback, and grow—ideally through the actions of many small developers working in many different places—to meet the need that is out there.

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