Zoning rules and mortgage regulations are pushing up the cost of housing.
Zoning rules and mortgage regulations are pushing up the cost of housing.
I nflation is no longer on the backburner, as more money, lower interest rates, and government stimulus seem to be boosting consumer demand, especially in housing. Home prices have been rising faster than they had been even during the infamous 2000s bubble. A classic case, it seems, of demand (meaning money) outpacing suppliers’ ability to produce the goods people want to spend that money on, which leads to rising prices. But there is something more to today’s housing market.
To see what’s so odd, look closer at what housing “demand” is. There is the demand for shelter, which expresses itself as rental expenses. That is somewhat different from demand for ownership, which expresses itself as home prices. The differences or similarities between rents and prices give us some important clues about what’s going on.
In theory, if housing demand is rising because of cheap mortgages, then home prices — but not necessarily rents — might go up. In fact, if more people build new homes or more developers build new apartments, then cheap mortgages should help decrease rents, even if the prices of homes rise.
And if housing demand increases because of rising incomes or injections of money into the economy by the Fed, then both rents and prices might rise. More money should in theory mean more new building, which keeps rents in check. But if, for some reason, new building doesn’t follow the money, then people might simply use the extra income to bid up rents on existing properties.
So if incomes go up 5 percent, enough new building could keep rents from going up at all. At the other extreme, with no new building, tenants might end up spending their extra income on rent. It’s hard to imagine a scenario, however, where a 5 percent increase in incomes — either real or inflationary — causes rent spending to rise by more than 5 percent.
Yet that’s been happening for several years — both before and after the COVID-19 recession —and it’s happening in the poorer half of our cities and suburbs.
If you split metropolitan America in two according to the average income in each ZIP code, then you’ll see that in 2015, lower-income Americans spent about 32 percent of their incomes on rent, while the top half spent about 19 percent. (I am referring to the rental value of a home, whether it’s owned by a landlord or by its tenant.) In the six years since, rent inflation has been so high that it’s outpaced income growth in poorer areas. According to my calculations, the average household in the bottom half of those ZIP codes is spending 2 percent more of their income on rent. Those in the top half are spending 2 percent less.
For the wealthier set, it does look like money is pushing up prices while creating enough new supply to moderate things. Yes, prices rise, but homes are built and rents stay under control.
The folks at the bottom are more beset by inflation, but it doesn’t look like a market with excessive demand. It looks like one where housing supply can’t keep pace with reasonable demand. People have a little more money in their pockets, and it’s driving up costs on the limited number of available rentals. Whether it’s because of America’s famously restrictive city zoning, post-housing-crisis limits on credit, or something else, not enough new units are cropping up in these areas.
With that in mind, it’s not hard to see why landlords have the upper hand: In 2010, there were more than 6 million empty units for sale or rent. Today, there are about 3.4 million. Percentage wise, the U.S. housing market has never really had fewer vacancies.
For families whose rent keeps taking more of their incomes, it won’t matter how many dollars the Fed prints. Much of it will end up being their landlords’ dollars. For families with above-average incomes, high prices could be a sign of monetary growth which, among other things, is producing new homes that bring down rents. That’s good news.
How do we turn it into good news for everyone (except landlords)?
This top-and-bottom asymmetry will not be solved by inflation-fighting measures which slow the economy by raising interest rates or tightening credit. In this economy, ironically, directing more money into new homes will be essential to decreasing home price inflation. It’s already working for the richest Americans.
In the past, construction activity was much higher than it is today, especially in affordable markets. If inflation is a concern, then breaking down the barriers to more building and loosening the regulatory shackles on homebuyers who need mortgages may be more important than the interest rate the Fed targets next month or next year. How do low interest rates help someone with a denied mortgage application for a new home that is banned by zoning rules?