February 07, 2019
Protecting a Share of the Housing Market
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People who work with me are often surprised by the extent to which my philosophical canon derives from low-budget offbeat films, typically from the 1980s. When in need of wisdom, I frequently turn to the teachings of Repo
Like the Time Bandits,
Nearly 70 years later, our collective failure to solve the affordable housing deficit may stem from
To support this claim, permit me a short departure into market theory. From the now-preferred mathematical approach to economic analysis, a market is simply a system of partial differential equations that
Acclaimed economists Arrow, Debreu, and McKenzie proved the theoretical existence of a single set of prices that can simultaneously solve for the “general equilibrium” of all markets in a national or global economy. One important aspect of this Nobel
Markets for consumption goods behave very differently than investment markets, responding to different “fundamentals.” On the supply side, prices for
In developed countries, global capital markets and the market for shelter collide locally with little chance of reconciliation. Local households compete with global investors to decide the character and quantity of housing that is produced. In markets that attract global investment, plenty of housing is produced, but shortages of affordable units are acute, and worsen over time. This is because a huge share of new housing is produced to maximize investment return, not to meet the needs of the local population for shelter. For example, there is no shortage of global investment willing to participate in developing $100 million apartments in New York City. But affordable housing, being much harder to finance, is in short supply. And in markets that have been abandoned by global capital, house prices fall below production costs, and surplus housing accumulates and decays. In extreme cases such as Detroit, market order can only be restored by demolishing thousands of abandoned homes and buildings.
Perhaps it is time that we challenge the conclusion that market-based solutions can address the challenge of sheltering a country’s population. Truman concluded that “By producing too few rental units and too large a proportion of high-priced houses, the building industry is rapidly pricing itself out of the market.” But Truman was thinking about the market for shelter, not investment. It is remarkable to note that the number of housing units supplied in developed countries such as the United States significantly exceeds the number of households. In 2016, the U.S. Census estimated that there were 135 million units of housing in the country and 118 million households. One in seven housing units were vacant. It is even more shocking to note that in the United States this oversupply of housing characterizes every metropolitan market in the country—even metropolitan markets with extreme shortages of affordable housing. In 2016, 10.3 percent of housing units were vacant in New York, 6.0 percent in the San Francisco Bay area, 8.2 percent in Washington, DC, and a stunning 13.7 percent in Honolulu. The problem is that many households have insufficient incomes to afford the housing that is available.
In the end, rather than fill the holes in the fabric of time and space, the Time Bandits decided to take advantage of them to “get bloody stinking rich.” The bandits sought to capitalize on celestial imperfections in the same way that global investors seek returns from short-term market dislocations. To illustrate the dangers of naked speculation in unregulated markets, consider an apocalyptic tale from a very different market. In 1974, heavy rains during planting season in Bangladesh suggested that rice might be in short supply at harvest time. In anticipation of these shortages, rice prices started to rise. Savvy commodity speculators realized that there would be a good return on any rice that was held off the market. The actual harvest produced a bumper crop, but the interaction between market expectations and market manipulations by commodity investors produced one of the worst famines of the 20th century—with an estimated 1.5 million famine-related fatalities. The famine did not result from real food shortages. The collision of the market for goods and the market for speculative investment priced rice out of the reach of the local populations, with landless families suffering mortality at three times the rate of families with land.
Perhaps shelter and food are too important to be left to unregulated markets to allocate. In light of the damage that the conflict between the market for goods and the market for investment can inflict on local populations, perhaps public policy should focus on protecting a share of the market—and the public—from the ravages of speculation. In this special anthology issue of Land Lines, Loren Berlin describes efforts to preserve affordable housing in the form of manufactured homes and to promote permanent affordability of that stock through the conversion of manufactured housing communities to limited equity cooperatives. Community land trusts and inclusionary housing policies are also effective ways to insulate shelter from speculation, as demonstrated by Lincoln Institute research (Jacobus 2015, Thaden and Lowe 2014). After almost seven decades of failed efforts to get private markets to meet populations’ needs for affordable shelter, it might be time to develop and to export, these other approaches based on a more realistic understanding of the complexity of housing and capital markets.
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