Don't hold your breath for cheaper housing

By Nicolas P. Retsinas, 9/15/2003

GO TO ANY meeting of low-income advocates to hear the familiar complaint: Housing costs too much. Prices are soaring faster than incomes. Ironically, the recession has encouraged a macabre sort of optimism. Panglossian souls expect that housing will prove cyclical, that eventually prices will fall. After all, for other economic phenomena -- unemployment, inflation, interest rates -- economists draw fluctuating trend-curves. The sanguine prophets of hope expect the market to correct itself.

It won't happen.

The housing market at first glance is no different from markets for other commodities, where supply intersects with demand. Generally, rising demand will initially drive up prices for the commodity, until suppliers, seeing the money to be made in that commodity, gear up to increase supply. This is the classic widget model of Economics 101. And generally it explains why prices have fallen for many "necessities" once considered luxuries, like televisions and microwaves.

Housing, though, is different.

One reason: We have sharply constrained supply. The large-lot restrictions, the building codes, the aesthetic requirements, the bans on manufactured homes all have shaped the landscape, guaranteeing that scenic spots stay rooted in a scenic status quo. If we suddenly erased all the constraints on supply, builders could construct more dwellings smaller, on smaller lots, with fewer amenities. Early in the century builders built three-decker tenements in New England mill towns, expressly to house the swarms of immigrants. We don't build triple-deckers any more. Ditto for the Sears and Roebuck "starter" cottages on postage-stamp lots. In upping the quality, the size, and the amenities of homes, we curtailed supply thereby keeping prices up. Visit those idyllic enclaves where schoolteachers, nurses, and police officers cannot afford to buy (sometimes even to rent) homes. Then read those enclaves' zoning/building restrictions. The limited supply represents one barrier to "affordable" housing, yet it is not the sole barrier.

The second barrier is income. Our labor force is bifurcated: low-income service workers, earning close to the minimum wage, and the middle-to-upper income managerial workers, earning far more. The solid middle manufacturing class has shrunk. Since mid 2000, 2.7 million manufacturing jobs have been lost. Today, 11 percent of our work force is employed in the manufacturing sector, compared to 30 percent 40 years ago. Our demand for housing reflects that bifurcation in income. The growing cadre of low-income service workers earn too little to constitute an effective demand. From 1976 to 2001, the median income (in real terms) of 18-to-35-year-olds declined almost 20 percent.

Consider the full-time Wal-Mart employee. (Wal-Mart is the largest single private sector employer in the United States.) That worker earns $9 an hour. At that wage, he cannot afford a moderately priced two-bedroom apartment in any city in the United States. He constitutes a "demand," but a demand that will not spur "supply," because the people who control the supply of housing the builders, the landlords, the property-owners see no profit in housing him. Without federal subsidies (e.g., Low Income Housing Tax Credit), they cannot make a sufficient profit in serving low-income tenants or low-income homeowners. So while the growing population suggests a burgeoning demand for housing, low incomes shut the Wal-Mart households out of the market.

Instead, builders, landlords, and property-owners are building for the other part of the labor force: the also-growing numbers of middle-to-upper-income Americans. The past decade's spurt of new housing is expensive, geared to people who can afford it.

Although it is easy to blame the "crisis of affordability" on inequities and glitches in the housing market, this crisis is not primarily one of housing, but of incomes. People earning very low incomes cannot afford the housing we are building. Indeed, even if we eased all the restrictions on supply, it is not clear that we could house the Wal-Mart worker in a "safe, decent home," by 21st century standards. And a return to the 19th century poorhouses is neither likely, nor desirable.

We accept the fact that by virtue of income, a lot of Americans are shut out of a lot of markets: The Wal-Mart clerk, McDonald's cook, the hospital orderly can not buy a new car, take a cruise vacation, or send their children to private schools. Housing, though, is essential, and a just society should not let its low-income workers live at the edge of subsistence.

Unfortunately, the "affordability" crisis won't disappear as the economy cycles into its next phase. Poor workers will continue to pay too much for housing they can not afford.

Nicolas P. Retsinas is director of the Joint Center for Housing Studies at Harvard University.