On the housing supply-side theory

Simply building more homes will not solve the Western housing crisis

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The housing crisis in the Western U.S. is getting a lot of attention lately, with the New York Times, The Atlantic, and now Business Insider weighing in with feature stories.

Each of the aforementioned stories has its strengths. Kyle Paoletta’s Insider piece, for example, deftly probes the roots of the problem and has a nice analysis of sprawl and its history and the breakneck growth plaguing (my term) many Western cities and towns. But every one of the writers falls into the same trap: A false belief that the solution to the problem is simply to build more houses, usually by clearing away regulatory “burdens” on developers.

Affordable housing solution? Houseboats in storage in Ticaboo, Utah. Jonathan P. Thompson photo.

 In The Atlantic piece with the (slightly ridiculous) title, “The Anti-California: How Montana performed a housing miracle,” Annie Lowrey writes: “(Gov. Greg) Gianforte said that the answer was obvious to him: Montana had a supply crisis. It needed a supply solution. … It set itself up for dense development. … it did something — and maybe enough — to fix its housing crisis.”

Talmon Joseph Smith reporting from Summit County, Colorado, for the New York Times: “Policy critics, and frustrated local renters fighting over limited spots, say it is an inadequate tool for the scale and source of the problem: a lack of units.”

And Paoletta in his Business Insider story, which opens in Durango, Colorado: “The solution to keep prices under control seems fairly simple: Just build more housing."

All of these accounts adhere to the theory that the Western housing crisis is caused by a simple supply-demand imbalance: A bunch of people move to Durango, Bozeman, Moab, Salida, and so forth and snatch up the available housing. Demand soon outpaces supply, causing prices to shoot into the stratosphere. 

The solution, according to this theory, is to up supply by building a crapload of new housing, which will bring things back into balance and lower prices to levels that are affordable for your average working stiff. And the way to get the market to build more housing is to obliterate the local land-use regulations getting in developers’ way. 

I’ll give them this: It is a simple theory. Too simple, in fact, because it doesn’t account for how grossly distorted nearly every Western housing market has become. It doesn’t account for the unique dynamics of housing markets in Western amenities communities, or for the vagaries of human behavior, especially of those who have a lot of disposable cash. It doesn’t account for the second-, third-, and fourth- home owners, or of well-heeled investors looking to profit from the Airbnb economy.

In these places, scarcity — i.e. lack of inventory, in real estate lingo — is certainly a factor in high home prices, but only a minor one. The big driver is wealth inequality, which manifests as some folks’ willingness and ability to spend gobs of money to own their own little — or vast — piece of Jackson, Aspen, Moab, or Durango, versus everyone else’s inability to do the same. The problem then is not a lack of housing, but rather a lack of affordable housing. And solving that problem is far more complicated than simply building more market-rate housing. 

To be clear, I’m not arguing that housing is above the laws of supply and demand. In fact, I agree with the authors of a 2018 paper out of NYU School of Law on “supply skepticism” when they write: “… the preponderance of evidence suggests that easing barriers to new construction will moderate price increases and therefore make housing more affordable to low and moderate income families.” 

This works if, say, a new industry moves into a mid-sized city with reasonable housing prices, bringing hundreds of jobs with it. Housing demand will climb and begin to outpace supply, raising prices. Rising prices will spur developers to build more homes. And building more homes will restore the demand-supply balance and stabilize prices. That’s meaningless, however, when the cheapest home on the market costs hundreds of thousands of dollars more to begin with than the average family can afford.

Just take a gander at these wacky numbers:

• Flagstaff: median home sale price: $675,000; median household income: $61,000
• Bozeman: median home sale price: $742,000; median household income: $67,000
• Durango: median sale price: $695,000; median household income: $69,000
• Teton County, Wyo.: median sale price: $1.7 million; median HH income: $94,000
• Moab/Grand County: median sale price: $620,000; median HH income: $42,100
• Santa Fe: median sale price: $620,000; median HH income: $62,000. 

(For reference: a person bringing in $70,000 per year who has a $20,000 down payment can “afford” a $250,000 home, according to the Zillow affordability calculator.)

Perhaps building hundreds of new market-rate housing units in these places will stabilize prices or “moderate price increases.” But what good will that do with prices like these? And so far, there’s little evidence that increasing supply in desirable Western communities does all that much to dampen price increases. 

Consider Los Angeles. Just yesterday the LA Times ran a piece headlined: “The California conundrum: Fewer people, more homes, but an acute housing shortage.” The Los Angeles metro area’s population has decreased by about 400,000 people — or around 3% — since 2017, which presumably should reduce housing demand. Between 2017 and 2022, 136,000 building permits for private housing structures were issued, increasing supply. And yet the median home sale price since 2017 has neither stabilized nor decreased. Instead, it has jumped by more than 50%, reaching a mind-blowing $860,000 this July. The laws of supply and demand apparently are not being enforced in Los Angeles.

They’re building a lot of houses in L.A., and the population’s shrinking. And yet …

… housing prices continue to shoot into the stratosphere.

Perhaps the supply-side theory will prove out in Durango, where 2,000 new housing units are currently in the works, according to the Durango Herald. Almost 600 are intended to be sold — with 199 of those having “affordability components” — while the rest are rentals. That’s a lot of housing for a town of some 20,000 people and should be enough to accommodate a good portion of the housing-deprived workforce and bring rents down somewhat. But will it lower housing sale prices? Only time will tell, but I’m not banking on it. While the 400 market-rate units will increase the supply, they also may induce extra demand, luring investors looking for a short-term rental property or a second or third home, or simply drawing more well-heeled folks who can pay exorbitant amounts for a mountain home.

It’s worth noting that Durango didn’t have to relax its land-use codes to clear the way for all of this construction. And nearly 500 of the units are in a single apartment complex, which is somewhat remarkable for a small Western community, where this kind of building density is often frowned upon and even, in some cases, banned. 

The authors of the aforementioned articles are right to condemn sprawl and to pin some of the housing crisis on single-family zoning laws. But encouraging density should not be confused with doing away with land-use regulations altogether. Montana’s Republican-dominated legislature made it possible for developers to “build housing units by right” and loosened already lax regulations. Should we expect a bunch of affordable apartment high-rises in downtown Bozeman as a result? Not likely. Try more sprawl and more profits for the developers and more folks moving into the area. 

Clearly something’s gotta give. But simply building more housing willy nilly is not the answer. After all, at its roots, the housing crisis is less about the gap between supply and demand than it is about the yawning abyss between the uber-wealthy and the rest of us. We could make progress on both fronts by, first, implementing a progressive real estate transfer tax on property sales that exceed $500,000, and by reviving the progressive income tax structures of the 1950s, 60s, and 70s, which made it more difficult for a few people to accumulate gobs of wealth, leaving them less disposable income to buy up multi-million dollar homes as if they were Monopoly properties. The revenues generated by these taxes could then be used to build sustainable, affordable housing.