Housing Supply, Simply the Most Important Issue in Fighting Poverty
There is no more important economic burden facing low- and middle-income Americans than housing costs. And given that the primary driver of housing costs is local limitations on housing supply, few policy changes would improve the lives of poor, working, and middle-class households more than relaxing local regulatory barriers to housing construction.
Granted, the causes of poverty, as well as economic burdens facing the middle-class, are multifaceted, and focusing too narrowly on any one issue runs the risk of missing the larger picture. Still, our dysfunctional housing policies deserve a more prominent place in the current debates surrounding poverty and opportunity.
The Bureau of Labor Statistics۪s Consumer Expenditure Survey reveals that, in 2012, U.S. households devoted around 33 percent of their total expenditures to housing. By comparison, healthcare constituted less than 7 percent and food about 13 percent of spending for the average household. The second largest category of expenditures was transportation, and it represented rough 17 percent of expendituresjust over half the share spent on housing.
Housing costs consume an even larger share of spending for low-income individuals and families. For households earning between $10,000 and $15,000, housing constitutes 42 percent of all spending, whereas for those solidly in the middle class, making between $50,000 and $70,000, housing constitutes 33 percent of all spending (still a rather large share). And unlike so many goods, the percentage of spending allocated to housing has remained relatively stable over decades.
The role of housing and mortgage costs has long been recognized as playing a central role in the fiscal plight of American families. In their book The Two-Income Trap, then-Professor and now U.S. Senator Elizabeth Warren (D-MA) and co-author Amelia Warren Tyagi place housing costs at the center of the theory of how a second family income resulted in the bidding up of housing prices. Critical to Professor Warren۪s theory was the fixed nature of housing supply. This sort of bidding does not result for goods where supply can be easily expanded to meet demand. As I۪ve written elsewhere, increasing restrictions on housing supply played a central role in the recent housing boom and bust.
Academic research has demonstrated the connection between higher house prices and restrictions on supply. A simple comparison illustrates the point. Phoenix and San Diego are of similar population and both have seen considerable growth in recent years, but housing prices are about twice as much in San Diego as they are in Phoenix. Knowing these facts, it۪s not surprising that San Diegan families pay a larger share of their income for housing than their counterparts in Phoenix. This disparity is nevertheless remarkable, given that Phoenix has a slightly higher poverty rate and a median income about 20 percent lower than San Diego.
One might guess that prices are higher in San Diego simply because it۪s more expensive to construct housing there. In actuality though, construction costs for the typical home are almost the same in both areas. That house prices are about twice as much in San Diego as they are in Phoenix is almost exclusively driven by differences in land prices.
One might also argue that more people may want to live in San Diego than Phoenix, driving up relative land prices in San Diego. However, even if there were more demand to live in San Diego, housing prices need not rise if builders simply are allowed to build housing more densely there.
Phoenix is not without its own building restrictions, but they are considerably less burdensome than in San Diego (or most of California). In fact, even during the bust, Phoenix witnessed construction levels about twice that of San Diego. And similar comparisons between the southern U.S., where it is easier to build, and the west, which has greater restrictions, yield the same results.
The typical approach to high cost burdens for housing has been to argue for ever-greater subsidies. As Senator Warren rightly observed in her book, “direct subsidies are likely to add more ammunition to the already ruinous bidding wars, ultimately driving home prices even higher.” The same economic logic holds in the rental market. Of course, where the problem is the inability to build, there is little reason to believe building subsidized rental housing will be any easier than building market-rate rental housing. The solution is to directly attack the limitations on supply.
Were families able to reduce their housing costs, they could free up more of their income for other basic necessities. They would also no longer be forced to stretch their incomes simply to put a roof over their heads. Obviously cheaper housing isn۪t a solution for households who lack any income, but for most, significantly cutting housing costs could make all the difference. Perhaps best of all, at a time when governments face severe fiscal constraints, reducing regulatory barriers to housing construction is a low-cost solution.
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Mark Calabria is the director of financial regulation studies at the Cato Institute.
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