Why Housing Got SO Expensive

In 1906, an earthquake and the fires that followed destroyed half of San Francisco's housing. 40% of the population was suddenly looking for somewhere to live. This could have been a catastrophe, but it wasn't. The San Francisco Chronicle, a month later, ran no stories about a housing shortage. Instead, it showed ads for flats and houses for rent. 40 years later, in 1946, San Francisco faced another housing shock. Post-war migration pushed the population faster than housing could keep pace. Yet, this time, the city slid into a genuine shortage. California's state legislature called the housing shortage the most critical problem facing California. Same city, similar shocks, but an opposite result. So, what changed? In 1906, prices were free to rise. Higher rents signaled builders to [music] build and signaled everyone else to economize. Take in a roommate. Use space carefully. In 1946, rent control froze that signal in place. The price could no longer do its job, so shortages followed. Two future Nobel laureates, Milton Friedman and George Stigler, answered that question in a pamphlet titled Roofs or Ceilings. Today, there's a housing affordability crisis and plenty of theories about what's behind it. The greedy, the speculators, the corporate landlords. Some go further and blame the whole setup. Leave housing to private markets, they say, and it will always price out ordinary people. >> [music] >> Each theory makes a prediction you can test. So, test it where the pressure is highest. San Francisco. >> [music] >> It's one of the two most expensive rental markets in America, where a one-bedroom now runs around $4,000 a month, close to triple the national median. If greed or corporate ownership were really driving rents this high, this is where it should be impossible to miss. But it isn't any of them. Not billionaires, not the profit [music] motive. The thing that actually moves the price up is policy. What the government does and doesn't let people build. The good news is that the problem is fixable. >> [music] >> First, the scale of the thing. In the 1990s, the typical American single-family home cost a little over three times the median household's yearly income. In 1995, a family earning about $34,000 a year could buy a typical existing home for around $115,000. By 2024, according to Harvard's Joint Center for Housing Studies, that ratio had climbed to five, close to the highest on record. The typical existing home now sells for about $407,500 against a median household income of roughly $84,000. Since 2020 alone, home prices have been up more than 50% and rents more than 30% while prices overall rose about 25. You already know that housing has gotten more expensive. But why? Part of the answer is stranger than you'd expect. As urbanist expert Addison of building restrictions grew partly out of the overpopulation panic of the 1960s and 70s. The neo-Malthusian fear, popularized by Paul Ehrlich's The Population Bomb, that there was simply too many people. In Boulder, Colorado, for example, a local zero population growth chapter helped pass a 1976 plan that capped building permits to hold the town's growth to about 1.5% a year. To neo-Malthusians, fewer homes meant fewer people. Absent those restrictions, a free market would have told a different story. A spike in demand raises prices in the short run, but high prices are an invitation. They signal to builders there's money to be made. Capital flows in, new housing gets built, prices come back down. In Build, Baby, Build: The Science and Ethics of Housing Regulation, American economist Bryan Caplan and Romanian artist Adi Brânzei compare it to a game of musical chairs >> [music] >> with a twist. After every round, someone adds another chair. The rich might grab the first new seats, but keep adding chairs, and eventually everyone sits. The trouble is that American housing is not a free market. Not even close. To build new housing in much of the US, you have to overcome dozens of obstacles. Zoning rules that ban apartments across most residential land, minimum lot sizes, height limits, mandatory parking, urban growth boundaries, historic preservation rules, design mandates, impact fees, and permitting reviews that can drag on for months or years. Builders have to clear every one of these before a single unit goes up, and each one adds cost. The Cato Institute's economists put hard numbers on it in their Affordability Handbook. Mandatory parking minimums, for example, can add $50,000 to a single apartment. In cities that doubled their minimum lot sizes, house prices rose 14% and rents 9. Permitting fees on an ordinary house average over $7,000. Impact fees can exceed $16,000. By one estimate, more than 40% of the cost of building an apartment complex traces back to local regulation. And in the most extreme markets, this hidden zoning tax can reach half a million dollars per quarter acre. The cleanest way to see the damage comes from American economists Edward Glaeser and Joseph Gyourko. Their move is to separate what a house costs to build from what it sells for. The actual cost of construction, land, materials, labor, and normal builders profit has barely moved in real terms for decades. Measured in constant dollars, a square foot cost about the same to build in 2015 as it did in 1980. So, if homes have become dramatically more expensive while the cost of building them hasn't, something else is driving the gap. Glaeser and Gyourko call that gap a regulatory tax. Go back to San Francisco. By the mid-2010s, a modest home there sold for around $800,000. But, the cost to actually build it, land included, was under 300,000. The difference wasn't lumber or labor. It was the land, bid up by the simple fact that you're not allowed to build much on it. And San Francisco is only the extreme. By the same measure, the typical Los Angeles home sold for about double what it cost to build, and the typical New York home for close to half again as much, which brings us to the most striking figure of all. In the handful of cities where this regulatory tax is largest, simply letting prices fall back toward the cost of building would cut housing costs roughly in half. In their 2021 paper, economists Kevin Corinth and Amelia Earvine estimate rents in San Francisco could drop by around 55% and in Honolulu by about 50, with double-digit declines across the rest. Nearly 40% in San Diego and well over a third in Washington, D.C. Now, maybe you think the answer is more public housing and more direct help from the government. The Marxist economist Richard Wolff is a prominent voice for that view. For Wolff, the deeper problem is that we hand housing over to private markets and the profit motive in the first place. His answer is for the government to step in, build and operate housing directly, and set rents at levels ordinary people can actually afford. But, his ideas run into two hard problems. The first is that we've run this experiment before. The Soviet Union made housing a state monopoly. The result was the kommunalka, the communal apartment, where several unrelated families shared a single flat, one room apiece, with a common kitchen and bathroom. The official allowance was around 9 square meters of living space per person. And in Moscow, you couldn't even join the waiting list for something better unless you were squeezed into less than about five. Nor was the wait short. In Moscow and Leningrad, a decade was ordinary, and 20 years was, by one contemporary account, the general rule. The second problem is subtler. If you fund housing assistance but refuse to deregulate, you make your own program vastly more expensive. Corinth and Irvine also have an answer for that. Federal rent assistance works by having tenants pay about 30% of their income, with the government covering the rest. When regulation pushes the market rent up by a dollar, the government's bill rises by a dollar, too. Washington already spends more than 50 billion dollars a year on rental aid, and even so, only about one in four eligible families actually receives it. Millions more sit on waiting lists. And just because the government can set arbitrary rents doesn't mean costs magically disappear. Public housing often ends up consuming even more resources from the economy to cover the very expenses the government created in the first place. But why don't we just control rents? It's the most popular fix, and perhaps the worst one. It keeps coming back because it sounds like it goes straight at the problem. Rents are too high, so cap them. But it fails for the same reason it failed in 1946. Prices are signals. Rent controls jam them. Without those signals, consumers and entrepreneurs lose the information they need to act. Rent also puts owners and would-be tenants at odds. When rents are set below market equilibrium, owners become less willing to rent out their properties, while more people rush to find a place. Frustration follows on both sides of the market. Economists usually illustrate the long-run effect with a supply and demand diagram. Over time, the supply of housing becomes more elastic, meaning owners and builders become more more to price changes. In the short run, it is difficult to convert residential buildings to other uses. In the long run, that becomes easier. As more housing is withdrawn from the rental market, the problems rent control created only get worse. In 1994, San Francisco expanded rent control to cover small older apartment buildings. Economists Diamond, McQuade, and Khan tracked what followed. Landlords pulled about 15% of the newly controlled units off the rental market, converting them to condos, redeveloping, or moving in themselves. As that supply vanished, rents citywide rose about 5%. The lucky tenants who held controlled units stopped moving. Turnover fell by 10 to 20%. A policy meant to make housing affordable made the city more expensive for nearly everyone outside the lucky few. So, come back to where we started. To the two San Franciscos. In 1906, a city lost half its homes overnight and shrugged it off because prices were free to call forth new building. In 1946, a far smaller shock became a crisis because we tied the market's hands. That's the story of the housing affordability crisis, 80 years later and on a national scale. It's not a failure of capitalism, and no one engineered it on purpose. It's a thicket [music] of rules the government wrote for us, and rules can be unwritten. The answer to more affordable housing is simple: let builders build. The housing market isn't as competitive as it could be because the government has raised artificial barriers to entry. Those barriers stand between you and the home of your dreams. Economics shows us the tools we need to tear them down. >> Hey, you want a shot at a million dollars? Okay, great. Take this 3-minute quiz on why America's less affordable.