Housing policy in America is broken. Since 2000, there’s been an estimated shortage of 7.3 million units, a result of government regulations preventing new supply. Two political forces drive this phenomenon. One is pure Nimbyism (Not-In-My-Back-Yard-ism), namely by existing homeowners who don’t want the competition of new development. The other is from renters, who would benefit from new development, yet sometimes align with homeowners and resist it. Because said housing is not immediately affordable for this latter group, they don’t believe it is useful, and think it may even worsen gentrification in their neighborhoods. This shows, on their part, a fundamental misunderstanding of how housing markets work, and the role new housing—along with “used housing”—should play within them.
This latter group generally consists of progressive politicians, tenants rights’ activists, and low-income renters. They think that if cities allow new housing, the projects should be either fully affordable to low-income renters, or have a certain percentage of units that are. This sentiment has crept into America’s affordable housing policy—for example, state and federal tax credit programs help finance new affordable housing projects; while inclusionary zoning mandates require developers to have affordability set-asides. Sometimes developers can’t meet these demands, causing projects to go unbuilt. This happened last year in my hometown of Charlottesville, VA, where a mid-rise project downtown fell through, partly because the developer couldn’t meet an affordability mandate exceeding 10 percent.
But this belief that new housing should be affordable is flawed. In reality, new housing sells at premiums, because it has nicer materials, modern amenities, no deferred maintenance problems, and the appeal of novelty. Older housing, by contrast, depreciates in value by an estimated 3.6 percent annually. Within 20 years, real estate in the U.S. often sinks from Class A to Class C. Even luxury housing, by sitting around for a generation, can depreciate into naturally occurring affordable housing that’s accessible to lower income groups. The term for this is “filtering”, and is a pattern recognized by economists. In 2014, Stuart Rosenthal published a study for the American Economic Review showing that rental housing in the U.S. filters down by 2.5 percent annually.
When housing markets don’t filter down, it’s because of regulation. For example, San Francisco has all kinds of old housing—59 percent of its stock was built pre-1950, compared to 19 percent nationally. But it builds few new units. This means there’s little replacement housing, and the city’s large wealthy population occupies the older units, helping push median values up to $1.36 million.
Meanwhile Tokyo is famous for its robust housing growth; in 2018 it permitted 145,000 units, over eight times more than metro San Francisco. Not only has this stabilized home prices (median values are $232,000), but causes housing there to fully depreciate within two or three decades.
Another industry where filtering occurs is automobiles. The government doesn’t control car production the way it does housing, meaning there’s plenty of competition, and car values depreciate by 10-20 percent annually. This helps Americans afford cars, and is why lower-income people know instinctively to shop at used car lots. There they will find everything from 5-year-old Mercedes that sell for under $30,000, to workable old cars worth $2,000.
These examples show the folly of modern housing policy. Metros that treat their housing markets like their car markets—allowing elastic supply—have stable prices and downward filtering. But metros that don’t find that even old, substandard homes become out of reach, since it’s some of the only housing available. Paradoxically, these expensive metros still often subsidize new affordable housing projects, which would be like giving select low-income people a brand new Lexus, when all they needed was a simple car.
Progressive advocates should take the opposite approach: don’t tout new developments as if they are an efficient affordable housing program; but don’t resist them either. Because the more new housing that’s built, the more “used housing” that is freed up to be rented or owned by low-income people.