Home prices have skyrocketed, and the White House’s plan will do basically nothing to stop it.
Inflation has taken center stage, and the White House desperately wants its signature bill to be the solution.
On Wednesday, the Bureau of Labor Statistics announced that in October, its main measure of inflation saw an increase of 6.2 percent, “the largest 12-month increase since the period ending November 1990.” The official response was to argue that the Build Back Better plan, President Biden’s social spending package, is the path forward to fighting inflation. This line is not a new one.
“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” Biden said back in July.
On Wednesday, Washington Post reporters noted that the White House’s message on combating inflation hasn’t changed, and that lowering prices for things like housing, prescription drugs, and child care is “the best answer to inflationary pressures.”
But one plank of the White House’s argument bears more scrutiny: the idea that its planned investments in housing will help combat inflation. At the end of October, the White House released the latest iteration of the Build Back Better plan. Under the heading “Bringing Down Costs, Reducing Inflationary Pressures, and Strengthening the Middle Class,” it highlighted its investments in housing.
Over the course of the pandemic, home prices have skyrocketed; the underlying issue is simply that there are not enough homes for the people who need them (in particular in the places where people need to live for their jobs). This supply crisis is forcing a growing number of people to bid on a small number of available homes, thus increasing prices.
But not all “housing investments” are created equal. Generally, there are two ways you can attack an affordability crisis: 1) You work to make the item itself less expensive (supply-side policies), or 2) You give people more money to be able to afford the item (demand-side policies).
Both have their place in policymaking. But if you pursue demand-side policies when you are facing a massive supply shortage, you end up increasing prices, not decreasing them. And the nation is facing an estimated 3.8 million unit shortage.
The White House estimates that, over 10 years, its plan will “enable the construction, rehabilitation, and improvement of more than 1 million affordable homes.” The words “rehabilitation” and “improvement” are doing a lot of work here; the number of new affordable homes that will actually be created is likely just a small fraction of that number.
While some of the money is going toward building new homes, the bill also contains subsidies for homeownership and renting. In a vacuum, this sounds great! But given that the supply of affordable homes is at a concerning low, the subsidies could put upward pressure on prices, especially since it will likely take a lot longer for homes to actually get built than it will to disburse subsidies.
This is particularly concerning for the low-income renters who don’t get the rental subsidies — in one study, increasing vouchers raised rents by 16 percent on average, and “caused [an] $8.2 billion increase in the total rent paid by low-income non-recipients while only providing a subsidy of $5.8 billion to recipients.”
But, crucially, the reason that rents rise for low-income tenants in these situations is because the subsidy comes without increasing the supply of low-income housing. Both have to be accomplished together in order to actually achieve the goal of affordability.
The White House knows this. In June, Deputy Treasury Secretary Wally Adeyemo wrote a memo targeted at Congress on the issue, saying, “Critically, the Biden-Harris Administration is undertaking an historic shift in U.S. housing policy by focusing on supply constraints and the availability of affordable housing units, including multifamily rental units.”
It’s looking like much less of a historic shift now.
The major constraint on building housing in the places where people are demanding it the most is zoning laws. These laws restrict what kinds of homes can be built and where, and regulate the size of homes to the point that smaller or “starter” homes are becoming incredibly scarce. For instance, a law mandating that lots of land be no less than 4,000 square feet means that starter homes (smaller than 1,400 square feet) are illegal. The history behind these laws is complicated, but essentially they are a way for some homeowners to block change in their communities, and in their original form were a tool of segregationists.
Beyond even small, single-family homes, it is illegal in most of the United States to build duplexes or small apartment buildings that could bring down the cost of housing. The White House has repeatedly acknowledged this problem, but in the Build Back Better bill, Democrats have metaphorically thrown up their hands, abrogating responsibility for the driving force behind skyrocketing home prices.
The best way to have tackled this problem would have been to tie the dollars in the bipartisan infrastructure framework to zoning reform. Iowa law professor Greg Shill suggested tying existing highway dollars to zoning reform, quipping that “there’s no reason Iowans should be subsidizing a highway from Silicon Valley to SF when the Valley makes it illegal to build homes under $1M.”
Essentially, if California wants federal dollars to build highways or transit, it’s going to need to reform policies like parking minimums and minimum lot sizes to get it. Instead, states are being handed money from the federal government to construct transportation networks that exclude large swaths of the American public from using them.
The federal government has held highway funding hostage for other reasons in the past — notably was the 1984 National Minimum Drinking Age Act, which “requires that States prohibit persons under 21 years of age from purchasing or publicly possessing alcoholic beverages as a condition of receiving State highway funds.” President Ronald Reagan also conditioned highway dollars on setting a national minimum speed limit; this was later repealed, and one study shows it may have cost over 12,500 lives.
If Democrats are serious about attacking housing inflation, they should put real money into incentivizing states to hold localities accountable. States are ultimately in control of local zoning policy; California, for instance, recently effectively banned single-family-only zoning statewide.
“Exclusionary zoning is a product of state law, and if we can get states to address that through funding incentives, I think that that could lead to some real change at the local level,” Phil Tegeler, executive director of the civil rights group Poverty and Race Research Action Council, told Vox earlier this year. “Local governments have no inherent authority that’s not granted to them by state government.”
Barring that, national Democrats should, as Jain Family Institute fellow and housing expert Paul Williams suggested, cut “all the little toy programs and homeownership subsidies and pour that money into the Housing Trust Fund for new construction.”
But perhaps Democrats aren’t serious about stopping housing inflation. In his statement about Wednesday’s inflation numbers, Biden touted that “home values are up,” as evidence that the economic recovery is progressing. It’s a window into the confused nature of American housing policymaking that the government cannot decide whether it’s interested in bringing down the price of homes or increasing them.