What do we talk about when we talk about the “housing crisis”? As Noah Kim observed in a recent article in Mother Jones, that term has meant so many things to so many different people that it sometimes seems to have no fixed meaning at all. Just in the past 10 or so years, “housing crisis” has referred to the fact that home prices have plummeted—and more recently, the fact that they have skyrocketed.
Confusing, isn’t it? Better to say that the American housing market is broken in many different ways, across different kinds of places, that require different and sometimes contradictory solutions. Fortunately, the economist Jenny Schuetz, a senior fellow at the Brookings Institution, has some of the answers. In a recent interview, which has been condensed and edited for clarity, we discussed the contents of her new book, Fixer-Upper: How to Repair America’s Broken Housing Systems.
Henry Grabar: One of the things that you mention at the beginning of the book is this idea that housing markets vary so much from place to place. It’s hard to find a national consensus about issues as simple as whether prices are too low or too high. Where do you think we could find agreement?
Jenny Schuetz: Two of the obvious areas are subsidies for low-income households because those really need to come from the federal government to cover everybody and to be financially feasible. And the other is how homeownership should fit into our picture of household wealth-building, because a lot of the homeownership subsidies are built into the federal tax code. Those are two areas where we need both federal resources and federal policy that supports household decisions. On housing vouchers, we already have a model that works. We just need more money in order to cover everybody who’s eligible.
On the ownership and wealth-building side, we really have chosen not to provide subsidies for people to build wealth outside of homeownership. And we could be doing a bunch of things, including making it easier for people to save money through their employers for short-term purposes, providing child-development accounts—baby bonds, right? These are things that you would need a federal subsidy for them to work adequately.
Cities seem to have such different problems based on whether their populations are increasing, decreasing, whether they’re building or not, whether incomes are going up or going down. But you show these graphs of housing costs in metro areas with very different profiles—these sort of humped, long-tail curves for Dallas and Detroit and Los Angeles. Those are such different places, but the fact that these curves are pretty similar—a lot of cities near the median rent, and few much higher—suggests that there is a kind of universality to some of the problems involved in housing in the American city.*
What that graph was trying to show is that there are expensive, exclusive neighborhoods in every metro area, and there are relatively more affordable neighborhoods in every metro area. We think of Detroit, for instance, as being a low-cost city, right? The core urban area is not that expensive. That’s a city that’s been losing population for 50 years, but even within the Detroit metro area, there are places like Bloomfield Hills that are very expensive. Dallas also has its exclusive neighborhoods. Within each metro, there are places that are really out of reach for typical families.
So in other words, the exclusionary zoning is not exclusively a problem in high-cost cities.
It’s a bigger problem in the really expensive metros. In places like Boston, New York, most of California, more communities have more restrictions on housing. So at the regional level, we don’t have enough housing. That’s not the same problem in Dallas and Detroit, regions that basically have enough homes for everybody. But there are high-opportunity communities within the region that are out of limits and unaffordable, particularly for low- and moderate-income families.
I guess one potential upside of that is that if you have really tight zoning and exclusionary policies in some of the absolute wealthiest neighborhoods, you encourage people who can’t afford those places to help revitalize a neighborhood that could use, say, a little investment or another kid in public school.
It’s a little bit less clear to me how that happens within a metro like Detroit or St. Louis. It’s not obvious that having a couple of exclusionary suburbs has produced urban renewal and extra resources in the core cities. There’s been some of that, but not enough to really turn the needle. I think actually the bigger change has been across metro areas. The fact that there are a lot of people who would like to live in the Bay Area or in Los Angeles or Boston and can’t afford to has definitely caused spillover into places like Austin and Nashville and Denver. The fact that we’ve seen stronger growth in the second-tier, midsize metros is very much because there’s a lot of exclusionary zoning in the places with the strong job markets.
One of the things you talk about in your book is who should make decisions about when places should be zoned for more housing. You talk about some of the state “fair share” rules—which require wealthy jurisdictions to permit or build workforce housing—and seem to have very different reputations. I often see California’s Regional Housing Needs Allocation as the butt of jokes, whereas New Jersey seems to have a similar program that is much praised. Why do some of these programs work and some of them don’t?
It’s not surprising that there are restrictive zoning rules in lots and lots of localities because that’s what current voters want. And their elected officials are essentially providing policies that respond to their voters. Moving things up to the state level offers some opportunities to make things better because the state sees the larger picture, particularly for things like regional labor markets. Massachusetts suffers as a whole if greater Boston’s exclusionary suburbs aren’t building enough housing. And so the state has an incentive to step in and try to make the regional labor market more functional. There are a bunch of different ways that states can go about this. And there are only a handful that have really done a statewide housing policy.
California is one, and you’re right: They have this regional housing needs assessment that has essentially not been enforced. So it’s on the books but has been very ineffective. New Jersey’s fair share law has been in existence for a long time, has almost certainly produced more low-cost housing and inexpensive places than would exist in the absence of Mount Laurel.
But it hasn’t fixed the underlying problem, which is that you still have an awful lot of really expensive suburbs that essentially don’t build multifamily rental housing and don’t let poor people move in.
Have you just given up totally on the prospect of these fragmented metro areas figuring out this problem themselves, given the way the governance is divided up between so many different jurisdictions?
As long as local governments are the primary entities that are responsible for development, land use regulation, approving housing production, and for paying for most of public services, we’re going to wind up with too little housing in the right places and enormous variation in the quality of public services across jurisdictions. That’s just baked into the system of localism.
I think you could get more cooperation from local governments within a metro if we had different financial incentives that were channeled from the state and federal government. So one option is the federal government gives a ton of transportation money to regional metropolitan planning organizations, MPOs, and they have to come up with a coordinated plan to spend the transportation dollars. There’s no equivalent on the housing side, right? So what if we took all of the [Community Development Block Grant] money and tax credit funds and all of the other federal money that goes to localities and gave it to an MPO, and the MPO and its member organizations had to figure out a way to spend it that’s appropriate for the region?
One of the things you notice is that there’s surprisingly few outspoken allies for zoning for housing growth, even on the side of the builders. Why do you think it might be that we haven’t seen some of the big builders really throw their weight behind loosening some of these restrictions?
Because of the way the building industry itself is structured. The really massive companies tend to be the single-family homebuilders who do subdivisions. They figured out how to work with the existing system and how to make money, so they don’t really have an incentive to rock the boat too much. Among the bigger infill apartment developers, you’ve got sort of this interesting tension that again, some of them have figured out how to work with the current system. It’s really uncertain. It takes 10 years to get approval, to build an apartment building. On the other hand, you don’t have that many competitors. Nobody else can break into the system either.
So it’s a risky business, but if you have figured out how to do this, and you have the right political connections and savvy and deep pockets to last for a long project, you can earn returns on that. And, you know, you don’t have a lot of competition. So on the builder side, the people who would actually benefit most from widespread zoning reform, making it legal to build, you know, eight-unit buildings everywhere, the people who would really benefit from that are small local development companies, mom-and-pop businesses who could build three or four projects a year within one metro area. They either don’t exist yet because there’s no competitive niche for them, or they’re much too small to really have a footprint on the lobbying side.
Right. And those firms were once the backbone of urban housing construction, but they basically disappeared in a lot of places. Shifting gears a little bit: When is the market going to nudge people and houses out of wildfire or flood risk zones?
It’s starting to happen in a couple of places where it’s just financially not feasible for, particularly, private insurance companies to stay in the business. So California, their private insurance in areas with high wildfire risk is essentially on the verge of dissolving because private companies have just realized the high likelihood of properties burning down in the same places over and over again, and that it’s just not worth offering coverage. And the state has to figure out whether it steps in and serves as the insurer of essentially first resort.
We have such a complicated system on both the housing finance side and the insurance side that up ’til now, nobody has really absorbed all of the losses. So if a house gets destroyed by a hurricane, the homeowner bears some of the losses, but the mortgage lender probably doesn’t even hold the mortgage on the books. So it’s the investor in the mortgage-backed security who will bear the loss. And for them, that’s a tiny part of their overall portfolio. They’re backed by the federal government- sponsored enterprises, and then you’ve got public insurance and private insurance. So as long as nobody bears most of the financial risk from climate, nobody really has an incentive to make better decisions.
You talk about the idea that Washington could potentially, via Fannie Mae and Freddie Mac or in another way, put a premium on, say, sprawl or climate risk.
We require homes in flood-prone areas to carry federal flood insurance. Climate-based risk in mortgage pricing seems to me like something we could do if we wanted to. There’s some technical issues about the quality of the data, particularly how granular the data is on climate risk and how that gets updated. But those are things that I think the market could figure out if it wanted to. The bigger obstacle is that Fannie and Freddie can’t make these decisions on their own. They have to get Congress to authorize them to do this. And Congress isn’t exactly leaning in.
I think you will probably see more activity from the banking regulators because some amount of this stuff is held on portfolio by the banks. The Federal Reserve, FDIC, could at some point start requiring banks to take better account of where they’re investing in properties and either maintain higher reserves or rethink their underwriting criteria for loans.
The other part of this, when we talk about the places we don’t really want housing to be built, is sprawl. It’s another place where the externalities aren’t properly accounted for in the price of the homes. You mentioned that one way we could have people bear the externalities of sprawl is higher gas taxes. But the politics of a gas tax currently suggest that that might be a tough sell.
At some point, we probably need to stop thinking about gas taxes, because as the cars switch over to electric vehicles, the gas tax is going to become essentially irrelevant. The politics around a carbon tax are really, really hard. And in part because of these equity implications—a lot of the people who live on the outskirts of major metros who drive very long distances to get to work are not wealthy people. They’re sort of lower- to moderate-income households who are living there because housing is relatively inexpensive. So passing a gas tax or a carbon tax, if those people can’t afford to live closer to their jobs, is incredibly regressive. And some of the political pushback comes from that.
You can’t really ask those people to pay a premium for the long commutes that they didn’t even want in the first place.
Exactly. If we’re going to put a carbon tax or gas tax on people who have limited incomes, we have to find a way to offset that either by essentially giving them a credit, giving them more money to pay for this, or better yet, improve the amount of housing close to jobs and improve noncar transit. So ideally you’d have a carbon tax that discourages driving and the proceeds get invested into things like more frequent bus service, which we could implement pretty quickly and cheaply if we wanted to do it. Run rapid bus transit down all the existing highways and major roads, run them at frequent enough intervals that people can actually use them to get to work. And then you have a feasible alternative to driving really long distances.
The equity thing comes up also in the climate risk. There’s almost a U-shaped relationship with income—these climate-risky places tend to be popular both with people who are super-rich and want a house in some beautiful California wine valley or along the Jersey Shore, and also with people who are very poor and who might live in places like Paradise, California, Norfolk, Virginia, or Houston, Texas. That makes it challenging to try and put a premium on housing in these places.
We probably have to think about the solution in a couple of pieces. If we made it harder or more expensive to get mortgages in climate-risky places, you could stop not just people buying those homes but new development in those areas. You shouldn’t be able to get a construction loan to build homes in places that are going to be underwater or catch fire.
For the people already there, there’s going to have to be some kind of a gradual phase-out. So you can’t just jack up the price of insurance and borrowing without giving people an option to move away. The federal government does have small-scale programs that will buy out homeowners who live in places that are at, say, persistently high flood risk.
Scaling up relocation, particularly for low- and medium-income households who want to move away from risky places paired with mortgages that are more expensive and discourage people from moving in—together, those things would work much better.
Let’s talk about renters. When it comes to getting aid to low-income renters, you talk about two different ideas. One is making housing vouchers entitlement programs so that everybody who needs one can get one. And the other one is just giving poor people money. Which do you think is a better fit?
As an economist? I would just give people cash as directly as you can, and something like the expanded child tax credit is pretty close to an attempt to do that. Just send people a check every month and let them spend it on what they want. Some of that money’s going to go to rent. Some of it’s going to go to child care. Some of it’s going to go to food. All of those are things we want people to consume more of. Giving people cash gets around some of the problems with the voucher program, particularly that not all landlords will accept a voucher. And there are good reasons why landlords don’t want to go through the extra paperwork and deal with HUD.
Are you concerned at all that in a lot of these cities where supply is limited, giving low-income renters a bunch of money to spend on housing just winds up bidding up the cost of housing?
Yes. Expanded vouchers has to be paired with zoning reforms. Otherwise you bid up the price of homes, and a lot of people are no better off than they were before.
That seems like an argument for protections for renters that don’t involve giving them more money—namely something closer to rent control, which economists usually hate. But there’s been some recent scholarship that I think complicates the picture a little bit. Where do you fall on that issue?
Rent control is not a solution to any of the underlying problems. It doesn’t give people more money to spend, it’s really poorly targeted in terms of who gets assistance from it. There’s a new paper from some economists at Hopkins looking at New York data that finds that an awful lot of the benefits go to nonpoor households in pretty expensive neighborhoods. It’s not well-targeted, and there aren’t going to be enough rent-controlled apartments to cover all of the poor people who need places to live. And it doesn’t fix the underlying shortage of housing and can even make that worse depending on how it’s implemented. So I don’t love rent control.
I understand why it’s popular with local governments, because it doesn’t cost them much money out of pocket. They have really limited financial resources. So this is one of the tools that local governments can adopt without help from the federal government. And it does provide some short-term relief for people who are able to get into rent-controlled units. It’s not great for all the people who don’t get those units. It’s like winning the lottery, which doesn’t seem to me like a particularly fair policy.
*Correction, February 19, 2022: This article initially suggested these graphs showed the relationship between population density and rents. Density here instead refers to the frequency within a metro area of a particular median rent.