Let's brainstorm..how can we make housing more affordable?

[llamaorama]

Originally Posted by Pavlov's Dog

I am just stating what public policies have contributed to the increase in housing costs. Obviously the cat is out of the bag and getting back to a situation where we can keep housing costs from inflating unnecessarily to make them more affordable is not going to be easy.

Its been a long time since I took one semester of economics in college so I might be wrong..

Why would the mortgage interest tax deduction, all by itself, be a driver of continuous, self-sustaining inflation? If it was, sometime tell the Republican party that lowering taxes is bad, because that's fundamentally the same thing.

Abolishing it would make housing permanently less affordable on a percentage of income basis for the majority of middle class Americans who own just one home that they live in which is also not particularly high value, but it would not stop investors from speculating on housing or treating it as a store of wealth.

It might cause a one-time decrease in price appreciation because the input of rising incomes going into more expensive homes would temporary shrink, but then over the long term it would just be the new normal.

[mhays]

Every solution is partial.

In an expensive city, square footage will be expensive, and increasingly so. Upzoning could flood the market with buildable capacity and help even the giant units, in part by shifting some new supply to higher-intensity areas. Also it would allow three-story houses where maybe today only two stories are allowed, meaning some townhouse formats even if oversized.

[Khantilever]

Originally Posted by 10023

How are higher interest rates going to help the middle class buy houses?

The headline prices would go down, but so would their budgets. It would reduce affordability. If anything, higher interest rates favor savers (generally speaking, the rich) over borrowers.

Same with the mortgage interest deduction - especially because it’s limited to the first $1 million of debt, which limits the benefit to the rich and makes this a mildly progressive feature of the tax code.

The problem with politics is that so many voters are economically illiterate.

The home mortgage interest tax deduction makes housing more expensive. It encourages people to purchase larger, more expensive homes by making financing artificially inexpensive. This drives up prices because housing supply is relatively inelastic.

It's an empirical question whether scrapping the deduction would improve affordability. It would improve affordability by reducing the market price of housing, but reduce affordability directly by making interest no longer deductible. Which effect dominates depends on 1) household income, and 2) the features of the local housing market, to name a couple factors.

1) Income. The deduction is extremely regressive. Homeowners are more likely to have higher income, and the deduction is larger the more expensive is your home. That it has a limit only makes it less regressive than it would otherwise be--but doesn't make it progressive.

2) Housing market. Armchair theorizing here, but the benefit of scrapping the deduction would likely be more pronounced in areas where housing is inelastically supplied, e.g. cities and the coasts. There, the increase in demand that the deduction causes is reflected in higher prices. In elastically supplied places, the increase in demand is more reflected in the size of housing.

Here's a recent paper simulating the effects of scrapping the deduction, published in the most prestigious academic economics journal. "Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare."

https://www.aeaweb.org/articles?id=10.1257/aer.20141751

[llamaorama]

This drives up prices because housing supply is relatively inelastic.

If the housing supply was more elastic, would the deduction still be a problem? Why is this a favored solution, instead of attacking the root cause?

Here's a recent paper simulating the effects of scrapping the deduction, published in the most prestigious academic economics journal. "Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare."

Why are the two options keep it or get rid of it? What about lowering the amount it applies to?

Which effect dominates depends on 1) household income, and 2) the features of the local housing market, to name a couple factors.

Tweak it so that it applies mostly to people who wouldn't be able to afford a home in a cheap market.

[Khantilever]

Originally Posted by llamaorama

If the housing supply was more elastic, would the deduction still be a problem? Why is this a favored solution, instead of attacking the root cause?

Why are the two options keep it or get rid of it? What about lowering the amount it applies to?

Tweak it so that it applies mostly to people who wouldn't be able to afford a home in a cheap market.

1) The deduction will always make housing more expensive at the margin, because housing supply will never be perfectly elastic. I wouldn't necessarily say it's the favored solution anyway, but it is almost definitely the lowest-hanging fruit. Edit: To be clear, I really, really believe in tackling the problem in other ways too. My own research focuses on zoning restrictions and their effects. But I know as well as all of you the problem of NIMBYism is extremely difficult.

2) That would be an interesting exercise. Why the authors did not in the study to which I linked is probably because simulating the effects of a marginal change to the deduction is not easy to do with their model. It's easier to simulate a sudden shock to see the movement to a new equilibrium. It's not a stretch to infer that, unless there's some weird stuff going on in the housing market, a marginal reduction in the deduction would still have the same--albeit smaller--effects as an elimination.

3) Perhaps. There's still the question of whether this is how we want to help people. Subsidizing the ownership of larger, more expensive homes is probably not welfare-improving. Even if you want to help very poor households, we don't necessarily want to make housing cheaper at the margin--but instead want to provide a lump-sum payment that they can allocate as is best. But this is part of a much larger political debate over how to help the poor.

[llamaorama]

1) The deduction will always make housing more expensive at the margin, because housing supply will never be perfectly elastic. I wouldn't necessarily say it's the favored solution anyway, but it is almost definitely the lowest-hanging fruit.

Dumb question, but why does a tax deduction make something artificially cheap, 'artificial' being the operative term.

Suppose the federal government lowered income taxes, would there be a market failure if the government did not actively throttle middle class household spending on mortgages?

[Khantilever]

Originally Posted by llamaorama

Dumb question, but why does a tax deduction make something artificially cheap, 'artificial' being the operative term.

Suppose the federal government lowered income taxes, would there be a market failure if the government did not actively throttle middle class household spending on mortgages?

No, these are good questions, and I should be clear first that I'm not at all an expert on tax policy.

Why a tax deduction makes something "artificially" cheap is because it makes it such that the recipient of the deduction perceives a "price" that isn't the actual market price. In the absence of some market failure, the market price of a mortgage reflects the equilibrium such that the social benefit of allocating more capital toward housing (reflected in how much people are willing to pay for a mortgage) is equivalent to the social [opportunity] cost of allocating more capital toward housing (reflected in how much lenders demand for a mortgage). The home mortgage interest deduction makes it so that the homeowner's perceived cost is less than the true social cost. This is the "artificially cheap" part.

Efficiency means that as a society we only allocate capital toward housing so long as the benefits outweigh the costs. By making the cost seem lower than it is, we encourage people to allocate capital toward housing beyond the point where the benefits outweigh the costs.

If the government lowered taxes (and cut spending, so it's a permanent tax cut and not simply a loan from taxpayers to the government), housing income goes up and demand for housing increases. To the extent that the deduction creates a market failure, I suppose it would be exacerbated by the increased demand for housing. But absent some price distortion in the housing market, an increase in income itself would not be a problem. It's a really interesting idea though that we really might want to avoid doing anything that causes increased demand for housing right now so long as we have so many distortions in the housing market. NIMBYism, the interest deduction, property tax subsidies, etc. It's kind of fuel on the fire. The other day there was an article shared about giving up on NIMBY strongholds because we need to stop allocating income toward land rents; in many ways, what happens if we increase household income is we also increase the income going to land rents, which is wasteful.

[10023]

Originally Posted by JManc

Except those houses a half hour away won't stay $250k for long and with the demand, they will shoot up to $400k-$500k in just a few years.

That assumes a very constrained supply, which I don’t think is realistic. The farther the distance from the center, the more land area there is within a certain range of distances (that’s just geometry). And there will be land to build. London is also building large apartment blocks around these new stations, because there’s no existing historical building stock or neighborhood character to worry about. Cities like San Francisco could do the same, turning former industrial land into high-density residential TOD’s.

The amount of new construction required to reduce prices in the eastern part of the SF peninsula would be enormous. You could build lots of new units and they would just be soaked up by existing demand, with prices continuing to rise. Building enough to actually reduce prices would ruin the city (aesthetics, traffic, loss of historical character, etc). It would probably be reduced desirability that actually led to a reduction in housing costs, not matching supply with current demand.

[Sun Belt]

Originally Posted by 10023

How are higher interest rates going to help the middle class buy houses?

The headline prices would go down, but so would their budgets. It would reduce affordability. If anything, higher interest rates favor savers (generally speaking, the rich) over borrowers.

Yeah, higher rates won't make things affordable and will only harm people that need to borrow.

Today: current rates are approximately 4.4%
-- a home that costs 299K [w/ 20% down] would have a monthly mortgage of about $1,200/mo

Adjust those rates up to 13% [common in the late 70s and early 80s]
--that same house payment is $2,650/mo.

Today, a monthly payment of $2,650 would equate to a $660K house [assuming you have 132K cash for the down payment].

But what if all you can afford is a payment of $1,200/mo? Then:
A] you're going to find a house listed for 135K [requiring much less for a down payment] or
B] That original house that was listed for 299K will have to come crashing back down to Earth.

[JManc]

You'd have to build a lot of housing and I still think demand will outpace it drive values up. Especially in cities like London and SF.

Here in Houston, those houses "30 minutes out" were semi-affordable up to a decade ago until people 'rediscovered' their relatively close proximity to everything and their values jumped.

[Sun Belt]

Originally Posted by llamaorama

It only took Denver a decade or so to build out most of its radial network of light and heavy commuter rail lines. Where there is a will, there is a way.

You can't California to Texas or Florida for reasons of geography. I suggest you look at Google Earth and tell me where exactly in LA county that isn't an hours drive from the city center you might put a tract home development starting in the 200's.

Likewise, where are going to put Texas style sprawl in the Bay Area? Tracy? Have fun with that commute.

Decentralization does help with this problem, but at some point you lose the coherency of the metro area. LA is functionally like a couple different big cities stitched together at this point. Eventually that will happen to Dallas and Houston.

1] Denver's light rail system didn't take 'a decade to build out'. The first section opened in 1994. The West Rail Line originates from the 1970s.

2] You can compare the geographies of California to Florida. Yes, we have mountains in the way, but Florida has lots of water, swamps and everglades in the way. South Florida is just as constrained as California's cities, however the most expensive part of Florida - S. FL is much less expensive than anywhere in California.

3] You can't put tract homes anywhere for 200K in California due to all the fees collected on each and every unit.

This:


Cannot legally happen in California. Anything above 3 floors anywhere near the water will not happen and adds pressure to the housing situation.

[MonkeyRonin]

I created a topic on this very issue in Canada a while ago, on ways to ease affordability while also ensuring livability & socially responsible, desirable development moving forward. Some possible solutions that were raised - which while primarily related to Toronto, would apply to many other fast-growing, high-cost cities as well:

• Get rid of the Single-Detached zoning designation entirely, and replace it with a broader Small Residential zone that would also allow for small apartment buildings (say, up to 4 stories/8 units), townhouses, and duplexes in traditionally SFH neighbourhoods.
  
  
• Make it easier to subdivide buildings & lots. Allow accessory buildings. Relax constraints on lot coverage, height limits, and setbacks for multi-unit buildings without requiring a zoning variance.
  
  
• Put minimum requirements in place for the proportion of 2 & 3+ bedroom units that all new developments of a certain size must have, to increase the stock of family-sized units (right now, 3-bedroom condos are so uncommon that they're often even more expensive than a house).
  
  
• Further increase taxes on foreign buyers and flippers of pre-construction units; and add a luxury tax for owners of multiple properties that are not used as rentals.
  
  
• Improve fast, efficient regional transit with the aim of making far-flung, lower-cost areas more accessible, so people don't have to choose between an unaffordable home in the core or a nightmarish commute from the city fringe.
  
  
• Create a more extensive heritage inventory and a more rigorous approvals process for proposed redevelopments of existing building stock. Aside from protecting heritage stock, this would have the effect of suppressing existing home values as they lose their redevelopable potential. Conversely, streamline the development process for proposals on undeveloped and underdeveloped land - like vacant lots, laneways, brownfield sites, parking lots, tower-in-the-park infill, etc. Encourage new construction where none exists currently to flood the market with new units without causing displacement.
  
  
• Form a public land development corporation, with the aim of building large quantities of reasonably-priced rental & condo units. This would still be a for-profit venture, building mainly market-rate housing - just with a smaller profit margin than private developers & more responsibility to the public good. With the ability to tap into public funds, this would give it a level of financial backing that few private developers would be able to match, while also being able to generate income in a way that current community housing departments cannot. Having a lower-priced competitor would also force other developers to sell at lower prices as well.

[Obadno]

BY allowing more housing units to be built.

The issues with Vancouver, and San Francisco and the places with housing shortages is that they have limits and very expensive barriers to develop. Demand goes unfulfilled and prices skyrocket as a result.

[jtown,man]

Originally Posted by DCReid

Unless people's perception change on what they want in housing, including mine, I think it will be difficult. The size of houses has grown dramatically despite the decline in household size. I see all of these big houses (3000-5000 sf) around me, but few kids. Even I, as a single person, want at least 3 bedrooms and 2 baths in any condo or townhouse that I would buy (and at least 1500 sf feet at that).

People seem to think that if they move further out, they can have bigger houses and more land. It's a self-fulfilling prophecy for bigger and bigger... and more $ and more $.

Hasn't the size of the American home stalled or even become smaller in the last few years(I might be wrong, of course)?

In any case, I think overall you are right. I am a product of your explanation. My parents kept buying bigger and bigger. My sisters also are doing the same in rural Arkansas. They started with a "starter home" and are buying a larger home every 3-5 years.

However, me and my girlfriend started out with a 530 sq ft apartment and are in a 633 sq ft apartment now. We both agree and talk about this often as real estate interests us a lot that we would want about 300 more sq ft per kid we inevitably have. So two kids= 1250 sq ft or so. That amount of space seems really large for me right now...like too large. Just cleaning my current place is a chore with a large shedding dog. So for me, I think around 1000 sq ft would be fine.

My point? I think there is *enough* people like me to make a change. Sure, most people are like my sisters, but I think that number is way lower relative to where we were in say 2000.

[jtown,man]

Originally Posted by MonkeyRonin

I created a topic on this very issue in Canada a while ago, on ways to ease affordability while also ensuring livability & socially responsible, desirable development moving forward. Some possible solutions that were raised - which while primarily related to Toronto, would apply to many other fast-growing, high-cost cities as well:

• Get rid of the Single-Detached zoning designation entirely, and replace it with a broader Small Residential zone that would also allow for small apartment buildings (say, up to 4 stories/8 units), townhouses, and duplexes in traditionally SFH neighbourhoods.
  
  
• Make it easier to subdivide buildings & lots. Allow accessory buildings. Relax constraints on lot coverage, height limits, and setbacks for multi-unit buildings without requiring a zoning variance.
  
  
• Put minimum requirements in place for the proportion of 2 & 3+ bedroom units that all new developments of a certain size must have, to increase the stock of family-sized units (right now, 3-bedroom condos are so uncommon that they're often even more expensive than a house).
  
  
• Further increase taxes on foreign buyers and flippers of pre-construction units; and add a luxury tax for owners of multiple properties that are not used as rentals.
  
  
• Improve fast, efficient regional transit with the aim of making far-flung, lower-cost areas more accessible, so people don't have to choose between an unaffordable home in the core or a nightmarish commute from the city fringe.
  
  
• Create a more extensive heritage inventory and a more rigorous approvals process for proposed redevelopments of existing building stock. Aside from protecting heritage stock, this would have the effect of suppressing existing home values as they lose their redevelopable potential. Conversely, streamline the development process for proposals on undeveloped and underdeveloped land - like vacant lots, laneways, brownfield sites, parking lots, tower-in-the-park infill, etc. Encourage new construction where none exists currently to flood the market with new units without causing displacement.
  
  
• Form a public land development corporation, with the aim of building large quantities of reasonably-priced rental & condo units. This would still be a for-profit venture, building mainly market-rate housing - just with a smaller profit margin than private developers & more responsibility to the public good. With the ability to tap into public funds, this would give it a level of financial backing that few private developers would be able to match, while also being able to generate income in a way that current community housing departments cannot. Having a lower-priced competitor would also force other developers to sell at lower prices as well.

Although I am no expert and I don't agree 100% with every little detail, I think this list is a great start to getting something together that could work.

[Chef]

One idea that may be ideologically unappealing to some but has worked in the past would be for government to build large amounts of rental housing and then rent it at a subsidized rate. Obviously this wouldn't be a solution to rising barriers to home ownership but could help with the equally out of control rental market.

[Pavlov's Dog]

Originally Posted by Sun Belt

Yeah, higher rates won't make things affordable and will only harm people that need to borrow.

Today: current rates are approximately 4.4%
-- a home that costs 299K [w/ 20% down] would have a monthly mortgage of about $1,200/mo

Adjust those rates up to 13% [common in the late 70s and early 80s]
--that same house payment is $2,650/mo.

Today, a monthly payment of $2,650 would equate to a $660K house [assuming you have 132K cash for the down payment].

But what if all you can afford is a payment of $1,200/mo? Then:
A] you're going to find a house listed for 135K [requiring much less for a down payment] or
B] That original house that was listed for 299K will have to come crashing back down to Earth.

The thing about high interest rates is that they usually also are combined with inflation and also wage increases. That can actually be very advantageous as a homeowner with debt since the amount of debt as a percentage of wages decreases over time. What has happened the past 30 years though is that most normal people, especially in those markets now classified as unaffordable, have experienced very high inflation due to the housing price increases over that period of time. Official inflation figures barely account for this though and of course wage increases haven't kept pace. Hence housing has become unaffordable.

[jd3189]

Originally Posted by Sun Belt

2] You can compare the geographies of California to Florida. Yes, we have mountains in the way, but Florida has lots of water, swamps and everglades in the way. South Florida is just as constrained as California's cities, however the most expensive part of Florida - S. FL is much less expensive than anywhere in California.

3] You can't put tract homes anywhere for 200K in California due to all the fees collected on each and every unit.

This:


Cannot legally happen in California. Anything above 3 floors anywhere near the water will not happen and adds pressure to the housing situation.

This is very true. Most of the major desirable and expensive cities and communities in South Florida are limited to the coastal barrier islands and downtowns along the intercoastal. Thus, most of the region can maintain affordable housing to an extent. All the very expensive condos that Miami is known for is gladly limited to a small part of town and does not have a huge affect on the prices of most other neighborhoods.


Not sure if it makes sense or is even economically possible, but can the most desirable and expensive housing be limited to a few neighborhoods within a desirable city? For example, most of NYC's most expensive properties are and have historically been in the UWS and UES in Manhattan. Even adding in TriBeCa and West Village, the total amount of luxury or wealthy properties in Manhattan makes up less than half the total properties.


For LA, the most desirable neighborhoods are also in a small portion of the city and region, being concentrated in Beverly Hills, etc. That leaves a good portion of the city up for everyone else.


For cities like SF, the same model should be used if it isn't being used already. Concentrate most of the market rate and expensive housing in the core of the city. Build in a very dense fashion, providing more microunits and high capacity buildings in TOD areas, especially in neighborhoods like the Tenderloin, Fillmore, etc that have the space while protecting the architecture and character of those neighborhoods. But each plot of land at the core must up used to its full potential. The land is too valuable to waste now, especially when building more transit developments around the Bay Area may not do as much by itself.

[James Bond Agent 007]

In some cities, there is nothing you can do to make housing "affordable." The best you can hope for is to do some things to keep prices from rising as fast.

[10023]

Originally Posted by James Bond Agent 007

In some cities, there is nothing you can do to make housing "affordable." The best you can hope for is to do some things to keep prices from rising as fast.

Even this doesn’t work.

You can’t make an expensive neighborhood “affordable”, period. You can make an affordable neighborhood easier to get to. It’s as simple as that.

And Florida and California are completely incomparable. Florida is much less expensive because, outside of some coastal areas that attract retirees and tourists, it’s not a very high income state. SF and West LA are expensive because a lot of people in those areas are making a lot of money.