The Solution To Affordable Housing

The Urban Institute recently released a report on how the demand for cheap housing drastically outstrips the supply.

We've Mapped America's Rental Housing Crisis

A blog post notes:

Why isn’t the private market filling this gap? The answer is relatively simple. With a few exceptions, the economics do not pencil out. Without subsidy, private developers cannot build or operate a new unit of rental housing at a cost ELI households can afford to pay.

But notice the lack of creativity here. 

The private market does not supply the needed housing because the economics "do not pencil out." It's awesome to see this acknowledgement of the reality that economic forces beyond the control of regulations are at work here.

The problem is the lack of critical thinking about the next sentence: "Without subsidy, private developers cannot build or operate a new unit of rental housing at a cost ELI households can afford to pay."

That is not a scientific conclusion. It's a policy choice that assumes that subsidies are the only way to change the economics of the housing market. But supply and demand tells us that the price of something goes down when supply goes up. Furthermore, lowered demand makes prices go down.

The answer is obvious: a large supply of housing that is in low demand.

Currently, we make housing undesirable--and therefore, affordable--by moving it away from jobs, transportation, and government services. Thus the poor live where they are doomed to stay poor.

How do we generate undesirable units that are close to jobs and services? We can't currently because zoning laws require that:

  • A. you are not allowed to add housing units in desirable areas, and
  • B. if you do, they must be extremely desirable (i.e., expensive).

How do you make undesirable housing that is not sub-standard? You make it small. We need laws that allow for the construction of units too small to attract the rich, but in neighborhoods where the rich already live, neighborhoods with jobs, transportation, and good schools.

No subsidies would be needed. Big buildings with lots of too small units could make money if you allow them to be big enough to achieve economies of scale.