In my last post, I referenced a Federal Reserve Bank of Cleveland commentary about rent inflation in the United States. The authors suggest that metros with a housing supply problem should sport lower vacancy rates. The Fed looks at a few places where the vacancy rate changes over time don’t match the measured rent inflation. Supply would seem to be disconnected from price. For why that’s neither here nor there, read this post about how supply restrictions are to blame for high rents. If I buy this argument, then I have to wonder if the Fed’s analysis is credible. Turning back to what the Fed wrote on the matter: “Some suggest that a shortage of rental housing is responsible, though not everyone agrees that such a shortage exists.” Unfortunately, no citations are provided and I don’t know who disagrees that such a shortage exists. From the Federal Reserve Bank of Minneapolis (2002):
The Twin Cities media frequently report on affordable housing issues, and policy forums on the topic are commonly held. The mayor of Minneapolis made affordable housing a top priority of his campaign and first term last year, promising to build a thermometer outside City Hall to measure progress on the issue. Several months after election the thermometer had yet to materialize, according to local press reports, because the mayor’s aides were unsure what the thermometer should actually measure.
Again, I don’t know if the Cleveland Fed is alluding to this policy paper (PDF) by the Minneapolis Fed. As a matter of practice, defining a greater supply of “affordable housing” is a subjective exercise. Less restrictive zoning might bring down the cost of rent (I’m convinced it does). But that rent decrease may do nothing to abate the supposed housing affordability crisis. I can appreciate why a well-respected researcher would disagree, regardless of supply restrictions, a housing shortage exists.
I’m not an economist. But among economists, there is a debate about how to address the problem of housing affordability. When the Federal Reserve Bank of Cleveland casts doubt on the efficacy of increasing supply to address rent inflation, I wonder about the research paper history that lends itself to such conclusions. The comments should be taken seriously, even among those who are predisposed to believe that greater supply is the answer. Of course, no analysis (from the Fed or a university professor) is above reproach. Back to the Federal Reserve Bank of Minneapolis:
Measuring the number of unaffordable housing units first requires a definition of affordability. In this debate, a unit is considered unaffordable if a household has to spend more than 30 percent of its income on it. We use this standard to measure the size of the “shortage” because of its public prominence, even though we recognize that such a standard must be subjective. We also restrict our analysis to the rental-housing market; the owner-occupied market remains affordable by the commonly used standards. We find that the housing “crisis” is heavily concentrated among one subset of the population—poor renters.
We then examine two of the most likely potential causes. First, low incomes lead households to spend most of their income on necessities, like housing. Second, government regulation, in part designed to improve quality, can increase the cost of housing so that it is unaffordable. The costs imposed by land-use regulation can be particularly pronounced for the lowest-cost units.
After examining the data for the United States and for the Twin Cities, a metropolitan area reputed to have a severe affordable housing shortage, we find that low incomes are the primary reason why the poor live in unaffordable rental units. Even if costs fell significantly—by an amount roughly equal to estimates of the increase in cost due to regulation—the vast majority of the poor living in the United States and the Twin Cities would still live in rental units considered unaffordable. Again, we note our review is limited in its scope and sophistication. In some areas of the country, such as California and greater New York City, regulation may play a large role in explaining high housing cost-to-income ratios. However, others have come to similar conclusions that these select areas are the exception rather than the rule (see Glaeser and Gyourko 2002, for example).
Yes, land-use regulation imposes a cost on renters. Yes, deregulation will lower rent costs. Those points conceded (and carefully weighed), “we find that low incomes are the primary reason why the poor live in unaffordable rental units.” In the words of the actual Fed policy paper, “Policymakers should recognize that government financing of new housing units is unlikely to be a cost-effective response to low household income” (PDF). In my own terms, the wages are too damn low.
The analysis conducted by the Federal Reserve Bank of Minneapolis concludes, “low incomes play the dominant role in explaining current affordability concerns in the country as a whole and in an area reputed to suffer from a severe affordability problem.” Emphasis added. Demand, not supply, plays the dominant role in explaining the housing affordability crisis. Making such a distinction does not ignore the basic laws of supply and demand. It doesn’t dismiss the valuable work of Edward Glaeser and others in proving how supply restrictions do, indeed, drive up rents. Regardless, rents are too damn high because wages are too damn low.
