A lack of homes is driving up prices in the D.C. area. Would simply building more houses fix the problem?
If you build it, affordability will come.
That's what economists say about the high home prices gripping metropolitan areas across the U.S., including the D.C. region. It's a supply issue, they argue: There aren't enough homes for everyone who needs one and the shortage is pushing up prices. Governments can help lower housing costs, the same economists say, by stripping away zoning restrictions and other regulations that impede the rapid construction of new homes.
They're correct — to an extent.
Lifting regulations and allowing the private sector to build is only a partial solution to the affordability problem. While unlocking supply would certainly generate loads of market-rate housing — lowering overall prices, reducing displacement and creating homes that many years from now will be more affordable — it probably won't bring much relief to low-income Washingtonians. There would still be formidable barriers to building deeply affordable housing, especially in jobs-rich places where it's needed most.
We'll talk about those barriers. But first, let's start with some basics.
How Building More Homes Lowers Prices
It's a simple formula: When demand is high, prices go up. Add more supply and prices go down.
That's mostly how housing prices work. Cities like Tokyo, Montreal, Houston and Chicago are case studies in how ample housing supply keeps prices reasonable. But adding supply is hard when local zoning rules — or height limitations — constrain it, says Christopher Leinberger, chair of the Center for Real Estate and Urban Analysis at George Washington University.
"We've made what the market wants — high-density, walkable urban places — illegal, so the little land that is in that category gets artificially bid up," Leinberger says.
Walkable, dense places account for only 2% of the Washington region's land, the professor says. If governments allowed that percentage to reach 5%, developers would rush in to fill it with new housing, and our affordability problems would begin to subside.
"A townhouse in Dupont [Circle] sells for an average $2 million, $1.4 million of which is the land value underneath," Leinberger says. "If all of a sudden there were thousands and thousands of other areas in the city where you could build townhouses, that $1.4 million value [would] start going down."
But residents, activists and even some housing advocates don't buy that argument, and it's obvious why: The vast majority of new housing construction here has catered to affluent people. All those fancy new apartments haven't meaningfully lowered prices for everyone else — in fact, average rents have only gotten higher, according to real estate listing service RentCafé.
This is where the basic supply-and-demand argument fails to fully explain housing markets.
Not All Housing Is The Same
If supply and demand is Econ 101, housing markets are "advanced economics," Rick Jacobus wrote in Shelterforce in 2019.
Housing doesn't behave the same way as commodities like oil. Producing more oil brings down oil prices across the board. But building a lot of luxury housing would have different effects on different parts of the housing market. That's because the market is made up of submarkets, some of which don't directly compete with each other. People searching for a three-bedroom apartment at $1,600 a month probably aren't considering $3,000 one-bedroom apartments, and vice versa.
Because the housing market is segmented in this way, adding supply in one segment mostly affects prices in that particular segment. Jacobus, an adviser on inclusive development, cites research that drew from dozens of U.S. cities in the 1980s. It showed that an influx of new high-end housing lowered the cost of other high-end housing, but its effects on other submarkets were diminished the lower down the price scale you go.
"If we build only high-end housing, everyone may see some benefit, but most of the benefit will flow to the rich," Jacobus writes.
This isn't to suggest that building new luxury apartments is counterproductive. For one, extensive research shows us that today's luxury housing is tomorrow's reasonably priced housing. (The process of new construction getting older and cheaper is called "filtering.") Secondly, building more homes for affluent people reduces competition over existing housing, which decreases gentrification and price-gouging. Finally, we can safely assume that regional housing prices would be higher, not lower, if no new homes had been built here in the last 20 years.
In other words, adding more housing — any kind of housing — is better than adding no housing.
But it's clear that the explosion of high-end housing in the D.C. area hasn't brought much comfort to low-income people. ("Low-income" generally refers to households earning 60% or less of the median family income. In the Washington region, that encompasses four-person households earning $72,800 or less, or individuals earning $50,950 or less.)
High-end rents have stabilized because there's a lot of high-end housing now. But there still isn't enough low-income housing for everyone who needs it, and competition for it remains fierce.
What Will It Take To Get Affordable Housing?
In desirable, high-cost places like Washington, market forces alone will likely never generate enough housing for low-income people. As developers often say, the math doesn't work.
The cost of land, development, regulations and maintenance are simply too high for builders to make a profit on new low-income housing. Even loosening up zoning rules, as Christopher Leinberger proposes, probably wouldn't lower land prices enough to make affordable housing profitable.
This is where public subsidies come in, though no local or state government is funding affordable housing at a level that meets need. The District has been most proactive, setting aside more than $100 million each year for the city's primary affordable housing fund. Other jurisdictions have lagged behind. Meanwhile, the federal government has largely divested from public housing, though it still funds direct financial support for very low-income renters, and it offers a tax credit that has been highly effective at financing affordable housing nationwide.
But the affordability problem is getting worse, and the coronavirus pandemic will likely deepen it. Residents put out of work during the public health crisis will require significant financial support to pay their housing costs, and many are at risk of becoming homeless.
All of this illustrates why, as Rick Jacobus writes in Shelterforce, the housing affordability crisis must be attacked on multiple fronts.
"In places where there is high demand, we need to build more housing — subsidized and market-rate housing, and even some luxury housing," he writes. "It won't solve the housing crisis on its own, but we can't solve the crisis without building."