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The Treasury Department is waving a warning flag to Congress and other policymakers about the housing market. Its message? The country is quickly running out of homes, and you need to do something about it.
Traditionally, the federal government’s housing policies have been demand-side interventions. Things like the mortgage interest deduction, which reduces homeowner’s taxes (stimulating demand) or the Fed buying up over a trillion dollars in mortgage bonds to help bring down mortgage rates (also stimulating demand). These types of policies are broadly popular since they help people afford something expensive. But they don’t do anything to reduce the cost of housing.
Now, in a memo authored by Deputy Secretary of the Treasury Wally Adeyemo, he makes the case for an increased focus on supply-side interventions. Simply put: We need to build more homes.
“Ultimately, the biggest driver of the lack of affordable housing today is a supply constraint that has existed before the COVID pandemic but has been exacerbated by the pandemic,” Adeyemo tells Vox.
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In the memo, he writes: “Critically, the Biden-Harris Administration is undertaking an historic shift in U.S. housing policy by focusing on supply constraints and the availability of affordable housing units, including multifamily rental units.”
Adeyemo is right: The supply problem is the biggest problem in the housing market. Not only is it the fundamental cause of skyrocketing prices over the last year, it was responsible for the burdensome cost of rent and homes before Covid-19 ever hit the United States and it opens the door to increased discrimination.
The memo outlines a few policies that Treasury believes will help alleviate the problem, all of which it would need Congress’s help to implement:
- Tax credits that make it “cost-effective to build new units of affordable housing and to rehabilitate existing homes in poor condition”
- Roughly $94 billion in additional subsidies to “build and preserve rental housing for the lowest-income renters”
- $40 billion to invest in America’s public housing stock
- $5 billion incentive program to “reward jurisdictions” that remove exclusionary zoning policies
Those policies themselves aren’t new proposals for Biden’s administration. Those four listed above are some of the housing policies in the American Jobs Plan, which Treasury estimates will “generate [the] production or preservation of more than 2 million affordable housing units.” What’s significant about the memo is its focus on supply. Adeyemo is making the case that the federal government cannot remain content with just helping people afford expensive housing — it has to do something to address the cost of housing itself.
The Treasury Department did not confirm with Vox how many units are going to be produced vs. preserved. While preserving existing affordable housing is important and ensures supply does not decrease, that only keeps the US at the status quo, which is a market with a roughly 4 million home shortage and where roughly 46 percent of renters are rent-burdened.
While this is a good signal of the Treasury’s and the Biden administration’s priorities, the proposed policies are unlikely to do enough to solve the supply crisis — and that’s if Congress gets on board.
What Biden’s plan will and won’t do
It’s hard to see how Biden’s current plan will substantially tackle the nation’s lack of housing. It’s a good first step, but at this point, federal policymakers remain unsure of how to effectively reduce local zoning measures that have suffocated the housing stock, in particular affordable housing in high-demand regions. So most of the housing plans are focused on measures that try and get at the problem in other ways.
Take the multi-billion investment in public housing, for instance. According to a 2019 report by the National Low Income Housing Coalition, there is a $70 billion backlog in public housing maintenance and repairs. So, it’s highly unlikely much of the $40 billion Biden’s team is proposing for public housing would go to increasing the nation’s housing stock. This doesn’t mean it’s not worth doing, it just doesn’t address the problem the memo is ostensibly about.
The policy in the memo that is the most likely to produce affordable housing is the investment in tax credits. One such tax credit is the low-income housing tax credit (LIHTC), which, according to 2018 research by the Urban Institute, is responsible for the creation or preservation of roughly 2.3 million housing units. Biden has proposed investing $55 billion in LIHTCs over 5 years.
More to the point, there is widespread agreement that the biggest cause of America’s supply crunch is local zoning rules, which have made it illegal to build many types of affordable housing, especially in the most job-rich regions.
These rules, things like minimum lot sizes which force developers to build large homes on large plots of land or parking minimums which make it inordinately expensive to build many affordable multi-family units, have driven up the cost in the most high-demand regions. In turn, that has forced many people who live in those regions to seek housing in more affordable places, thereby increasing demand in previously affordable communities and creating cascading supply issues throughout the country.
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The $5 billion that the federal government is seeking to allocate is very small in the face of that problem. A senior Treasury official said that this was a moderate amount of money but that the current goal is primarily to learn from what localities do in response to these funds and see what works to see how the federal government can target the most harmful policies.
The official added that the $5 billion will likely be a mix of Sen. Amy Klobuchar’s proposal to provide localities with grant assistance to figure out how to re-do their zoning laws and the original White House proposal that would only grant localities funding once they have removed the harmful zoning laws.
There is widespread research on the harm of these policies both to the lives of working-class Americans and the general economy. The problem with eliminating exclusionary zoning laws isn’t technical or academic, it’s political.
Some local homeowners seek to block the development of new housing either out of concern for their own property values or a personal dislike of the kinds of people they assume will be able to live in their communities if more affordable housing units are built.
Over the last year, homeowners have accumulated over $1.5 trillion in home equity, according to research by CoreLogic. It’s likely that unless these exclusionary zoning laws are removed, the incentive to continue restricting the building of more housing will win out.
If the $5 billion measure to tackle exclusionary zoning laws passes, the Biden administration would be going further than any previous administration has in challenging exclusionary zoning — but it’s nowhere near enough to tackle the problem.
Memos are all well and good, but the real decision-maker is Congress
Historically, Congress hasn’t been interested in intervening on the supply-side. Why? Demand-side policies are fun! Policymakers get to help their constituents afford something without having to do the hard and often politically dicey work of making something cheaper. But it also means that the government often fails to tackle the root of the problem.
“One of the worst tendencies in American politics is to restrict supply and subsidize demand,” economist Tyler Cowen wrote in a 2019 Bloomberg column, crediting the phrase to economist Arnold Kling. “The likely result of such policies is high and rising prices, restricted access and often poor quality. If you limit the number of homes and apartments, for example, but give buyers subsidies, that is a formula for exorbitant prices.”
This is exactly the problem in the US housing market today. To be fair to Congress, it’s local governments that have restricted supply, while Congress has come behind them trying to subsidize the rising cost of housing and rent. But the national economic impact of these goes beyond the local level: Researchers have estimated that the nation lost a whopping 36 percent in economic growth from 1964 to 2009 due to these policies.
It’s a hard problem because many of the demand-side policies are worthwhile ones.
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For example, universalizing housing vouchers would provide an additional 11 million people with help affording their rent, reduce domestic violence, food insecurity, and child separations from their parents. But at a time when the supply of affordable housing is low, there’s evidence that landlords would be the beneficiaries of the policy as increased demand would lead to increased rents. Further, any low-income households that don’t participate in the program could see higher rents. The government should fully fund the voucher program anyway, but the bottom line is without more supply, there is a fixed amount of people that can be housed no matter how many subsidies are provided.
Congress is also considering passing a “down-payment assistance bill [that] would provide $25,000 to first-time homebuyers, but only those who are first-generation homebuyers and economically disadvantaged,” reports HousingWire. If the bill passes, there may be a few more low-income and first-generation Americans who are able to purchase a home. But it will predominantly be a giveaway to existing homeowners, who are on average wealthier than the general public, because it will raise the value of their homes.
Adeyemo argues in favor of doing both: “You’ve got to do things to make sure that even in a tight housing market, people of color and low-income people aren’t left out. But the place where we want the most resources at the moment is trying to stick with supply-side constraints. We need to make sure that renters don’t see rents go sky-high and ultimately the benefits of homeownership are accrued to the home-buyer rather than to the institution that owns the home.”
“Getting this balance right is going to be important,” he added. “Congress has largely focused on the demand side, providing vouchers, finding down-payment assistance. What we’re trying to signal with this piece is that we also want to work with them on the supply side because it’s often something that people haven’t emphasized.”
