[34679]

The lack of affordable housing always has been and always will be a supply problem. When demand for homes outpaces the number of homes being built, prices go up. Plain and simple.

Homes that are built for renting (mainly apartments and condos, but some houses, too) are built for profit. If you make it less profitable to build, fewer will be built. If fewer homes are built, the problem is compounded, not rectified.

If you want to make housing more affordable, make it as cheap and profitable as possible to build new homes. Get rid of the fees that can push over $100,000 for a single family home in some counties, before the builder even buys a nail or 2x4. In most states you can build a home for less than the price of permission to build a home in some California counties.

[verbify]

I used to think so too. Now I'm on the fence. High interest rates means people can borrow less, and has a dampening effect on house prices, low interest rates means people can borrow more, so house prices go up.

Our current environment of low interest rates means that borrowing is cheap - which has pushed up prices, as now people can now afford larger mortgages. This has come at the same time as a withdrawal of mortgage finance from first-time-buyers, so effectively people who have bought before can buy another house, while those who haven't can't get on 'the housing ladder'. This is according to economist Ian Mulheirn, and is very much based on the UK (although similar arguments might apply elsewhere). Supply is part of the problem, but according to him, the smallest part.

https://housingevidence.ac.uk/wp-content/uploads/2019/08/201...

[ng12]

> low interest rates means people can borrow more, so house prices go up.

Sure, but they go up by the amount of money you saved on the mortgage, the net price is the same. The amount homebuyers can afford to pay doesn't change with interest rates.

[verbify]

> The amount homebuyers can afford to pay doesn't change with interest rates.

The amount people can afford to pay doesn't change, but the cost of the house does change.

Assume a 30 year mortgage. If the interest rate is 2%, and I spend 1.5k a month on my mortgage, I can afford a mortgage of 406,000 and own the home at the end. However, if interest rates are 10%, even if I'm still earning 1.5k a month, I can only afford a mortgage of 171000 in order to pay it off by the end. You can double check my figures using this calculator - https://www.bankrate.com/uk/mortgages/mortgage-repayment-cal...

Given that deposits are usually at a minimum 10% of the house price, it's very hard for first-time buyers to gather that amount of money - while people who have purchased before can sell their existing home.

The issue the paper describes is that interest rates have gone down, so house prices have gone up, _and at the same time_ it's harder to get your first mortgage (i.e. you need a larger deposit) - which most new buyers cannot afford.

[ng12]

The error in your logic is assuming the bank is going to want the same % down payment for a 2% and a 10% mortgage.

[verbify]

A down payment is usually a percentage of the value of the house (typically 10-20%). If the house is worth more, the down payment is higher. As I said before "effectively people who have bought before can buy another house, while those who haven't can't". A higher downpayment is yet another barrier. However those who have houses already can use their existing previous equity as a downpayment and therefore can sell their home and buy another.

This underscores the view I was promoting - that interest rates play a large part in the difficulties besetting new buyers.

[notSupplied]

But it results in a higher overall level of societal leverage despite consuming the same quantity of housing.

[dragonwriter]

> The lack of affordable housing always has been and always will be a supply problem.

Yes, but in the expensive parts of California the limiting supply factor isn't how much people want to build but how much they are allowed to build because of zoning and other constraints, so there is a fairly large range where reducing the incentive to build will have no effect on actual results.

But, anyway, does this really reduce incentives for new construction? It seems to me rent control and eviction restrictions of this type increases the expected profits for new construction, because it doesn't limit existing rents, and doesn't allow high-end demand to be met by bouncing tenants out of lower-end units and renovating them and raising the prices. So, it reduces the competition new units face from existing ones at the top of the market while leaving the rents that can be charged initially for those new units unrestricted. (And, by limiting the ability to bounce unprofitable tenants in favor of new ones, if it doesn't spur new rental-focussed unit construction and housing demand remains the same it creates a greater incentive to build for sale as owner-occupied housing where, again, prices are unrestricted.)

The real danger isn't lack of incentive to build, it's lack of incentive to maintain existing units instead of milking what remaining profits can be made in the short term, then letting them fail in isolated, judgement proof, limited liability business enterprises by not reinvesting because you can't recover reinvestment with rent increases, while reinvesting the extracted profits elsewhere.

[devtul]

Doesn't zoning fall under the same category as high permit prices when it comes to roadblocks for new units? Even when you say

> It seems to me rent control and eviction restrictions of this type increases the expected profits for new construction

Zoning and high fees will still be a problem, new units can be rented/sold at a premium but then we have the issue of it being affordable in rent or credit. My guess is that the new rule protects(temporarily) whoever is already in the game, any new comer will still get screwed.

[davinic]

Prop 13 also plays a huge part in why vacant areas don't get developed.

[mikeash]

Lack of supply is a problem, but is it caused by an inability to turn a profit? It seems like developers have no trouble making money from new construction. The difficult part, and the part that limits supply, is getting permission to build.

[Symmetry]

They aren't unrelated. The more hoops a developer has to jump through to get permission to build anything the more outside returns are required to get people to push to do that. The people who thrive in this environment aren't the most ethical of business people and you'd get more ethical developers if there were clear rules allowing certain things to be built and less outsized returns. But better that than nothing getting built.

[mikeash]

You’re totally right. It just looks like the current situation in places like SF is almost entirely due to difficulty in getting permission. Remove rent control entirely and the supply wouldn’t increase much. It’s different in various other places.

[cat199]

> If you make it less profitable to build, fewer will be built.

.. and fewer will be speculated on, driving up the underlying price, which is then translated into rent.

this is my problem with simple smithian models of real estate - they ignore the wider capital market impacts.

not a fan of rent control, but also not a fan of fund fueled real estate bubbles, and both influence the cost of rent.

[folkrav]

Not American, so my knowledge on the matter is limited. Is it that expensive even outside SF and LA areas?

Also, AFAIK, these two areas (and surroundings) are very, very stressed in terms of traffic, and more housing means more people, and more cars. Can those cities deal with more traffic?

[dragonwriter]

> more housing means more people, and more cars.

More housing in SF requires design that supports fewer cars. That's not as true in LA, perhaps, but it would still be the best way to do it.

[rayiner]

Remember the US is a federal system so costs vary greatly depending on state/municipality. California regulatory costs result in high prices even though the state is less dense than many others like Ohio with far cheaper housing. https://finance.yahoo.com/news/house-costs-500000-build-sell....

[noxToken]

Very expensive. When you leave a lot of major metro areas, housing costs way less. There are 3+ BR homes on ½ acre of land (approx half an American football field or half a soccer pitch) in the South roughly 15 minutes from downtown areas for $125k - $175k USD. The cost of living in areas like SF and NYC are very high compared to the rest of the country. Housing is a major part of that cost of living hike.

[knightofmars]

> Get rid of the fees that can push over $100,000 for a single family home in some counties.

It depends on what outcome you wish to achieve. Single family zoning is backwards policy in urban environments.

https://www.citylab.com/equity/2018/11/single-family-zoning-...

[intended]

Thats incorrect - not all land is equally valuable, so just building more buildings doesn’t mean that housing is solved.

Infrastructure around the builds also matter, which means just building denser isn’t a solution.

Complimentary services like schools, stores, pubs, churches, skate parks, parks etc change the value of a location as well, and change it differently for different demographics.

So making it cheap and profitable only makes it profitable to build - it does not solve the problem of affordable housing.

[FussyZeus]

> Homes that are built for renting (mainly apartments and condos, but some houses, too) are built for profit. If you make it less profitable to build, fewer will be built. If fewer homes are built, the problem is compounded, not rectified.

Arguments like this continue to be made for more and more aspects of our market: pharmaceuticals, heathcare services, elder care services, and now housing. Everywhere you look the markets seem ill equipped to handle the needs of people.

Maybe the problem is markets then? Maybe the problem is expecting our entire society to work based on profit motive? I don't deny it's served us fairly well for awhile, but it seems like we're hitting the wall a lot lately.

[eloff]

Markets are hardly perfect, but in this specific case it should be the most efficient solution to the problem - if you could fix the zoning and other laws that distort it so badly that it's dysfunctional. And your still going to want to add incentives for things you value but the market does not - perhaps like lower income housing. In some of the other cases you mentioned markets are not necessarily the best solution. Canada benefits greatly from having a single buyer for pharmaceuticals - that concentrates the negotiating power and we get better prices because of it.

[FussyZeus]

What are the zoning laws you see as the problem? Serious question, I'm not in that area and don't know much about SF's zoning issues.

[sologoub]

There are severe restrictions on density and heavy parking requirements just to start. It’s much much more complex than that, but to simplify - people who lived in a given area want it to remain the same.

SF Bay Area is creating 3+ jobs per new unit built (any unit). So the gap is growing rather rapidly, resulting in demand far outpacing supply.

Most of the peninsula cities/towns do not want any growth and want to remain single family home neighborhoods. However, based on demand, they should probably evolve more into either denser row houses or apartment/townhome type.

The way to restrict this from happening is to require more land per sq.ft. of housing and require more parking per bedroom and guest parking for Multifamily housing. All this makes land use less efficient and therefore more expensive, deterring development.

[EpicEng]

The reason that supply is not meeting demand is because the market is not free to expand to meet the needs of the people.

[proverbialbunny]

Kind of. It's improper regulation. You need some regulation or people die, but when regulation is bad it can sometimes be worse than no regulation at all.

In the SF/Bay Area (and possibly CA as a whole) there is more space allocated for businesses than there are for houses. Likewise, zoning is spread out so people have to commute to work. This is why, eg, the greater Los Angeles area has some of the worst traffic in the US, only beaten by Texas and DC.

The history behind these bad regulations comes from racism. In the 50s suburbia was created in such a way to isolate residence selling safety. I don't want to go into the details here, but it's a fascinating piece of US history.

When businesses and commercial are interwoven with residential people stop fighting for the few places close to work, which stops spiking up the price of those areas. Likewise, when the ratio is right there stops being a supply problem, even if it is the same amount of houses. In CA's situation it could mean less business buildings or more urban housing.

[EpicEng]

Well sure; I didn't mean to imply that there should be no zoning/housing regulations, only that it has gone too far in some areas, which has stifled development and caused prices to skyrocket.

[tathougies]

Right instead of a society in which everyone behaves accorsing to their own free choices, and incentivized to make a socially helpful choice via some kind of personal reward (profit), we should instead have a society in which people are incentivized to work for others because of what? Force?

[el_cujo]

You could make the opposite argument as well, that if the market was "freer" or less regulated or whatever then anyone could build and supply would better match demand. It's a situation where you can skew the message whichever way you want to benefit an agenda since most of our systems are neither pure free-market capitalism nor pure socialism. Obviously zealots from either side are going to say our shortcomings are because we've given too many concessions to the other.