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Big Real Estate Says Regulations Caused Housing Crisis, But They Wrote the Rules

The problem with our housing system is that by design some people stand to make a lot of money from the lack of supply.

A person stands in front of several boarded up public housing units in the Lincoln Heights area in Washington, D.C., on September 23, 2022.

The vast majority of economists, pundits and politicians agree that there aren’t enough homes in this country. The most conservative estimates put the number of needed homes at around 1.7 million units, with the most liberal estimates calculating it as high as 7.3 million. The reasons for this huge discrepancy — resulting from variations in counting potential homebuyers as well as the type and location of housing units needed — are important, but ultimately most entities assessing the national housing situation settle on a number between 4 and 5 million.

From here, we tell ourselves a simple story about housing. Namely, that we have a housing shortage, so we need to build more homes. This sounds nice, easy even: All we need to do is incentivize the builders of homes, the real estate industry, to build more. But that’s where things unravel, because the reason we don’t have enough homes is a direct consequence of the real estate industry’s influence over what kinds of housing have been allowed in our country — a direct consequence of treating housing as nothing more than a commodity to be built, bought and sold for profit.

Real estate agents and developers are some of the loudest critics of regulations like mandatory setbacks, minimum lot sizes and zoning codes excluding multiunit properties. This is a relatively recent development resulting from the fact that the industry has run out of cheap, easy places to build. The truth is that the real estate industry is protesting the world that it built and has fought to maintain for more than a century.

Building Single-Family Homes

This world began to take shape in 1922 as the federal government sought to respond to what was seen as a critical shortage of housing following World War I. Better Homes in America (BHA) had kicked off a campaign to create “a nation of homeowners.” The phrase came from former President Calvin Coolidge, the group’s chief adviser at the same time he was serving as the country’s vice president. Coolidge was joined by the likes of BHA’s first president, Commerce Secretary Herbert Hoover, and BHA member Franklin Delano Roosevelt, then president of the American Construction Council, one of many new trade associations. In this way, the BHA perfectly represented the revolving door between the real estate industry and federal government.

By the following year, BHA’s “Demonstration Week,” in which recently constructed, idealized homes were put on display in cities across the country, had the support of governors from 30 states plus the territories of Hawaii and Alaska. These overwhelmingly detached, single-family demo homes were what people would picture when they thought of, as Hoover put it, “the home as an investment.” Single-family houses were what would be built to satisfy what Hoover described as a “primal instinct in us all for homeownership.”

This wasn’t a coincidence. In an article entitled “Essentials for Demonstration Home,” Chamber of Commerce Director of Housing Conditions John Ihlder described detached, single-family homes surrounded by open space as “the best, unquestionably.” Notably, Ihlder also prescribed the minimum setbacks which should be required. What had been an exception would quickly become the rule.

But that wasn’t all. Another article, this one written by John Gries from the Department of Commerce’s chief division of building and housing, described the importance of zoning to create and maintain areas exclusive to single-family homes, ensuring that “houses built would be safe from invasion by apartments or industry.” Amid heavy lobbying from the real estate industry, this rule would be codified in 1926, when the Supreme Court upheld the right of a Cleveland suburb to restrict apartments from an area of single-family homes.

From this point forward, the mission of the real estate industry became selling the detached, single-family home. With the country devastated by the Great Depression and the federal government eager to stimulate the economy, the real estate industry had cheap land, cheap labor and federally backed credit. The industry approached its mission with the same zeal which had informed the late-1800s era of Manifest Destiny, the idea that U.S. expansion had been “allotted by providence.”

Those who claim that we can build our way out of our current housing shortage point to the past as examples of the market meeting everyone’s needs. This is a lie. While the post-World War II boom provided many people with a steady increase in wages to offset rising housing costs and the national homeownership rate continued rising, it did not do so for everyone. Millions of people were locked out of the housing boom, the market deliberately failing to meet their needs. This group of people, who were disproportionately Black but also included non-Black immigrants and a sizable number of white people, often lived in public housing built and operated by the federal government.

Opposing Public Housing

From the beginning, public housing was ordained to operate at a loss. This didn’t have to happen, but the Housing Act of 1937, which created the first public housing in the U.S., specified that it would be exclusively for low-income residents so as not to disrupt the profit margins of private developers. Additionally, every unit created would also dictate that lesser-quality units already in existence — slums — would be torn down. The federal government agreed to the latter to appease cities, which court rulings determined to have primary oversight over the building of public housing.

Buildings remained segregated. Over time, as more white residents secured loans and bought homes and more housing for Black residents fell into disrepair, segregated public housing became more and more difficult to justify. Vacancies in white public housing grew alongside the wait lists for Black public housing. In 1954, the California Supreme Court decided in Banks v. Housing Authority of San Francisco that the same standards must apply to all who were eligible for public housing, regardless of race.

Almost overnight, public housing became taboo and politically unpopular. Twelve states passed constitutional amendments requiring local referendums for building public housing for low-income families. The Supreme Court upheld the practice. The real estate industry, always opposed to public housing, was quick to draw attention to the government costs of public housing while further obscuring the far more massive government subsidies involved in incentivizing the sprawl of suburbanization.

As these subsidies created white suburban “utopias,” prices went up. Meanwhile, longstanding disinvestment within inner cities created cheap spaces. Developers and government officials saw their opportunity: Areas were rezoned to draw higher-income residents back to the city. The fact that lower-income people, disproportionately those of color, were pushed out was viewed as a regrettable consequence of the market at work.

This situation, with some displaced at the same time others gained access to a valuable asset, became an analogy for the entire economy as the 1980s and 1990s rolled on. Wages had stagnated and wealth inequality — especially that driven by housing — had skyrocketed.

The Housing Gap

As economists Lawrence Mishel and Josh Bivens wrote for the Economic Policy Institute, “Between 1979 and 2017, the compensation of median workers trailed economywide (net) productivity growth by roughly 43%, leading to rising inequality.” Workers were producing far more, but the benefit was instead being concentrated in a tiny segment of the population, what Mishel and Bivens identified as “workers at the top (mostly highly credentialed professionals and corporate managers) and owners of capital.” The rich were getting richer, and the cost of being poor was growing.

Fueled by deregulation in real estate and banking, the real estate industry found new buyers in the 2000s. The building and selling of real estate was now being driven by the loosest possible lending practices, perhaps best illustrated by the prevalence of so-called NINJA loans given to those with “No Income, No Job, and no Assets.” Homes were increasingly built and sold to existing homeowners seeking an additional home solely as a retreat or asset rather than a residence. As economist Daniel Garcia calculated in a 2019 paper for the Federal Reserve, “Overall, second-home buying could explain about 30 percent and 10 percent of the run-up in construction employment and house prices, respectively, from 2000 to 2006.”

Between the beginning of 2004 and the end of 2006, the annual rate of privately owned homes constructed never fell below 1.4 million, numbers never seen before. This was a time of severe overbuilding, overselling and overbuying — in short, a bubble.

When this bubble finally burst, it hurt nonwhite families — particularly the Black families who had been targeted by banks with predatory lending terms — worst. The number of home purchases dropped off. Without buyers, so did the supply. In March 2011, the number of new single-family housing units built dropped to an annual rate of 368,000, a low point in the 43 years since the Federal Reserve had begun keeping this data. These low numbers would continue to rise steadily over the course of the next decade, finally reaching an annual rate above 1 million in January 2021, a level which has been maintained ever since.

But the price of housing has continued to increase. Officials throughout the real estate industry have explained this by villainizing existing homeowners and local government officials who are saying no to changing the building and zoning codes. But the reason they have this power in the first place is because the real estate industry championed these rules to raise the price of housing.

The industry has done such a good job of this that housing has become out of reach for an increasing number of renters and prospective buyers. As more and more millennials and Gen Z-ers reach prime homebuying age without any real prospect of ever owning a home, the threat of a market crash grows.

The real estate industry is right to argue that we have a housing shortage in the U.S. It’s also right to argue that we need a “once-in-a-generation response to address the nation’s housing shortage and affordability crisis.”

This could mean easing restrictions on accessory dwelling units, as has happened in states throughout the Pacific Northwest; reexamining zoning laws or reexamining dozens of other regulations that the real estate industry now opposes. But this is only a beginning. Ultimately, we need to turn to models like cooperatively owned housing in Oakland, California; rental equity partnerships in Cincinnati, Ohio; mixed-income public housing in Hawaii; and community land trusts, in which residents own their house while the price of the land it sits on is kept stable.

The problem with our housing system is not the lack of supply; the problem is that some people stand to make a lot of money from the lack of supply. That’s the way it was designed. It’s time we changed it.

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