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While the housing crisis is real, enforcing legislation to address the problem isn't the solution to fix it

Recently, Senators Tina Smith, Jack Reed, and Tammy Baldwin introduced the Affordable Housing and Homeownership Protection Act. This bill aims to generate $50 billion over ten years by implementing taxes on large investors for the purchase of single-family homes. The $50 billion generated would be utilized to support the construction of approximately 3 million new homes.

In the Congressional Record report, the senators briefly explain the reasons why they are introducing this bill. The report states that the bill is a response to the escalating housing crisis. Firstly, the report identifies a shortage of about 6. 8 million homes. Moreover, a rise of 39% in home prices and 31% in rent over the last four years is observed. Even more concerning, in the report they cite the National Low Income Housing Coalition which finds that 73% of low-income households spent more than half their income on housing.

After briefly outlining the scope of the crisis, the report delves into the perceived cause. According to the report, the driving force behind this crisis is the acquisition of single-family homes by large investors. The rationale is that low-income households become victims of rising prices due to the upward pressure exerted by these investors. Families unable to match the financial power of these large investors are compelled to pay inflated prices for homes or face the looming threat of homelessness.

The housing affordability crisis is a genuine problem confronting the US population. Regrettably, the proposed remedy in the bill not only misidentifies the root problem but also suggests an inadequate solution. To gain a proper understanding of the housing crisis, it is crucial to pinpoint where policymakers go wrong and subsequently offer a more accurate assessment of the issue.

As mentioned previously, the report asserts that significant increases in housing prices are attributed to large investors. The primary evidence presented in the report is the claim that one in four single-family homes purchased in 2023 were acquired by investors. However, this evidence can be misleading, as the term "investors" encompasses small investors not necessarily comparable to the large corporations being criticized. When studies look at specifically large investors, we see that as recently as 2021 large investors only purchased 3% of single-family homes. Additionally, according to a recent study by the Brookings Institution, it was found that large institutional investors own only 3 percent of the single-family rental stock. With such a minimal share of homes held by large investors, it is not reasonable to attribute the responsibility for driving upward pressure on housing prices on to them. More importantly, it is unclear how taxing this small percentage of the housing market will positively affect housing prices for the rest of Americans.

To put it simply, the root of the housing crisis is due to the lack of growth in the housing supply in the face of growing housing demand. While demand for housing grew due to the rise in median income and government spending on affordable housing, the supply remained constrained by zoning and land-use regulations.

An excellent study by Gyourko gives a detailed account of how government regulations seriously constrained the housing supply. Prior to the rise of land use regulations in the 1970s, price growth in the housing market was followed by large amounts of residential constructions. In the following decades, this trend became continuously less robust as less construction followed periods of high housing price growth. Additional evidence supporting this trend can be observed in the 1980s when real construction prices, focusing solely on labor and materials costs, began to diverge from housing prices. The interpretation here is that land use regulations contribute to elevated construction costs for houses, leading to an artificial inflation of housing prices. Take, for instance, minimum lot requirements; these not only raise the expenses associated with constructing new homes but also reduce housing density.

In conclusion, while the Affordable Housing and Homeownership Protection Act aims to address the housing crisis by taxing large investors, the root cause of the issue lies in the insufficient growth of the housing supply amid increasing demand. Government regulations, particularly land use regulations, have played a significant role in constraining housing supply, contributing to artificial inflation of prices. Rather than targeting investors, a comprehensive approach addressing regulatory barriers to construction may prove more effective in achieving sustainable solutions to the housing affordability crisis.


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