Living with a crisis of affordable housing

For most people, buying a house is a big decision. Factors like interest rates, school zones, commute times, location, and, of course, affordability influence the decision to forego the monthly rent payment for a long-term mortgage.

Yet buying a home remains out of reach for many individuals and families in the U.S., with house prices hovering close to an all-time high, and millennials, for a variety of reasons, opting to continue renting.

Luis Quintero, an assistant professor at Johns Hopkins Carey Business School, knows well the interwoven variables affecting the decision to buy (or not buy) a house in the United States, along with the fluctuating market forces driving prices. A specialist in urban and real estate economics, particularly related to policy-related topics like affordability, Quintero recently met with The Hub to discuss the state of the housing market and share insights from his recent research uncovering an important yet missing piece of the housing puzzle.

Let's start with the big picture: What is the current state of the housing market in the U.S.? Is the nation, as a whole, lacking in affordable housing options?

The short answer is yes, we're going through an affordability crisis—and have been for the last few decades due, in part, to the subprime mortgage market of the late 20th and early 21st centuries, when banks gave out loans to people with lower credit scores and a higher likelihood of defaulting on their mortgage payment. Banks knew the mortgages were risky, so they sold them as soon as homebuyers signed the dotted line. They didn't really care that, say, Joe and Kate didn't provide truthful data in their application and might struggle to make their monthly payments—they didn't care because they were offloading the risk to someone else.

During that period, it wasn't uncommon for someone to buy three, four, or even five houses in places like Florida or Arizona, where they could get a good deal and then flip the house and make a nice profit. All of this led to much higher housing prices—a big housing bubble—followed by a steep decline in prices, in 2008, when the bubble burst and the financial crisis hit.

But prices didn't continue to decline, as expected. Instead, as the lingering effects of the crisis dissipated and demand started increasing, supply did not catch up. This drove up prices that still haven't dropped today. That's one of the reasons so many millennials aren't buying: Houses are too expensive.

Are houses too expensive everywhere?

The housing market is not a homogeneous space in the U.S. The country is diverse, and affordable places still exist, but those places have fewer jobs and lower production, so there's a trade-off and a real mismatch between the jobs and housing available. San Francisco, for example, has a ton of attractive jobs—not just high-paying jobs in the tech sector but also middle- and lower-paying jobs. The city offers a really attractive labor market. But in San Francisco and other cities—New York, Washington, D.C., Los Angeles, Denver, Seattle—the demand for housing is high, but the supply is low, which has driven up prices in extreme ways.

A lot of people with middle- or lower-paying jobs would love to live in San Francisco or another high-cost city, but they can't find affordable housing. Similarly, people living there now—for instance, baristas serving cappuccinos to software engineers—struggle to make rent and can't afford to buy.

Cities like Baltimore, Cleveland, and Pittsburgh are more affordable and offer the amenities of a city, but these cities, too, are still suffering from affordability issues.

Monopoly power arises from frictions like information & search costs, disrupting infinite variation. As market frictions prevent these flows from varying infinitely with rent, landlords face a demand that is downward-sloping instead of infinitely elastic.

— Luis E. Quintero (@leqonomics) August 23, 2023

What's driving the country's lack of affordable housing?

This isn't a simple story, but in a sentence: Affordable housing hasn't been solved in this country because the supply hasn't caught up with the demand.

After the Great Recession of 2008, the market started recovering, and I mean really recovering—going up, up, up, and up. But as a country, we didn't build enough houses. Why not?

Part of the reason involves zoning regulations, which prevent a lot of new construction. In the U.S., neighborhoods and neighborhood associations go through a political process to decide what can be built in their neighborhoods. In Europe, for instance, that doesn't happen because decisions are made in a more centralized way, and zoning regulations for certain areas of the city may include the interests of different parts of the whole metro area. But in the U.S., where decisions are made in decentralized way, NIMBYism—not in my back yard—is widespread. Homeowners or whole neighborhoods tend to look out for their own interests and protect their investment.

Some studies in housing market research discuss the link between regulations and the low supply. Other studies point to a labor shortage and scarcity of buildable land—think of Manhattan, for instance, where nearly every inch is covered. But our research shows those are only part of the problem.

What, specifically, have you learned from your housing affordability research?

Our research has shown those factors certainly contribute—there's no doubt, for instance, that regulation prevents a ton of new construction. But even if we fix that, we still have what we call a "market structure" problem or, essentially, a rising market concentration in homebuilding.

Let me explain.

Ever since the Great Recession, smaller builders have had a hard time surviving in the market. Many were kicked out—they went bankrupt. Large, powerful developers were more likely to weather the storm and survive. Consequently, they gained power and started to dominate building in many regions, in some cases building 60%, 70%, or even 80% of new housing construction. One of my papers, "Fewer Players, Fewer Homes," offers examples, some from the analyses of outside research groups and others from our own. But to give you a sense, consider, for instance, that 100 of the largest homebuilders in the U.S. now account for about half of all new single-family home sales, up from just over a third decades ago. Most of these gains come from increases in the shares of only two homebuilders—D.R. Horton and Lennar—which, together, build almost as much as the other eight firms in the top 10 combined.

Another interesting statistic: Despite the strong recovery in home prices after the Great Recession, the number of builders has declined 65 percent since 2007, right around the time the financial crisis started.

This sounds like a game of Monopoly, played not on a board but in real life.

Yes, it's a lot like Monopoly, given that the more area your properties cover, the more you control the market and the higher prices you may charge. The U.S. Department of Justice and Federal Trade Commission uses what is called the Herfindahl-Hirschman Index to assess market concentration in various industries. A score of 1,500 to 2,500 is considered "moderately concentrated," and anything in excess of 2,500 is "highly concentrated." By 2015, 60% of the housing markets in Virginia, Maryland, Delaware, New Jersey, New York, and western Pennsylvania surpassed the "highly concentrated" threshold.

Typically, in economics, new businesses enter the market when business is booming and prices are going up. But that hasn't happened massively in housing construction since the big builders kept dominating after the recession. After all, they have deeper coffers and can handle recessions and inflation; they have whole teams and individuals devoted to navigating the complex zoning regulations of cities—to taking city council members to lunch to convince them that building here or there is in their best economic interest. Small builders don't have these things.

How, then, does the high market concentration in housing construction affect home prices?

When you have a monopoly, you have an interest in withholding supply to increase demand—really, to increase prices. That's what we see happening and one of the variables contributing to the continuous rise of house prices. We have some large, dominant players who do not want to produce as much as they can because they know it will bring down the prices of their other units. So, they intentionally avoid building, or they build over a staggered time period. That's why you see new neighborhoods with only a couple of houses over the span of months or even years. They deliberately keep the housing they're producing scarce.

Does the housing market crisis have implications for the broader economy?

Yes, in a huge way. Our research finds that market concentration has decreased the annual value of housing production nationwide by $106 billion and is altering macroeconomic dynamics. By this, I mean it affects the economy at large by, for example, limiting the ability of workers to move to employment; straining the budgets of low-income renters; and creating unequal distributions of housing wealth, while also (as I'm writing about in a forthcoming paper) contributing to inequity and segregation.

Housing plays an integral role in housing consumption and investment decisions. Consider, for instance, that housing consumption accounts for 16% of total personal consumption and 11% of the GDP. So, yes, the housing market cycle—and the volume of houses being produced—is most definitely a critical part of macroeconomics.

What, then, do policymakers need to look out for and know? What kinds of housing policies can help?

The decentralization of housing regulation is a big problem in the U.S., with neighborhoods being extreme in their attempts at keeping out the construction of multi-family housing like apartment buildings and duplexes—hence the spread of NIMBYism. In 2018, Minneapolis, Minnesota, became the first major city in the country to establish a metropolitan-wide restriction on single-family zoning, which meant that individual zoning boards couldn't keep multi-family dwellings from going up in their neighborhoods.

Although I'm all for neighborhoods deciding certain things, city and state governments need to pass regulations that keep zoning from being too restrictive. Cities and states are always interested in improving affordability and generating economic growth and opportunity, and solving the housing crisis is a key part of that. These more centralized and fair regulations would allow the housing supply to grow, while contributing to the health of states and cities.

The federal government, meanwhile, should stimulate demand, with housing and rental vouchers supplementing the high housing expenditures. But change also needs to happen with the market concentration in homebuilding. As long as we have monopolies, we're not going to solve the problem. The federal government needs to be very attentive to the mergers happening among companies. For example, Builder magazine described 2017 as "a mergers and acquisitions juggernaut for home building." Among the many mergers: Lennar purchased WCI Communities in 2017 and then merged with CalAtlantic to form the largest homebuilding firm in the country, the magazine reported. This phenomena continues to this day.

Mergers and acquisitions have contributed in a significant way to our current housing crisis. And they've made it difficult for small-scale builders to survive—and for a lot of people in this country to be priced-out of buying a house.