Exploring Cures for the Housing Affordability Crisis

The United States is currently facing a housing affordability crisis. To address this pressing issue, it is crucial to explore innovative solutions. In this article, we propose a range of measures, some mild and others radical, that can ameliorate the worst symptoms of the housing supply crisis and pave the way for a more effective housing market.

Streamlining Regulatory Processes

One of the major obstacles to increasing housing supply is the complex and time-consuming regulatory processes involved in construction and development. Streamlining these processes at the local, state, and federal levels can significantly reduce costs and expedite the building. Simplifying zoning regulations, permitting procedures, and environmental reviews while maintaining necessary safeguards will encourage developers to embark on new projects, consequently increasing the housing stock. Simpler regulations are likely to attract more builders to operate in a specific area by reducing the need for expert knowledge in negotiating them, thus fostering competition and lowering costs. The combination of increased supply and reduced building costs will help to stabilize prices.

Altering Local Government’s Incentives

As long as local government is funded by property taxes, local governments will have an incentive to keep pushing home prices up: And just as monopolists prop up prices by reducing supply just enough but not too much, local governments do the exact same thing with respect to the properties they tax: They intentionally approve less home construction to prop up prices. 

Ideally, property taxes would simply be forbidden. Indeed, properties would be exempt from capital gains and sales taxes as well: To ensure that the government has absolutely no incentive to restrict supply. Of course, this proposal is not feasible.

What is more feasible would be to insist on a freeze on assessed values and then to require that all new assessments, rather than using market prices, must use assessments on existing properties—the owner would have to explicitly ask for a market-based assessment if he believes using historic values is producing an excessive evaluation. In practice, this would amount to using the lower of a market assessment and a “taxable value-based” assessment. While this policy might also lead to less housing supply than we ought to have (perhaps prices should be going down), price stability has a lot of advantages, including the facilitation of mortgage lending.

Reducing Nimbyism

In principle, property taxes should give homeowners an incentive to keep property values down. However, the benefits of increased home values for local government and homeowners outweigh this tax incentive. However, if you were to give property tax revenue to an entity that had less desire to restrict supply, property taxes could be used to punish nimbyism, the political pressure to stop construction projects because they make noise, increase traffic, etc. This leads me to the following proposal: The Federal government should implement a property tax that is twice the size of the existing local tax (or 1%, whichever is larger) on any price appreciation between the “frozen” assessed value and the current market value. This would cause owners to have a more wary attitude towards pushing for policies that increase their home values: Sure, you will make more when you sell, but you will pay more while you are living in it. I would also exempt improvements, esp. ADUs or “in-law suites” (which we will discuss later), from the assessment: Essentially, the Federal tax is assessed on the “base structure” at the time the original assessment was frozen.  

Embracing Innovative Construction Techniques

Exploring innovative construction techniques can significantly boost housing supply while maintaining quality and cost-effectiveness. Modular construction, 3D printing, and other prefabrication methods can expedite the building process, reduce construction waste, and lower expenses—most importantly in this tight labor market, the cost in man-hours. Encouraging research and development in these areas, as well as removing regulatory obstacles blocking their adoption, will contribute to a more efficient and scalable housing industry. Regarding prefabricated home components altering the Fannie Mae’s and Fredie Mac’s underwriting standards so that homes using prefabricated components are not automatically assumed to depreciate faster could be esp. helpful: The stigma against “deals on wheels,” as we at Fannie jokingly referred to loans on manufactured homes, often amounts to stigma against whole categories of innovation.

Read more: AI in real estate, Part I

Unlocking Underutilized Spaces

Revitalizing underutilized spaces can increase housing supply. Converting abandoned buildings, encouraging the construction of ADUs, and utilizing public land for affordable housing initiatives can help address the shortage. Local governments can encourage the revitalization of abandoned and blighted homes by creating a “blighted property holding tax.” If the tax accessor deems the property in question to be either vacant or both abandoned and in C5 or C6 condition (using the Uniform Appraisal Dataset ratings for property condition—i.e., uninhabitable or barely inhabitable), he can impose an additional tax. The holder can challenge the additional tax by getting an appraisal that refutes the condition assessment or by finding a tenant for the property.

Regarding the next proposal, promoting the development of accessory dwelling units (ADUs) and relaxing regulations around them can unlock additional housing potential within existing residential areas. These properties can increase apartment inventory and allow in-laws and other relatives to “move in with the kids” which opens older housing stock for newly formed families. As for public land, it is important to understand that not all public lands are parks; much of it consists of vacant lots, “brownfields” (unmaintained land that is not at all scenic or park-like), vacated government buildings and facilities, etc. These lots can be sold to builders who are willing to make more affordable housing units.  At present, the Federal government favors local governments and NGOs when selling vacated Federal facilities. It would make sense for the government to add housing developers to this list. Indeed, they ought to simply auction the facilities off to the highest bidder, after making sure the existing facilities are not being scavenged by foreign entities with untrustworthy motives. However, given that the government is unlikely to do that, adding housing developers—esp. ones willing to produce mid-level housing—is better than not.  

Investing in Infrastructure

Addressing housing supply requires a holistic approach that includes investing in supporting infrastructure. Improving transportation will reduce the need to live closer to the city center. This will, in turn, decelerate the rising demand for centrally located housing. Indeed, we could tie Federal block grants for road maintenance and construction to the number of housing starts and new construction permits in a state. This would provide a direct financial incentive for building more in the suburbs along with the road capacity to handle the subsequent traffic.

Of course, ADUs face opposition from NYMBYs and others who fear they might reduce available parking, increase population density,  and, quite frankly, allow less affluent people to move into the neighborhood. However, rather than outright banning them, taxing them appropriately would make more sense. Again, the goal ought to be to achieve stable home and rental prices throughout the US so that changes to prices are entirely due to unanticipated shifts in demand.

Conclusion

The housing affordability crisis is, in reality, a housing supply crisis. We are not under undue or unprecedented population stresses: Indeed, Japan has far fewer issues with housing affordability than we do despite having a much, much higher population density. Thus, our solutions should be focused on alleviating obstacles to increasing supply.  By streamlining regulations, incentivizing affordable housing development, embracing innovative construction techniques, unlocking underutilized spaces, fostering public-private partnerships, and investing in infrastructure, we can make significant strides toward increasing housing supply and creating a more inclusive and sustainable housing market. If we can give more thought to the incentives that underlie the limited supply of homes, we can begin to untangle our current mess.

Franklin Carroll

Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.

Published September 27, 2023