The Housing Crisis and Market Incentives

Most coastal cities, and even large Midwestern cities, are experiencing an influx of real estate development. This sounds like it should be a good thing, but because this development has primarily targeted college-educated knowledge workers, the new housing popping up coast to coast has not resulted in better accommodations for most Americans.

Fundamentally, we’re dealing with a serious imbalance in the supply of housing and the demand for housing. This supply imbalance exists both at the levels of (1) not building enough housing in absolute numbers to keep pace with population growth, and (2) not building enough housing which is affordable for the majority of people.

While developers blame government regulation, and that certainly is part of the story in many areas of the country, these unequal outcomes also seem to follow quite straightforwardly from the profit-seeking incentives which drive business decisions within a capitalist economy.

Our country has been caught in a trap of its own designs.

Putting it crudely, it’s more profitable to make high end housing units and rent them to people who have a lot of money. In contrast, it’s less profitable to construct lower-end housing units of ethical quality and living standard, and to rent them to the poor.*

The reasons why the logic of gambling on high end properties for richer folks wins out are, I think, more complex than I present here, and I want to explore those factors in future essays. But for now, I do think that this logic needs to be portrayed as a gamble, because when we look at it from that perspective, it makes more sense.

Investment is the taking on of risk in hopes of a corresponding reward, and thus the investor seeks the investment with lowest risk and highest return. Affluent knowledge workers provide just such an investment.

Those who have more money are able to pay more money up front, and are less likely to default in the future. They are also more likely to purchase rather than to rent long term, which is good for investors because they get their return in a lump sum rather than smaller sums spread out over time. The affluent also have the resources to hire maids and repair staff to keep up their place, are likelier to have fewer children who cause wear and tear, and also tend to invest in security measures for monitoring and safeguarding their property.

But what about competition? If everyone is trying to sell properties to college educated knowledge workers, won’t that drive down prices? There are a few factors at play here which make competition less meaningful in this economic equation.

(1) With the explosion of new business and technology ventures, and all the hosts of services which support them, new members of the upper class are being created all the time. They’re even moving from overseas! The rich are richer than they’ve ever been before, and more people are getting larger scraps from their tables. And, pre-Covid, these people were congregating in only a few cities, so their locations and movements were highly predictable.

(2) For the affluent, price is rarely the number one consideration in their economic choices. For the middle class and the poor, price tag is a constant consideration, and a driving point in their personal economic decisions. However, for those for whom money is not scarce, questions of comfort, lifestyle aesthetic, personal values, and location play much more important roles in a buying decision. This saves developers from engaging in a race to the bottom of trying to capture the affluent on price point.

(3) The affluent do not necessarily limit themselves to owning just one property like the poor and middle class tend to do. One household may own three properties in three different cities, and only live at two of them for a few weeks out of the year. For instance, this article reports that some 75,000 apartments in NYC (30% of all unoccupied apartments in the city) are only occupied seasonally or temporarily, and an additional 27,000 are off-market for unknown reasons (AirBnBs?).

My basic point in this essay is that investors and developers are acting rationally within the current market constraints they are experiencing. The incentives of capitalist markets seem to encourage this convergence of resources on high end apartments in cities with burgeoning populations of well paid college educated knowledge workers. When our society relies on the profit-motive to produce housing for its citizens, the present housing crisis becomes predictable.

This is not to say that the situation is simple in the sense of having only a small number of parts which can be untangled easily. However, I think these considerations point us towards asking the following question —

“If housing is such a crucial component in the bedrock of society, why do we leave the provision of shelter to the mechanics of the market at all?”

________________________________________________________________________

*This proviso is crucial, because there is plenty of money to be made in extorting money from the poor by providing them with sub-standard living conditions. This is how Trump’s father made his millions (see chapter 4 of Samuel Stein’s “Capital City”).

However, advances are being made in manufacturing quality dwellings cheaper, through innovations in pre-fabricated homes, homes made from recycled materials (shipping containers, for example), and even 3D printed houses. What forces are holding back this flood of high-quality and easy to manufacture shelter? I’m not quite sure myself, and I think it’s worthy of further investigation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s