Free Market Institute Blog
Livin’ At the “YMCA”?
One of my first post high school jobs was the midnight to 8 am shift at the Grand Rapids, MI, YMCA, which had over 100 residents. We rented small, clean rooms with a single bed, desk, sink, weekly housekeeping, and communal baths–all for about $9 a night. I checked in men who were having marital problems, the occasional misfit, and some single men who were merely frugal and in between housing choices.
That sort of Spartan housing option has faded away over the past few decades; meanwhile, home prices have skyrocketed and homelessness has exploded.
Today, nearly 20% of millennials assume they will never be able to afford a home. Between higher home prices and mortgage rates rising from under 3% to over 7%, the average monthly home mortgage in the USA is now over $2300, and nearly $4000 in places like California.
What went wrong? Is this the market’s fault?
We can blame markets for a lot of things—after all, markets reflect peoples’ values, and sometimes we don’t like that people value endless Marvel movies and rave dances over operas and documentaries. But I doubt that we can blame housing woes on markets, and in fact, I suggest we give them a chance at solving this challenge.
Imagine for a moment morphing the utopian visions of John Lennon and the grounded free market beliefs of Milton Friedman: could we make housing obtainable?
Yes: but first, we need to understand the problem. Home prices have risen about three times as fast as inflation since 1963. Why?
Some of this is because we’re getting wealthier, and we want larger homes. In 1963 the average new home was 1450 square feet, with about 435 square feet per person (my childhood family of seven felt pretty comfortable in 935 square feet). By 2014, new homes averaged nearly 2700 square feet, and with smaller families, each person enjoyed 1046 square feet. Today, that figure has shrunk a bit, partly because of our smaller families and shifting tastes.
No problems here. We got what we wanted and bought what our increasing productivity allowed.
But did we? Since 2008’s financial crisis—caused, to a large extent, by the popping of an artificial housing bubble—we’ve reflated that very bubble; blame ZIRP. The government’s zero interest rate policies brought about unnaturally low mortgage rates, which not only helped ease the burden of consumer and government debt, but they made it easier to afford that extra 600 square feet per person.
Mortgage interest tax deductions also brought about implicit housing subsidies, which increased demand for homes.
Even so, home ownership has become more onerous in the past few years. I have friends who gladly pay over $5000/month in rent because purchasing that condo would cost them $10,000/month, with California’s pricey real estate, today’s high property taxes, and higher mortgage rates. Last year, only 1 in 6 homes were affordable to people earning the median income in their community.
There’s something else to examine: building codes.
Lawrence J. McQuillan, a Senior Fellow and Director of the Center on Entrepreneurial Innovation at Oakland’s Independent Institute, tells the story of Chris Mortenson, a San Diego developer who, in the late 1980s, wanted to make some money and alleviate homelessness by constructing low income housing.
His architect proposed a four story building with 120 sq ft units, each containing a bed, desk, microwave, sink, and toilet, with communal showers—a step up from the YMCA units I rented out in college.
The city waived its building codes. Each unit cost $15,000, with monthly rents of $200—and remember, this was not subsidized housing, and it was built by a profit-seeking entrepreneur.
This occurred in the late 1980s, so a building like this today would cost $34,000 per unit and rent for about $440 a month. Today, a San Diego apartment built to code costs from $192,000 to $375,000. A realtor friend of mine told me many years ago that building permits add $75,000 to each new home in Santa Barbara. That’s not the market’s fault.
According to Phillip Howard, building codes “dictate minimum room dimensions, require that bathrooms and kitchens be separate from rooms for every other use, and mandate hundreds of other details. Good ideas and technological advances fill every page of the code book. Who can object to any of this? No one, provided society can afford it.” Howard calls it a “drive toward mandated perfection.”
The mounds of red tape, permitting requirements, costs of retrofitting and the additional construction costs for larger buildings do harm to those who cannot afford housing.
It’s always good to ask, cui bono? Who benefits from all these barriers to entry? The answer: all sorts of people, including politicians, bureaucrats, electricians, drywall installers, and architects. And, current homeowners. As a homeowner, I do. My children don’t.
Howard reminds us that “Real people tend to have their own way of doing things…Law, trying to make sure nothing ever goes wrong, doesn’t respect the idiosyncrasy of human accomplishment….When law notices people doing it differently, its giant heel reflexively comes down."
Put your John Lennon and Milton Friedman spectacles on, and envision how markets could mitigate many of our challenges. Imagine some flexible, market-friendly innovations in housing, and we can imagine putting a dent in homelessness and millennial housing angst.
