When the shortage bros accidentally demonstrate that zoning is a trivial part of the story.

Random Walk will make it two antagonistic posts in a row. Enjoy.

• housing shortage steelman
• payment-to-income ratios skyrocketing totally stagnant, if not lower
• debunking the shortage myth, over and over and over
• ‘the land-use did it!’ (nope)
• it takes more work-hours at prevailing wages to buy a home! (nope)
• the totally obvious, staring-you-right-in-the-face, non-shortage hypothesis

Every day the steady drumbeat of “Housing Shortage Affordability Crisis” marches on, and every day Random Walk says, “lol, wut?”

Shortage steelman

The shortage argument is a bit of a moving target, but the gist of it is that:

• regulators are bad—which is generally true—and they are artificially depressing the supply of housing.
• They do this (mostly? entirely?) at the local level with zoning restrictions that prevent builders from building whatever the market will bear.1
• As a result of those supply constraints, home prices rise beyond-the-reach of too many people.

This shortage-affordability dynamic is now a “crisis,” although it’s a bit unclear when it became a crisis (or what would make it an un-crisis), and whether it’s a crisis everywhere, or just where houses are expensive.

The solution is to eliminate regulation transfer regulatory authority to the ‘good’ guys, so that we can ‘build more housing.’ If only we built more housing, then everything would be better.

Shortage proponents can correct me if I’m wrong, but none of this is an exaggeration or misrepresentation, so far as I’m aware.

A common bit of evidence that Shortage Bros tend to proffer is a comparison of home values to inflation:

Home values have appreciated substantially more than inflation, at least since the 70’s.

So you see, obviously the price of homes have gotten out-of-control.

It cannot be explained by rising wages, it cannot be explained by bigger, more expensive homes, it cannot be explained by higher input costs, and it cannot be explained by unevenly dispersed demand.

Well, it can in part, but even when controlling for those things, housing is still more expensive than it “ought” to be (at least where people want to live), and therefore we conclude definitively that there’s a shortage, and it’s a crisis, and something must be done.

And this is a theory that people feel *very* strongly about.

Debunking the sHoRTaGe myth

Random Walk has spilled inordinate amounts of ink debunking this myth, or at the very list, debunking the notion that it’s somehow axiomatically true.

Without rehashing it all here, the gist of it is:

• demand is not, in fact, growing—the stork is not on our side;2
• whatever shortage we may have had, it’s gotten substantially better over the past few years (due to historic levels of building), so whatever is causing the “affordability crisis,” right now (as opposed to the non-crisis from 2008-2020), can’t be shortages.3
• home values are not, at the moment, appreciating (for the most part). Homes aren’t selling at all (and it has nothing to do with ‘lock-in’), and the ones that do sell, are going for smaller and cheaper.
• rents also have not “skyrocketed” (and in some places, for some inventory, rents are cheaper than they were in 2019, including NYC!);4
• in general, price signals, builder behavior, and supply-levels (which are high) are all responsive to many things—interest rates, especially—the least of which appears to be changes in local zoning regs.

I mean, if there was a big shortage, then riddle me this:

Why would payment-to-income ratio drift steadily lower?

House payments as a share of income have been flat-to-down since the 70’s.

Yes, that’s right. Payment-to-income is either flat, or down, and definitely not up.

The exceptions to that decline are (a) a period we generally recognize as a “bubble” (2004-06); and (b) right now—both of which are associated with historically low borrowing costs (and a frenzy of homebuying).

Very curious.

Mostly, and perhaps my biggest gripe with the ShOrTaGe truthers, is that demand for housing is heterogenous. The reason people people bid up various homes

• is not only (or even mostly) about the “shelter” (as opposed to the neighbors),
• that demand evolves depending on the person, life-stage, and life-choices, and
• “just bUiLD MoAr because prices” reflects an impoverished-to-the-point-of-lazy understanding of what actually drives home values.

Shortage Bros implicitly rely on what I call the Hydrothermal Sea Vent theory of home values: spontaneously, value/nutrients just spew forth from some point on the map, and therefore the goal is to cram as many barnacles on the tube-thingies as possible, while energy is still spewing, until eventually the vent is depleted, at which point the barnacles gradually migrate to the next vent (leaving their empty barnacle husks behind).

That’s not really how it works, at least not since the 19th Century, and yet.

The land-use did it (nope)!

Anyways, here are two recent entries into the shortage discourse, that just seem flawed for obvious reasons (apparent only to Random Walk and 

Aziz Sunderji for whatever reason).

The first is a paper out of Harvard titled Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation.

As you might have guessed, the argument is basically that land-use regulation explains why home construction workers appear to have become less productive relative to other manufacturing. That is, while the same number of auto-workers made progressively more cars, the same is not true for house-construction-workers.

Clearly, that means that house-construction is being throttled by the regs.

I’m not really doing the whole paper justice, but here is the money chart:

Land-use regs take off in the ‘70s, leading (supposedly) to precipitous drops in “housing units/employee.”

In the author’s words, “regulation rose after 1973, roughly when construction and car productivity started decoupling.”

That’s certainly a theory, but when I look at that chart, I see (a) the S&L crisis; and (b) the GFC. In other words, two major disruptions in the mortgage markets seem to drive, by far, the most substantial productivity changes.

The trend of land-use cases, however, just seems to be doing it’s own thing. Are they some part of the equation? Sure, maybe, but y’know, perhaps consider the more obvious hypothesis first (or at all)?

Homes are getting steadily more affordable since the 70s

Here’s another one, from Jeremy Horpedahl, aka an economist writing every day.

Horpedahl, who is much smarter than Random Walk, made the following observation about the rising cost of homes:

The real price of homes relative to wages has risen 31% since 1971 (and 17% if you focus only on homes with central A/C, which is more expensive).

Whether 17% or 31% that’s a lot! You see, shortage!

But if you look at Horpedahl’s series of “work hours to purchase a square foot of home,” (which is an admirable attempt to make a true apples-to-apples comparison), the story looks a little different:

The cost of homes (as measured by work hours per sq ft) runs a shade under 6 hours, with three notable spikes.

When does the cost of homes appear to spike?

Well, costs spike in (a) the late 80s (S&L), (b) the GFC housing bubble, and of course, (c) right now. Were those national outbreaks in NIMBYism? Is the lesson of 2006 “just build more!”?

Of course not.

Once again, prices actually appear to be pretty level (if not declining), but when they do move, it’s interest rates (not zoning) doing the work.

If you cut the data to focus on mortgage payments specifically (as Horphedahl thoughtfully does), the “shortage” story looks even worse:

Mortgage payments (as measured by hours worked at the average wage) have gotten steadily cheaper from 1979 to 2019.

By 2019, “affordability” had nearly returned to the 1971 level, except when NIMBYism historically low interest rates intervened, causing a run on homes.

Once again, another “housing shortage” fail.

It’s the interest rates, right? Surely, you considered that

Again, I don’t know how anyone looks at this data, and says “yup, obviously there’s a housing-shortage-crisis because zoning.”

And yet, that’s what pretty much everyone does. And they will get angry with you, if you suggest otherwise (trust me).

The far more obvious inference is “oh, asset prices are sensitive to changes in interest rates, and when rates are low, home values go up.” Whether that’s the correct inference, perhaps reasonable minds can disagree, but given how plausible an explanation it appears to be, you can’t just ignore it.

Does that mean that zoning makes no difference, at all? Of course not.

Does that rule out the possibility that in some places supply-side constraints are making it harder to build than necessary, such that supply is lower than what demand would support? Nope, not that either.

But serial declines in cost interrupted only by seismic shifts in monetary policy (and not zoning laws) is certainly not helping the housing uber alles theory of everything.

Look, draw your own conclusions, but the housing shortage case is weak sauce. It’s certainly far weaker sauce than would justify treating the proposition as axiomatically true (at all places equally, for all times).

But, on the other hand, “never let a good ‘crisis’ go to waste.”

This article was originally published in Random Walk and is republished here with permission.