More hot dogs please!

It’s hard to disagree with David Apert’s recent post titled “Affordable housing advocates should talk about land use… and land use advocates need to talk about affordability,” but I do. The problem isn’t that the two groups are talking past one another, but that they both make the same mistake, putting too much emphasis on housing price rather than pushing for fewer rules and less regulation of housing production. Obsession with price leads to price interventions that only make things worse. Consider the parable of the hot dog vendors.

Imagine a night out on Seattle’s Capitol Hill. Everyone is feeling hungry, and there are two hot dog vendors working on two opposite corners. The lines are long, but about equal at each stand. Sometimes people will give up on one cart and move to the other. Sometimes a potential customer gives up or gets distracted and walks away. No matter, since the hot dog vendors are struggling to meet the demand even as people find other options.

You finally get to the front of the line and you realize that this hot dog stand’s prices are lower than the other one. A hot dog here costs $1. There are different toppings, and some other minor differences, but compared to the hot dog your friend bought across the way for $2, this hot dog is going to do the trick for less money.

“How do you do it?” you ask. “How do you sell hot dogs for half the price as the guy over there?”

“Oh, we sell affordable hot dogs,” the vendor says proudly. “We get help from the Hot Dog Tax Credit Program to produce cheaper hot dogs.”

You eat the hot dog and you’re still confused; affordable hot dogs? Aren’t all hot dogs the same? When you think back to your freshman economics class you remember that price is related to supply and demand. How does the government decide how much a hot dog should cost if the supply and demand doesn’t set the price?

Later you Google the program the vendor talked about, and to your surprise the hot dogs he sells cost more, $2 per hot dog, to produce than the “unaffordable” vendor who sells hot dogs across the street for $2. That vendor struggles to keep his hot dog production costs lower to make a profit. Still, his price is higher than the other guy’s. Sometimes people get mad, calling him greedy since he’s selling his hot dogs for more than his neighbor who gets subsidies and can charge less.

You can’t figure out why government would intervene like this in the hot dog market supporting a product on one side of the street that’s more expensive to produce than the typical hot dog because of wage requirements, funding rules, overhead for extra staff required by the government, but that sells at a lower price. And the guy on the other side of the street has to sell hot dogs without a subsidy, which means his price is higher in order to make a profit. All of this is going on while there is huge demand for hot dogs.

When it comes to housing, the hot dog story is, unfortunately, an all too accurate analogy for the way we all talk about housing in this country. We see prices we don’t like and our response is to try and lower them through mandates and subsidies.

Oddly, subsidies that produce lower priced housing come with so many rules and regulatory strings that the costs to produce “affordable housing” can be higher than market rate housing. Meanwhile the regular developer has to face increased costs from regulation too, and without a subsidy her product will have to have a higher price reflecting those costs and making it “unaffordable” to some people. We pay more for “affordable” housing, sell it for less, and do little to lower the costs of market rate housing.

Prices can help innovation, since when prices go up, people are motivated to innovate and find ways to meet demand at a lower cost. When prices are low, people work harder to add value to products so they can sell them for more. Too much interference with price ends up causing weird perversions in the market.

Ironically, creating more and more regulations to control price just keeps prices high. Prices will go up and down, but if we free developers of all kinds, for profit and non-profit, from excessive regulation that drives up price, then we can create competition that fosters innovation and will, eventually, bring prices down. When prices rise, developers then have motivation to produce housing at a lower price, and the cycle repeats.

Affordability is a relationship to price. All housing is affordable to someone. What we should be worried about is making it easier, cheaper, and more affordable to build housing. If we do that, the prices will reach an equilibrium.

Let’s move beyond housing affordability and, instead, let’s talk about reducing the costs of housing production. Let’s try to reduce costs, make it easier to build housing, and promote competition. Avoiding the temptation to control price could lead to a win for everyone, with more and better housing, falling prices, and more options for homebuyers and renters. The added benefit is more people living sustainably and profitably around publicly funded transit infrastructure.

21 Replies to “Hot Dogs and Housing: Moving Beyond Affordability”

  1. The problem with the hot dog analogy is that there’s no such thing as an old, run-down hot dog (one hopes not, at any rate). There’s no such thing as “affordable housing construction” because new construction by definition is too expensive to be affordable, without large subsidies, and even then, it’s not really very affordable to the people who really need it.

    Notice that the “affordable” housing that’s being included in the new housing in the north stadium lot is going to be priced at people making 70% of median income, which amounts to $49,000 or more — which means virtually no black people, no immigrants, and no Latinos. The structural inequalities in income and wealth will exclude those people because their median incomes are far, far less. And frankly even $49,000 is well out of reach for a lot of white people I know — there will be no retail workers in those units, no social service providers, etc. Their affordability is completely bogus.

    1. Seattle’s minimum household income was reported as $60,665 or $40,868 per person. 70% of household income would be $42,500. 1.5 people working full time (household income/per capita income) would need to pull down $13.75/hr. Two people working full time would drop it to $10.31/hr. Minimum wage is $9.04. I think it’s a bit of a stretch, not to mention condescending, to claim this prices out virtually all minorities.

  2. The hot dog analogy is off in so many ways. First, you’d have to show your low income hot dog card to buy from that vendor. Their cost per dog would likely be higher since they’d be selling to a limited market (i.e. economy of scale) but the vendor on the other corner with long lines would raise prices and likely push gourmet tube stakes (higher profit margin) and produce less of the affordable dogs. The last line, an attempt to tie this issue to transit is funny. Removing zoning restrictions on rural land was what created Sprawlville in the name of affordable housing. Without government intervention Lowball Builders LLC isn’t going to be grilling up high density housing in expensive urban areas well served by transit.

  3. To continue your analogy, you can’t sell just any hotdog in this town. A “hotdog” according to regulation XYZ from the city code, must be at least 8 inches long, and consist of a bun made out of wheat bread covering said meat, with at least 2 tablespoons of relish, etc. You can’t sell half of a hotdog, or a hotdog without a bun or a tofu dog or any such nonsense. As a result, there are plenty of people who buy a full hotdog, then look around for someone to share it with.

    It becomes pretty obvious how you can reduce the cost of the hot dogs and housing.

    1) Change the regulation to allow for smaller, less fancy hot dogs. Of course, health regulations must be followed, but a better balance between what people expect in a hot dog and what people can afford could be achieved.
    2) Reduce the raw material cost of the hot dog. If we are going to subsidize, this is where we should subsidize. Of course, this gets tricky. If we subsidize pork, then beef isn’t as good a deal. What about lamb? The same is true for lumber, metal, etc.
    3) Reduce the cost of land. As it turns out, both vendors have to pay a city tax. We could reduce this cost. Of course, there is a problem with that as well. Other types of activities become relatively more expensive. If we reduced the property costs of housing, then restaurants and clubs could become more expensive. I’m not sure if I want that.

    The first option makes the most sense, and incurs the least cost to the city, as long as people are willing to accept it. Figuring out how to achieve this type of balance and describing a new design that would actually be nicer for everyone requires political leadership.

    Much of the city seems to have a ridiculous view of housing and growth that is both nostalgic and pessimistic. Nostalgic in that folks somehow believe that things were better “way back when”. As a fifty year old guy who grew up around here, I can comfortably say “in some ways they were, in some ways they weren’t”. The funniest thing is that I run across a lot of people who seem to think that the problems “just got worse”. “Parking started getting bad five years ago” and “traffic really started getting bad ten years ago” is a pretty good way to determine how long said person has lived in the area (a little more than five and ten years respectively). There has been a long, steady trend towards more traffic and congestion (which, you guess it, means it becomes harder to park) for the last fifty to sixty years.

    Pessimistic in the sense that no one seems to trumpet the value of said congestion. Traffic is bad because way too many people drive and we are really popular. You can’t find a parking spot for the same reason. When I lived in Fremont 30 years it was easy to park. There was nothing happening there. Yes, you could go to the (old) Red Door, or grab something to eat at Yak’s. But no sushi, no Indian food, no dancing, and, believe or not, no Thai food. Do we really want to return to that? Of course not.

    This is where we need better political leadership. Less regulation will lead to lower housing prices (or, at the very least, a smaller increase in housing prices). It will also lead, in some very important ways, to a better standard of living for everyone. More restaurants, more shops, more places to have fun, and yes, a better transportation system.

  4. Back in the real world, Seattle Housing Authority proposal for Yesler Terrace raises concern:

    To rebuild its World War II-era subsidized apartments at Yesler Terrace, Seattle Housing Authority (SHA) has come up with a bold plan.

    “The underlying assumption for this project is that the market forces will play outright for SHA,” Licata said. “If we’ve learned anything in the last four years, it’s that no one can predict market forces.”

    No one can predict market forces? No one gets everything right 100% of the time but if you don’t want to believe anyone, then what? Tarrot cards? Maybe he’s just saying he want’s to hedge the bet. But even that requires a level of confidence in predicting the market. Witness Metro’s failed attempt to use diesel futures to hedge against higher fuel prices.

    1. I read that this morning. It should be ‘out right’ and not ‘outright’ yes?

      1. I sort of thought the same thing but didn’t want to change the copy. It could have been said either way; outright meaning everything falls the way SHA wants/predicts. Either way it’s a subtle shade meaning about the same thing.

  5. The hotdog analogy mostly doesn’t work because a hotdog won’t keep you dry when it rains. A hotdog is also affordable because even people who need subsidized housing can buy one. And also there isn’t this ideologically tinged belief that deregulation of hotdog markets will cause “innovation and therefore prices to fall”, as if there is necessarily a causal relationship there.

  6. J. Kunster addresses this in part in today’s rant against sprawl-ville.

    “ridiculous regulation” for sure drives up property values by preventing more housing being built. But what’s ridiculous for you, is a sane rule designed to keep the city from turning into a 3rd world slum where any bit of plywood, some steel roofing, and public land become housing.

    1. We all tend to head straight to the extremes. There’s a lot of room between the current rules and plywood slums.

      1. Not really, look the houses that Hugh Sisley owned. They were a few steps from slums. Also , slum housing, a la tenements are only two generations in the past in this country…

      2. You can run the ritziest mansion into the ground – that’s a log different than building housing to low enough standards to call them slums when new.

      3. Well Pierce County has it’s “slums”, people living in unheated garages, no indoor plumbing, etc.

        It’s not that we can’t have affordable housing, its that we want “quality” affordable housing and sometimes that means “small” as in less then 1,000 sq ft.

        I’m not in disagreement that the rules need to be revised but when ever I hear that call I’m highly suspicious until I know why they want a particular rule revised. What I have seen is a trend to building larger housing on smaller lots, not smaller housing on smaller lots.

  7. Take a gander at Tioga, North Dakota. I think this might humble you. Little regulation. Cheap land. Voila, Scuzville.

  8. Typical libertarian thinking that a reducing regulations are the answer. Expecting the algorithm that is the free market to solve an affordability problem is like expecting natural selection to produce smarter people. The free market system selects for higher profits, in this case high end condos. Just like natural selection selects ability to reproduce, so will end up selecting uneducated teenagers and moron cult leaders.

    1. Just to be clear, are you saying that a centrally-planned economy would lead to universally lower prices? Because history hasn’t exactly borne that out.

      What history has shown is that, when you constrain supply, growing demand leads to rising prices. Wendell Cox, who couldn’t possibly be more opposed to smart growth, shows exactly this in his annual reports about urban growth boundaries; metropolitan areas with minimal restrictions on sprawl (like Houston) have seen much slower growth in housing prices than regions with more restrictions (like Seattle).

      1. Did I say centrally planned economy or is that what your paranoid right wing brain hear? There are many things in the world that are not a free market economy or a centrally planned economy.

        Nudge people in the right direction with taxes(raising them for less desirable things like sprawl), and through sensible building codes.

        I don’t know about Huston in particular but my guess as to how they kept the prices low was to keep changing the definition of Huston to include massive sprawl.

      2. If you think that I’m right wing anything, you haven’t been here long. :)

        My objection to your post is that your assertion that higher regulations will lead to lower overall prices. Decades of economics research, including from well-respected liberal and progressive economists, has found precisely the opposite: all regulations cost money. Therefore, trying to regulate your way to lower prices is a fool’s errand.

        Where the market breaks down (by definition) is with externalities. The market-clearing price for petroleum does not take into account the pollution that is inflicted upon all humans on earth; therefore, it is the right and responsiblity of government to use taxes and/or regulations to make sure that the cost is borne by the polluter. Similarly, sprawl has a number of externalities.

        For housing, the problem is not externalities, but rather that the market may not produce equitable outcomes. That is, an unregulated market will produce the lowest cost for housing overall, but that cost may be disproportionately higher (in terms of percentage of income) for low-income people than we would like it to be. The answer for that is the same as it is for everything else: give those people enough money so that they can afford market-rate housing.

        You can’t regulate your way to lower prices. It just can’t be done. That is not “right-wing”; it’s the truth.

  9. You talk a lot about reducing regulations but don’t offer any concrete examples. What regulations would you remove? Which regulations are disposable or even harmful? Seismic codes? Environmental rules? Design guidelines? I could see this argument holding water in the example of San Francisco, where it’s extremely difficult to build new housing due to land constraints and regulation.

    But in Seattle? I think you’re beating a straw man. There is a huge amount of reasonably-priced market-rate housing being built right now. So much so that some experts are expecting an apartment bubble in the next few years. We don’t have to worry about serious land constraints for a few more decades, and by that time more single-family areas will likely be opened up for multifamily construction. Likewise, I don’t see our environmental laws as being overly restrictive. Nor do I see our design review process as being terribly prohibitive. But then again, I’m not a developer.

    However, few developers or property owners would choose to target low-income renters, for various reasons founded or unfounded (opportunity costs, lower payment reliability, ego, etc). Therefore, someone has to step in and provide options to people who simply cannot afford appropriate market rate housing near their place of work. Nonprofits and government agencies are the obvious choice.

  10. I should add that in the case of San Francisco’s unaffordability, much of the culpability lies with the desirability of that city: many people earn a six-figure income in the Silicon Valley and live in The City, driving up the cost of housing for everyone. Unfortunately, San Jose and Santa Clara are glorified suburbs with office parks, and there’s simply not enough housing in the more attractive Peninsula communities to accommodate the people who would like to live there. And aside from Berkeley and parts of Oakland, the East Bay is a pretty dreary place. So San Francisco is the bedroom community of choice for many Techies, and it’s showing in the rental price spike right now.

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