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.