I listen to all the talk on how to reduce housing costs from government officials and am amused and disheartened by the lack of industry involvement and thus understanding of the industry by those proposing cures. Much of the discussion is similar to the other conversations on inflation. (I gave some thoughts on inflation here.) Locally, I have been involved with Jack Davis’s Faith Based Housing Committee, the UWMC Housing Matters group, MACOG’s Marshall County Housing Study, One Marshall County’s Housing & Infrastructure Committee and the newly formed Marshall County Community Development Corporation (MCCDC) of which I’m a board member. Back before this I was on Culver’s Entry Level Housing Committee and the MC Crossroads Housing Committee. In all of these meetings, I can only name one other person from the construction industry, no others from the development industry and only a two or three from the rental industry that have been included. The unfortunate thing is that the industry has been blamed in some of these meetings, making it harder to ask them to consider participation.
The general theory is that the reason for the higher housing costs is all due to scarcity. The study done for the Housing Matters group came up with a deficit of 1,300 dwelling units for Marshall County. There is no doubt that scarcity is a factor, but more housing isn’t the panacea. Assuming costs are totally contingent on demand assumes that housing building contractors are taking advantage and price gouging because they can. In most situations, that is not the case. There are underlying inflation costs that have caused material and labor costs to spiral up. This is a problem that travels up from the bottom of the material supply chain. At a certain point, if demand starts to be satisfied, the incentive to build new housing goes away.
There are couple of other effects that seem to be overlooked. The first of these is the increase in property values. It is often stated in these meetings, that more new housing will make existing housing stock more affordable. Sounds good right? Until you’re the existing homeowner hoping to profit from your home sale. If some of these plans are successful, some who have counted on their home’s value appreciation will see a reduction in their net worth. The second effect is how this will affect property taxes for the county and municipalities. These governmental entities, while understanding the challenge to potential homeowners, have benefited from the increase in property values. While this is tempered by homestead exemptions, it has still been a net benefit as commercial residential property is affected as well.
The bursting of the housing bubble in 2008 has contributed to this problem as well. As so often happens, the pendulum has swung from the easy credit days back then to credit tightening to theoretically prevent another bubble. Homeowners need to show more steady income. Commercial residential developers/builders have to do the same, meeting a higher income to debt service ratio to satisfy lenders.
Add to these things, all of the new energy codes, safety standards and zoning hurdles and you find that building new homes is not always an easy prospect. Locally, there are attempts underway to start a land bank, streamline processes and in some cases provide short-term, low-interest loans. On the national scale, there are ideas bandied about such as 50 year mortgages, releasing government land for home construction and making down payments on a home something you can take from and/or hold in your 401(k) plan. All are interesting ideas, but not necessarily things that will make an immediate difference or be proven to be correct responses quickly.
I don’t see this problem going away quickly. Some of the “solutions” may result in unintended consequences. As is often the case, it may be best to let the market figure it out over time, but to the extent that it can be solved externally, I don’t think it will happen without all the players around the same table.
