Economics 202: Artificial Limits on Supply – Housing

In my last post I commented on the effect of artificial limits on supply (mostly government regulations) as a cause of higher prices. In this post I will deal with one example, the effect of government regulation on the cost of housing.

It is quite common to blame builders for the increasing cost of housing. While I do not doubt that builders seek to make as much profit as possible from every housing unit they construct,((Indeed, go back to the thesis of my very first economics post: “My thesis is that as a general rule people will tend to act in what they perceive to be their (economic, political, social) best interest.”)) there are other forces at work.

One of these factors is demand. As the population increases, the number of households seeking housing increases as well. We are in the midst of a remarkable sellers’ market with housing selling for a significant premium over the (presumably already inflated) asking price.((Demand is also influenced by the availability of financing and low interest rates, but I am anticipating just a little bit; stay tuned.))

Another factor, however, is the limits that government (chiefly local government) puts on their ability to build large amounts of housing.

In the early part of the twentieth century, municipal zoning became widespread. The earliest forms may have simply attempted to segregate residential, commercial and industrial uses from each other, but municipalities soon learned that they could use the zoning power to exclude the poor and minorities (who are over-represented in the lower income levels) by, among other things, prohibiting or severely limiting multi-family housing and requiring relatively large lot sizes.

Decades ago builders could provide housing affordable to working families without subsidies and set-asides (think Levittown).((A single house on a large lot may yield a profit, but as the number of houses on the same size tract increases, I am certain that the aggregate profit increases as well (at least to a point), even though the price of each home will be less and therefore affordable to a larger portion of society.)) But as the easily developed land was used up, it became harder for the free market, even where permitted to do so by appropriate zoning, to provide such housing. Exclusionary zoners, at least in New Jersey, have done a pretty good job of running out the clock on the ability of market forces to provide affordable (in the generic sense) housing for households of modest incomes.

But for every government-created problem, there is likely a government-proposed solution, with a significant premium in transaction costs and control.

In 1975 the New Jersey Supreme Court found in the State constitution a limit on municipal ability to use the zoning power to exclude poorer households. In fact, it determined that municipalities had an affirmative obligation to use their zoning power to provide a realistic opportunity for their fair share of housing affordable to lower income households. This ruling did not prohibit the use of the zoning power to exclude the poor by increasing housing prices, it just limited it. Over the ensuing 45+ years there has been much litigation over the details.

It is not my intention here to discuss the myriad failings along the way, I just want to point out that “affordable” has become a term of art and, like so much else, those not wealthy or not poor enough to qualify for the government benefit are squeezed out.

Jay Bohn
August 16, 20201