Housing in America is broken and has led to a gentrification/displacement crisis. How did this happen?

We simply no longer build enough units to meet demand and keep prices affordable for most Americans. The house price to median household income ratio in this country was 2.2-to-1 before the 1970s. Over time the average rose to 2.8-to-1. We are now at 3.4-to-1. The figures are deceptive as they are actually much higher in many of our dynamic high-growth Metropolitan Statistical Areas (San Jose is 10-to-1).

What is even more troubling is that the housing crisis will almost certainly get worse before it gets better. What most people do not understand is the projects they are seeing built today started the approval process years (sometimes decades) ago. The number of projects beginning the approval gauntlet is dwindling rapidly due to a random and capricious process.

Scott Cox

How did we get here? Some of the contributing factors were specifically designed to hamper housing development while others simply did so by accident. Here are some of the key ones:

  • Local control over land use has become a disaster for housing. MSAs have dozens of municipalities within their borders. Each has its own policies and procedures for land use. It allows a small group of existing homeowners to kill desperately needed housing. How? While it is possible to get elected claiming to be for affordable housing, politicians rarely receive votes for approving a project. They do, however, routinely lose votes for approving a project (especially if the proposed project is higher density than its neighbors.) But if you do not already live there, you cannot vote.
  • Local land use authorities have also become the masters of taste and design. They are not simply managing the adjacencies and compatibility of various uses, they determine lot sizes, densities, and exterior design and materials. These decisions are not based on sophisticated analysis of the desires of all of their constituencies, consumer research, etc. It is simply elected officials’ (or unelected staff’s) taste and/or pandering to a few neighbors of a project to gain their votes in the next election, all of which reduces the density and number of units built.
  • Property tax policy is heavily and unfairly skewed to support those who already own homes. In many parts of the country, residential property tax rates are very low. Because it is so low, municipalities believe that new residential development will be a burden on community services. So, the mantra becomes “make new development pay for itself!” Unfortunately, we are not just asking new homeowners to pay for themselves through special tax districts and fees that can be $40,000-50,000 per unit or more. They do not get a break on their base property tax, so we are asking them to pay for themselves and to contribute to the existing infrastructure and past failures to fund it properly.
  • There is widespread hypocrisy regarding “smart growth” and “sustainability” and “maintaining community character,” which on the surface are all laudable goals. Let’s look at Boulder, one of the hardest jurisdictions in the nation to gain approvals for housing. Job growth in Boulder has exploded, while residential construction lags way behind. They take great pride in being green. What is greener — allowing very little building but requiring it to have solar panels, community gardens, etc., or allowing enough residential units to be built so those who work the jobs in Boulder don’t have to commute 30-plus miles to work?

There are four truths of the housing crisis:

  1. You cannot have affordable housing without building plenty of housing. Homeowners in quality neighborhoods think density and new projects will change their character, which is unacceptable. We cannot build in struggling areas because it might lead to gentrification. Environmentalists believe greenfield development is “dumb growth.” Where do we build then? The fact is, the character of neighborhoods will change over time, just as we are evolving in our attitudes towards a variety of social issues.
  2. We will not be able to build enough housing unless we embrace higher densities, which will in some cases have to be near existing lower-density neighborhoods.
  3. Neither the left nor the right has the moral high ground here. Progressive liberals who espouse “affordable housing for all,” and conservatives who say they believe in “free markets” both vote against projects in and near their neighborhoods.
  4. You cannot expect politicians to vote for projects unless you vote for them afterward.

How does all this relate to gentrification and displacement?

If you don’t build enough units to satisfy demand prices will rise (Econ 101). If prices rise, where will those with some means but who can’t afford new product or established neighborhoods go? To challenged neighborhoods with potential where they can afford to buy or rent. And then you have displacement.

You can’t fix this by providing extra money to those struggling. You fix this by providing enough options so the problem does not roll downhill.

Scott Cox is principal consultant at SLC Advisors.