Book Review: Build, Baby, Build

A must-read for those interested in affordable housing

I don’t normally do this, since I don’t write a book review blog or anything but… I recently read a book that may be the most compelling thing I’ve ever read about why housing is so broken and so unaffordable. I think it is essential reading for anyone anywhere who has even a passing interest in why the American Dream is dying a slow death.

Plus, I had mentioned that I would talk about this book in my last post about how high housing prices hurt the industry, by depressing the total pool of commissions, which goes counter to conventional wisdom about high prices = high commission checks.

The book is Build, Baby, Build: The Science and Ethics of Housing Regulation. It was written by Bryan Caplan, a professor of Economics at George Mason University, and a well-known figure in libertarian economics. As the image above suggests, Ady Branzei is given illustrator credits because this is a comic book. I suppose the proper term is “graphic novel” except it’s not a novel; it’s a nonfiction work — something like a graphic economic treatise.

I think it’s a brilliant move, because the people who need to read this book are not usually the type to read dense economic papers or treatises. Caplan is dealing with rather heavy-duty topics that go way beyond simple supply and demand. By explaining them through comics, Caplan makes complex concepts easy to understand. (That doesn’t mean you have to agree with said concepts, just that you can understand his argument.)

There have been reviews of Build, Baby, Build that I urge you to seek out if you’re interested. Those go into the larger economics of the book. I wanted to review it from my particular specialty: the real estate industry.

Core Arguments

What Caplan argues is that deregulating housing would lead to all sorts of beneficial outcomes. The heart of that is his claim that deregulation would lead to a 50% drop in housing prices.

Caplan cites via footnotes (in the back of the book) a 2015 study by Gyourko and Molloy and updates it with more recent housing prices, and says that “gives us a conservative estimate of a 50 percent price fall from deregulation.”

The argument is well made. The first two chapters lay out why we have such a huge inventory shortage, especially in high-demand areas where jobs are. He starts by dismantling the traditional arguments, like “there’s no land” or “greedy builders don’t want to build affordable housing” and the like. His argument, backed up with research, is that government regulation of all sorts choke off supply by disincentivizing builders, who would otherwise try to make as much money as possible by building as much as they could, which drives prices down.

He then proposes deregulation as the panacea solution; in fact, he titles the chapter “The Panacea Policy” and spends the remainder of the book justifying it and defending it from likely counter-arguments. Of course, as a libertarian myself, I am inclined to side with Caplan but I do think he makes some very strong arguments.

For example, he refers to the work of Frederic Bastiat, the 19th century French economist, to talk about the positive effects of regulation (such as historic preservation) that are seen while the negative effects are not seen, such as beautiful new buildings that would have been built. I found his example illustrating that powerful, since he points out that the gorgeous old Waldorf Astoria was torn down in 1931… to build the Empire State Building, which has come to represent New York.

Caplan spends time even addressing the political division over housing, and argues that deregulation would appeal to both the Left and the Right. He talks about NIMBYism and how difficult it is to overcome, because of psychology: deregulation is scary, and people like the status quo.

He even admits that housing deregulation is not winning, except in small isolated pockets. But he wrote the book because housing deregulation deserves to win.

Well, I write this because his book deserves to be read. Go buy a copy and read it. It’s a comic book. You can read it in a single sitting.

From the Industry’s Perspective

The one thing Caplan does not discuss, because it seems so ancillary to his core arguments, is how deregulation would impact the real estate industry. He spends a lot of time talking about builders, but no time talking about brokers, mortgage bankers, and others who make a living from the sale and purchase of housing.

Yet, I do think Caplan should address it because NAR is one of the largest lobbying organizations in the country. State REALTOR Associations are incredibly influential and powerful at the state level, and it is the states not the federal government that has the most power over housing regulations. Win brokers and agents over to the cause of deregulation, and his task would be made easier.

One reason I wrote my previous post about how high home prices are hurting the industry is that Caplan’s goal of reducing the cost of housing by 50% would be a non-starter for people whose paychecks depend on the price of the home sold. Not to mention agents will have a helluva time explaining the benefits to their customers who already own a home.

If it turns out — and perhaps economists like Caplan can actually research this — that the overall pool of income for the brokerage, mortgage and title industries are hurt by high home prices, then it would be easier to get those industries to line up behind the cause of deregulation.

Like Caplan, I channeled Bastiat to point out what is not seen: the homebuyer who never enters the market, or the homeowner who never lists because he has to buy another home when he sells.

There is, however, an additional element for the industry to consider.

What really hurts brokerage is the cost of housing relative to the ability of people to buy it. It is the Price-to-Income ratio that is the real problem, not the nominal price of the house. If the median price of a house in the U.S. were $2 million, but the median income of American workers were $1 million, the PTI is 2.0 and we would see 15 million transactions a year.

Construction is a major source of jobs. According to IBIS World, the construction industry employs over 10.3 million people. I don’t know if that takes into account all of the businesses and employees upstream from construction, such as building materials and energy. I don’t know if that 10.3 million figure includes downstream businesses from real estate brokerage to inspectors to food trucks to feed workers. What we do know is that increasing construction activity is one of the surest ways to drive economic activity, which drives wage growth.

Cities around the country bend over backwards to try to get tech firms to open offices because of job creation. But a software company has precious few upstream suppliers, and few downstream businesses beyond coffee shops. I mean, what does Facebook need from its suppliers? Electricity, server space, bandwidth, some computers and office furniture? Whereas a new subdivision needs lumber, siding, pipes, windows, drywall and fixtures, and on and on and on. Plus all of the trucks to transport supplies to the job sites. And on and on and on.

If no one else would argue this, we in the housing industry should be lobbying cities to stop courting tech companies so much and start courting builders. Deregulation would go a long way towards encouraging construction, which then starts the economic engine revving.

Perhaps Caplan’s prediction of a 50% drop in prices becomes more like a 25% drop in prices, because incomes would go up instead? Maybe what we in the brokerage industry see is not 7 million transactions at $250K median price, but 7 million transactions at $300K median price because the median household income has gone up to $100K from all of the economic activity from build, baby, build. Using the same math I used in my last post, that translates to $112 billion in commissions for the industry.

Deregulation of housing could be a real boon for the real estate industry, by driving prices down and raising income, which translates to more transactions at prices that aren’t as low as we might fear.

Get the Government Out of the Way

Let me conclude by suggesting what does not surprise anyone who knows me at all: freedom.

Get the government out of the way, and we will see an explosion of economic activity. Nowhere is this more evident than in housing. Caplan makes a very strong case for why we have the worst housing market in history, and the solution for it: deregulation. Get the government out of the way, and builders, workers, architects, financiers, suppliers… in short, American industry would be unleashed to deliver what most Americans want: a home.

The American Dream has never been, is not today, and will never be to rent a tiny box in the sky for the rest of our lives. The American Dream was always a home. That home doesn’t have to be a house with a white picket fence; it could be a condo in a skyrise. But we all know the difference between owning, making us the lords and ladies of our own castles, and living under somebody else’s terms and conditions.

Even as we preach the value of homeownership, especially since we preach the value of homeownership, we should be pushing deregulation. Get the government out of the way, and let us fix the housing crisis.

-rsh