How to Make Housing Affordable
I discussed this at Inman at some length, so wanted to share further...
One of the benefits of living in Las Vegas is that real estate conferences come to town. Inman Connect is one of those conferences, although after this year, it will move to San Diego.
One topic I ended up discussing and debating with friends and colleagues whose opinions I truly respect is affordable housing. Given that housing is a critical issue, is quickly becoming an election year issue, and is central to the well being of the country as a whole, and everyone at least pays lip service to wanting more affordable housing, to wanting the American Dream achievable, how do we actually do it?
I won’t rehash all of the arguments from the Dar-al-REALTOR, which pretty much amounts to infinite money printing to juice demand while driving prices ever higher, offset by building ever more soulless “affordable housing” units that the proponents themselves would never want to live in.
This is Elm Trails, a new tiny-homes subdivision in San Antonio. With 660 sq. ft. 1BR/2BA homes priced at about $165K. Let me know when the CEO of NAR, the President of the Texas REALTORS, and the lobbyists for the San Antonio Association of REALTORS move into this neighborhood.
So what’s the solution? Is there one?
Short answer is, I don’t know. I’m a pretty smart guy, but I do not pretend to be an expert in this area. And “this area” is so complex, so interwoven with rules, regulations, laws, finance, environmental concerns, demographics, politics, etc. etc. such that I don’t actually believe anybody is an expert. Which is why I feel comfortable proposing solutions since I don’t know what is not possible.
I will rehash a proposal I’ve made earlier, along with a couple other steps that seems to be required due to math. But this should be a conversation. I’d like to hear what y’all have to say, what your ideas are. I will open the comments on this post so we all can get your smart takes and insights.
Let’s get into it.
Making Housing Affordable, Step One: Supply and Demand
One of the fiercest — though entirely civil — debate I ended up with at Inman was over my recent post about immigration and housing.
My friends all but accused me of being some kind of a racist xenophobe, talking up how wonderful migrants (legal or otherwise) are. I sorta expected that, because that’s the NPC programming at work. It doesn’t work on me since I’m an immigrant myself and I don’t suffer from white guilt, but that’s the thrust of the argument.
Problem is, they can talk about how wonderful illegal migrants are all they want, and how America is a nation of immigrants, and the Statue of Liberty and so on. I end up agreeing with them on all of their points, but then point out the math problem:
From 2019 to 2024, we built 6.725 million new housing units. In the same period, there were 9.8 million “border encounters” reported. Even if we assume that no one got past the border without encountering border patrol, that’s some 3.275 million more people than housing units. Those are the known illegal migrant numbers.
Legal migration numbers range from 2.1 million to 3.2 million a year from 1994 to 2024. These numbers are not in dispute. And since 1994, we averaged 1.294 million new housing units per year. So annually, just using legal immigration numbers, we’re short anywhere from 800K units to 2 million units.
A Canadian friend pointed out that the government of Canada — under Justin Trudeau, no less, rather than under some racist xenophobe conservative government — just decided to cap immigration numbers. Just to get some breathing room.
If the socialist utopia of Canada can do it, then so can we. Not because we have anything against immigrants, but because we need breathing room.
So step one, which can be done if there is political will in Washington DC, is to limit legal migration and to enforce the border. To have some breathing room, to allow builders to catch up a bit on overwhelming demand. Removing those here illegally would be a beneficial step for making housing more affordable, but that would be at least a step 1.5 rather than step one.
Making Housing Affordable, Step Two: Disincentivize Landlords, Incentivize Mortgages
One of the most often argued points viz immigrants is that they’re not buying houses. Ergo, they’re not the reason why young American families can’t afford to buy a house.
Except that since we don’t have 15 million people living on the street, they are inhabiting some sort of housing unit somewhere. As renters, no doubt. And that rental demand then drives up the price of housing as investors will naturally want to buy rental inventory.
Every single family home that is purchased as a rental unit is one that cannot be owned by an American family. That isn’t politics; that’s just logic. Every single house purchased by an investor is one that cannot become a family home.
According to Redfin, investors bought 26% of the country’s affordable homes in Q4 of 2023. That was a drop of 11% YOY, but still… more than a quarter of all entry-level, affordable homes were bought by investors. It is remarkably difficult to find out what percentage of the 164 million residential housing units are owned by investors, but House and Home Online says that 25% of all SFRs are investor-owned, and that 16% of the total are owned by investors. On the other hand, US homeownership rate is 66% implying that 34% are investor-owned. (Definition of homeownership rate is here.)
Whatever the number, we can’t blame the investor for doing what’s right for her and her family or company. We can blame the system we have setup to incentivize people with money to put that into real estate, rather than into some other asset category.
So, a while back, I put forth MADRE — Make American Dream Real for Everyone. I will repeat some of those proposals here.
Tax-free transfer of real estate. Eliminate all taxes on the sale of residential real estate, including investment properties and multifamily properties.
Punitive taxes on rental income. I thought 80% tax rate should do it, but if we need to make it 90%, so be it. This tax would cover all income from residential rentals, including fees that are not rent.
Make income from purchase mortgages tax-free. At the same time, make all income from purchase mortgages free of all taxes: local, state and federal. Under the current tax code, interest income is taxed at the ordinary income tax rate. In addition, some wealthier taxpayers are also subject to Net Investment Income Tax. We wipe them both for interest income from purchase mortgages.
The idea is a simple one: incentivize current landlords and real estate investors to convert their real estate assets into mortgages. They can do this either by selling, and then investing the proceeds into a mortgage pool, or by offering seller-financing to buyers. By making that income entirely tax free, the ROI should be quite attractive for passive investors.
There is also the benefit of increasing the availability of mortgage, which should put pressure on rates as well as making it easier for buyers to get a mortgage in the first place.
Note that the 80% tax is on net income, not on gross revenue, which means that nonprofits can still operate affordable rental housing since… they shouldn’t care that the operation is not particularly profitable. Investors who want to hold on to their rental properties for whatever reason are free to do so, and make 80% less net profit from the investment. They’re not losing money on the real estate holdings — just not making as much money from them.
Please review my original post for some details, but that’s the basic proposal: fewer landlords, more mortgage lenders.
Making Housing Affordable, Step Three: Build, Baby, Build
Step three is very much in line with the supply side advocates. We simply need to build more homes, first to catch up with demand, and second to prepare for the future.
There are, I think, three separate components.
Local Regulations
The first is what most people point out: do something about local zoning regulations, local environmental regulations, and other legal and regulatory barriers to building. The simplest would be for Congress to enact national legislation that overrides any state and local regulations by virtue of the Supremacy Clause.
I imagine the details of such a law would be daunting, but at a high level, it seems possible to craft something that allows for building new housing without tens of thousands in fees and months and months of delay, while leaving as much local control over land use as possible.
Make it emergency legislation that sunsets after a certain time, or after hitting a housing affordability goal. I recommend PTI of 3 (median price of a home is 3 times the median household income).
Financing
The second has to do with financing. Builders were beat down during the GFC and the housing bubble. And construction loans are not easy to get these days.
If we do MADRE (above) then the availability of residential mortgages should be dramatically increased. The change we can make, then, is to have Fannie and Freddie stop underwriting residential mortgages, and start underwriting loans for builders.
If Federal subsidies were going to the supply side (builders) instead of to the demand side (buyers), I imagine the impact would be more supply and lower demand, which means lower prices… which means affordable housing.
Workforce
The third component is to have enough workers who can do the actual building. There is a skilled labor shortage in the United States, particularly in manual labor intensive industries like construction. In fact, one of the justifications for turning a blind eye to lawbreakers illegal migrants is that they will build homes for Americans.
According to this law firm, some 1.4 million construction workers, or 13% of the total, are illegal. Removing 13% of the workforce isn’t going to do wonders for the ability of builders to build more housing.
Since illegal and legal migration both are part of the math problem in Section 1, we would need to be extremely careful about how we solve for this.
One solution, certainly, is to encourage training and education in the trades for legal immigrants and for citizens alike. Mike Rowe has been on the forefront of that mission for years. How about allocating $1 billion — not even 1/60th of the money we sent to Ukraine — to Mike Rowe Works Foundation to see what that does? If it works, how about we give him $10 billion — still a drop in the bucket compared to the money we send to other countries for foreign aid — and see how that works out?
Another solution is to increase legal immigration, balancing the impact on existing housing for workers with the new housing such workers would create. We could create formal guest worker programs allowing people to come here to work, then go back home… then come back when there is work to be done without actually moving here permanently. That protects the workers, who are no longer in the black market afraid of the law, and creates a safe harbor for employers, while letting us control how many permanent newcomers we should have in the country.
We Americans love folks wanting to work hard. We don’t love law breakers, so let’s change the law.
Making Housing Affordable, Extra Credit: Income
Every single proposal above creates a tradeoff, not a solution. There will be winners and losers. Homeowners like me will lose, as the value of their homes — often their primary investment — will drop.
The only painless way to make housing affordable is not to deal with the housing part of the phrase, but with the affordable part of the phrase.
We’ve all seen charts like this one:
Many of us have seen charts like this one:
And fewer of us have seen charts like this:
The reality is that housing has not gotten more expensive, but that our money has gotten less valuable thanks to inflation. Home prices in gold terms prove the point.
The truth is that the American worker has not made much wage progress in decades in real terms. Housing has become unaffordable because American workers have been getting screwed.
The pain-free way of doing housing affordability is to raise the real inflation-adjusted income of Americans such that $450K is no more than three times median income… which implies $150,000. You can’t do that with money printing or financial gimmicks. You can only do that through increased productivity, not just for the elite few who work keyboard jobs (which I could argue are not all that productive for the most part), but for everybody.
Since there is no policy I can think of that would double the income of the American worker through productivity gains, I’ll leave that for others to consider. One solution, I think, could involve not continuing to use money that depreciates by 2-6% every single year. But that’s heretical Austrian economics voodoo so I understand if you avert your eyes.
Wrapping Up
I assume that most of you who read this far are shaking your heads and muttering something like, “What a moron! These won’t work!” But of course, I doubt any of you have any solid ideas for how to make housing affordable either. Which is why I thought I’d start the discussion.
One thing is clear to me, however. Simply subsidizing demand with lower rates, with longer terms (heard a friend actually suggest 100 year mortgages), with down payment assistance, with whatever … does nothing for housing affordability. If anything, subsidizing the demand side simply makes the price go up. Sad reality of the law of supply and demand.
I further assume that many of you have really smart insights and takes I had not considered. One friend during Inman talked about how infrastructure — things like roads, power grid, sewers, etc. — make housing affordable as does Work From Home or similar gig economy setups. He’s probably correct, which means all of the Build Baby Build plans should incorporate the need for infrastructure as well.
Let’s hear your ideas. Your smart takes and insights. I don’t have all the answers. I’m not sure I have any answer at all. I might be just an idiot. But if so, it’s because I don’t quite know what is impossible, what can’t be done, and so just see the things that can be done and should be done.
The comedy is that it’s serious. We must come up with a solution to make housing more affordable. Our country and our way of life depends on it.
Hey ROB,
One of my favorite subjects....and solutions. Firstly, I've got to say "I'm talking up my book". Meaning, I believe people want, and prefer, to live in, or near, city centers - the ones that already exist today, big and small. So, I'm not a supporter of building our way to lower prices unless it's infill. That said, you mentioned the answer, or least part of it - (re)zoning. The other part is off-site construction. Bring all that together and we'll have really cool homes (all types), reinvigorated areas in, or near, where people want to live and lower prices. Problem solved :) Thanks, Brian
"housing costs no more than three times median income." Quick Google: Median Boston area income = $89,212. Which means roughly $270,000, yes? Boston median housing price? QG = 718,045. Kyrie eleison. Love the conversation, tho!