"Affordable [housing/homes/rental units]" appears seven times in this piece and sixty times in the linked "Federal Home Loan Banks Combined Financial Report" (which is, it must be said, much longer).
Neither defines "affordable", and it's hard to tell whether the authors are using it colloquially, or in the technical sense of "costs no more than 30 percent of income" - the common definition for government programs.
At any rate, I think everyone who pays serious attention to housing in the US knows two things:
- 'Filtering — the process by which properties age and depreciate in quality and price, becoming more affordable to lower-income households — not new construction, is “the primary mechanism by which the housing market provides affordable supply.”' (https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-061520.html)
- Affordability provisions often frustrate development, both because they make the projects less attractive for investors and developers, but also because they activate NIMBY resistance. Sometimes, NIMBYs even _add_ those provisions to make projects less palatable and harder to finance.
All of which to say is: the exclusive focus on constructing new "affordable" homes seems well-intentioned, but counter-productive.
Nobody is shocked or angry that new cars are more expensive than used ones. But somehow people expect new housing to be as cheap as old housing. It's absurd.
Most of the obstacles to housing supply and lower housing prices are at the state level, but there are some tax policies that artificially boost the market price of housing while having almost no effect on supply. The federal government could stop doing these things. It wouldn't have a MASSIVE effect, but it would have an effect:
1. Eliminate the special tax status of REITs. For those unfamiliar, a REIT is a type of company that consists of at least 75% housing and cash and distributes at least 90% of its earnings to shareholders. As long as it does this, it's exempt from corporate taxation. I'm not a fan of the corporate tax, but as long as we have it, it should be applied equally across the board.
2. Eliminate the primary residence deduction. If you sell your primary residence, you can deduct $250k from your capital gains taxes or $500k if filing jointly. Again, if I had my way, we'd be taxing consumption anyways, but while we have capital gains, they should be taxed the same across the board. For political reasons, current owners would probably have to be grandfathered in. That's fine.
3. Eliminate SALT and MID. Again, you'd probably have to phase them out over time, which is fine.
4. Eliminate steel and lumber tariffs. Self-explanatory.
I think option number two is a terrible idea that will make people much less likely to move, and/or would require much more complex tax implementation.
First, people who sell their houses usually buy new ones and will have to pay an appreciated price for that new house. If you are reducing the capital to buy a new house by 15% because of capital gains taxes, that is going to disincentivize moving considerably.
The second thing it will do is add complexity due to house improvements. If you have to worry about the capital gains taxes on your house, then any time someone makes an improvement, they are going to use that to increase their basis. Which will advantage people who are good at documentation/tracking and filing with the IRS and disadvantage everyone else.
As for the taxation of reits, if you make that change, you'll just move a ton of money out of reits into other advantage tax forms of aggregating capital e.g. partnerships, mutual funds, etc.
Also as for the REIT thing, yeah investors would move on to other stuff. That's good. My point is that we're artificially boosting demand for housing for no reason.
REIT's aren't boosting demand. They are making the capital available to build housing *slightly* less costly by creating a vehicle to combine money and invest it without having to pay corporate taxes. Individuals receiving payouts from REITs still have to pay taxes on the dividends.
So as for capital gains taxation on housing, I actually think that would be a wash for most sellers. Their net worth would decrease, and they'd be selling for less, but then again, the next house they'd buy would be cheaper too. It's a bit more like the question "what if everybody's home equity suddenly decreased 10%? Existing homeowners would lose out for sure, but I'm not sure it would effect liquidity.
As for discouraging improvements, that is a concern I do share, and one reason I favor land value taxes. I don't really like the capital gains tax at all, I'd rather we were just taxing consumption. That way if somebody bought a house for $500k, then sold it for $750k, and then bought a bunch of stuff with that $750k, they'd just pay taxes on that $750k and we wouldn't have to worry about how they got it. BUT, if we're going to have capital gains taxes, I can't think of a reason to exempt housing other than inertia. Like if we were coming up with the capital gains tax for the first time, would we invent a housing exemption? I don't think so.
"I actually think that would be a wash for most sellers. Their net worth would decrease, and they'd be selling for less, but then again, the next house they'd buy would be cheaper too."
Why would the next house be cheaper? Its not like if you are a new home owner without equity a house is cheaper...
And again I'll note that most people put a lot of money into a house paying for upkeep and improvements. That raises the "cost" basis of the house. But few people track that because of the tax exemption on selling. What you're saying is that we should charge the tax and make everyone account for all that investment. I think that's overall a much worse place for the majority of people. It would be good for rich people though who can hire a CPA to handle all that for them.
I’ve put probably 100k into my current house, which was bought as an “as is” property that needed fixing up. I’m fine with reducing or eliminating the deduction as long as my investments are accounted for. Additionally, you’d need to change the backend - people who lose money ought to be able to count that as a capital loss.
But I agree that a consumption tax system would be the better option. If only we could convince the rest of the country.
I have to say that this seems like one of those instances in which "people respond to incentives" seems like it's not really true in a substantive way even if it's true in a formal way (put in another manner, the marginal elasticity of demand to this policy may not be literally zero, but I would guess that it's very, very low)[1]. The marginal "need" for price sensitivity when it comes to a purchase the size of a house seems negligible -- saving money is its own reward. Conversely, buying a house to live in it for a few years then flip it as a capital good doesn't really work as a long term business plan -- because (1) the transaction costs of moving are very high, (2) a primary residence is by definition a consumption good (I would argue typically far more than a capital good. The capital good part is just along for the ride and prevents you from being indifferent as to whether the mortgage is underwater), and (3) once you sell you *still have to live somewhere* so you can't just choose to be short the housing market and enjoy your gains in the way that you can cash out of other equity investments.
You could maybe make a case for eliminating the deduction on the grounds of literally having people have less money in their pockets and thereby lowering demand, but I don't think that the foreknowledge that you can deduct taxes when you eventually sell really bears on peoples' ex ante price sensitivity except as mediated through how much money existing homeowners retain. For first-time homebuyers there are far too many other dimensions to homeownership for it be a primary driver in practice even if it's a subsidized class of investment in principle.
[1] I actually think a lot of individually-oriented tax policy is like this because it's too attenuated, temporally remote, or opaque. Not all of it, but a lot of it.
So, I agree the the responsiveness to this policy change would be small, BUT I think there would be an impact because right now, most people who sell their homes have capital gains well under the threshold. So eliminating that deduction would induce taxation at a time where there typically is none. Also, flippers would definitely notice. And even in a market where not everybody is aware of all the contours of the market, the few who are aware will adjust their behavior, and at a certain point, that would be baked in to the price.
Possibly? I guess we'd need a real world example. The top capital gains rate is 20%, so somebody selling their house would still be turning a profit, just less of one than before. Either way, existing property owners would see their net worth reduced. If they wanted a HELOC, the amount they could take out would probably be reduced. So I do think there would be an effect before the sale, so that's why I'm not so sure.
Based on the discussion around FHLBs, it seems like the appropriate action would be to remove their tax exempt status and use the taxes gained from them to fund housing programs.
Looks like a big money grab for local banks so they can keep maintaining their opulent branch locations and seats on the local chambers of commerce. I honestly had never heard of FHLB before. Money would be better spent directly getting involved in building the homes via some sort of capital fund. Partnering with the private sector makes sense because reducing the cost of housing and increasing availability benefits them directly. We need to get rid of all of these twentieth century solutions to twentieth century problems that somehow remain. We have newer, more complex modern problems that require sleeker and more sophisticated solutions.
I'd heard of them before, and thought of the idea approvingly - because, as you say, and as I understand it, they are primarily local banks that are more-responsive to local conditions and more amenable to low-dollar loans than the big banks are - however, on the numbers in this article it looks like the government is handing half of the value of the subsidy to shareholders. Maybe that's not such a good deal!
However, we're missing a data-point: what's the multiplier on the capital conversion? If the FHLB's are making many times more $$$ of loans (that they wouldn't have without the subsidy), and returning profits on those, then it still might be a wise use of the the money. (Why wouldn't they pursue that profit absent the subsidy? Maybe the risk profiles, or the administrative costs don't pencil out?)
I don't know the answers to those questions, but it's clear to me that this program deserves some hard scrutiny. It would make a good topic for a future SB column, no?
Am I right to read this that most of these policies are directed towards deed-restricted/below market-rate units? I’m not opposed to that but I think the problem in expensive cities isn’t only that there are too few deed-restricted units but that the market rate units are exhorbitantly expensive due to scarcity. Assuming I have understood correctly, this seems like a major gap in the strategy described above and belies the notion that the administration is truly doing all that it can as the author asserts.
As I understand it, the author thinks the FHLB should be lending more to homebuilders—not just affordable builders, but any builder. Developers have told me that recently it has been all but impossible to get loans from banks, not just "loans at a good rate" but loans, period. And they've been going for other sources of capital, but that's not easy either.
I don’t mean “insider” as the usual cant the rubes intend, but more as an explanation of why the writer is trying to beat the FHLBs over the head.
I’m sure that they could be doing more, and I certainly support any beatings they receive. But to take a step back… really, man? Is that ALL we can do? I know you’re just writing about immediate and feasible steps, but the juice you’re squeezing is just such an embarrassingly tiny drop in the bucket of 10-15 million units needed.
Not to mention, most of what the FHLBs will finance are just more of those dysfunctional 5-over-1’s — perhaps with slightly more variance in size and footprint, but still roughly the same predictable investment product.
We need WAY more action for financing missing middle housing. If the FHLBs can do that, then great. If not, we shouldn’t waste time beating obsolete incumbents over the head, but rather build new institutions who will do what we need them to do.
What is dysfunctional about 5-over-1? Why is the financing different for whatever you mean by missing middle (some people include 5/1 in that)? My sense is that the financing challenges for smaller buildings are basically zoning, code, and scale, given current interest rates, none of which are really about banks at all.
The main financing problem for smaller buildings is actually that they tend to be nonstandard. Because they mainly serve to fill in suboptimally used interstitial spaces (IE like the space between two adjacent buildings), they don’t have a reliably uniform value proposition. It’s relatively more work to underwrite them than to underwrite a 5-over-1.
My problems with 5-over-1’s are mostly in implementation, not in their impact on local supply. To wit, most of them have glaring flaws in their urbanism: enormous vacant lobbies, putting amenities on the ground floor instead of the second, to the exclusion of retail, not enough variety of ground floor retail spaces, and the twin evils of RealPage and financing vehicles that require the entire building to be revaluated if they ever dare to drop rents.
So, it’s not that I hate them. It’s just that they’re not an unalloyed good; they’re seeding a shit ton of problems we’ll eventually have to deal with. Like the failed public housing projects of past generations, I don’t want this one to come back and bite us in the ass.
I live in the SF Bay Area suburbs, where 5-over-1s are gong up. Sometimes cities require retail on the first floor. It's almost always a mistake and the developers can't fill the retail.
I'm confused when you seem to contrast 5-over-1s with smaller buildings that fill the space between two adjacent buildings. Why wouldn't those infill buildings also be 5-over-1s? I also don't understand why you think a 5-over-1 has an enormous lobby; the ones around here don't, because the landlords/sellers want to sell or lease the valuable space in their expensive buildings.
"5-over-1" is an industry term referring to buildings that typically take up large chunks of an entire block. The term is used to keep separate from the more infill-focused traditional mixed-use format. I'm not inventing anything new here, I'm just trying to be accurate about specific formats.
To be clear, my complaints absolutely do NOT apply to mixed-use buildings.
Also, RE the 5-over-1s around you, I'm not saying EVERY 5-over-1 makes the same mistakes, I'm just saying that they frequently DO make these kinds of mistakes, and that's why it's an inefficient form. If the ones around you AREN'T making those mistakes... well, bully for you! I applaud that. But just because it's being done right in certain areas doesn't mean that they generally aren't being implemented right at the national level. If 70% of them make the mistakes, that means there's still a good 30% doing things right, but I'm pretty sure you'd agree that getting things wrong 70% of the time is A Problem.
5 over 1 is an industry term for a building that is Type 5 (wood construction) over Type 1 (concrete podium). The wood construction will be four or five stories, and the concrete will be one or two stories. They are also sometimes called podium buildings. Sometimes people think the five over one refers to five stories of wood over one story of concrete, but the technical term refers to any wood frame over a concrete podium.
If you want to describe some other sort of building, use another term. If you object to a single residential building covering most of a block, that's a different conversation.
I'm kinda dubious about a residential building covering most of a Manhattan block, because it would be too thick for residential. That is, I'm surprised someone would want to build one. Do such buildings have central courtyards?
I’m aware that it’s a term of art; but it’s also recently escaped its original context and is now generally used to describe the style of buildings that take up most of a city block (or similarly sized area). I’m not sure why you want a new or different term; the extracontextual meaning is pretty common at this point, and I generally prefer to bow before the gods of common usage.
RE courtyards, I don’t believe they generally use them. Why do you ask?
Is the issue with 5-over-1s or with the more general aesthetic preferences that people have? Which I guess is another way of asking, what is a relatively generic/standard design approach that you think solves for the issues you highlight?
My problem isn't the aesthetics -- I have mixed feelings about that -- but rather that they aren't as resilient of a format as traditional multistory mixed-use. The high-level problem with 5-over-1s is that they take up most of an entire block, and the entire building gets packaged up as a single financial product, which causes a lot of the downstream issues (wasting ground floor space, inflexible rents, etc).
Traditional multistory mixed-use, OTOH, is more flexible and responsive to local markets without tanking the entire block all at once.
Interesting, thanks for sharing. There are definitely trade offs when you have larger buildings of scale vs flexibility. I'm not sure why the rents would need to be inflexible though as a result of that though.
I'd also be curious to understand why you think the ground floor space would be wasted. Given the ability to have integrated planning, I would think you could make more efficient use of the space. Definitely would require planning though.
As a counter: my city requires retail on the first floor of most 5-over-1 projects, and the vacancy rates are depressingly high. It lends a sort of abandoned character to these new neighborhoods, much worse than austere apartment leasing offices or gyms.
The whole point of housing deregulation is to let people build, and for them to figure out what works and what doesn't. I'm sure developers would love to put in retail, all things being equal, and charge rents for what would otherwise be a non-revenue generating building services area. But the fact that they tend not to probably indicates that they know something we don't.
The empty ground floor spaces have to do with a market failure in commercial leasing, not some fundamental problem in ground floor retail.
Just try this quick thought experiment: if ground floor retail was inherently unworkable, then why is there so much of it in NYC? Why is there so much of it in “historic” districts like mine?
I live in an historic district with a lot of new development right next door. In fact, part of our historic Main Street is a rather unusual 5-over-1, which gives us an excellent overlapping control case.
On the Main Street, most of the retail spaces are filled. And on one of its corners is a 5-over-1 that tucks its leasing office into the back, with an interior retail courtyard and external retail, ALL filled stably for years now.
Just two blocks away, are a bunch of brand-new 5-over-1’s. Their lobbies dominate >75% of their footprints, and they have some retail spaces yet to be filled.
Obviously, ground floor retail isn’t magic — there’s no magic law that “if you build it, they will come”. But I think it’s pretty obvious that SOMETHING is going on here, and it’s strongly associated with wasting a bunch of the ground-floor footprint on a lobby and other amenities.
I suspect it has to do with some combination of the financing/revaluation process and the market failure in commercial leasing. But that’s hard to explain; to some extent, we kind of just have to use “wasting a lot of ground floor space on lobbies” as a heuristic for “is this project part of the market failures or not?”. So that’s what I’m doing here.
The 5-over-1s in Main Street fill because it's Main Street and that's where a big chunk of the city goes when people want to do retail-like things. Build ten copies of it next to each other and things won't be nearly as lively.
Like, are the residents above the retail single-handedly of keeping that much retail alive? If not, every time you build one of them the ratio of residential to retail just goes down and down, which is fine if your city is desperate for retail but not in cities where 15% of storefronts are permanently empty like mine.
As I told AlexZ, the problem isn't that they aren't using ENOUGH ground floor space on excess retail, but rather that the financing vehicles used to build these large projects are what forces the landlords to keep them vacant, for fear of triggering a revaluation if they lower their commercial rents to fill the spaces.
The benefit of Main Street's traditional multistory mixed-use buildings is that they're all separable. On my Main Street alone, there are at least a half dozen different commercial landlords. If any one business fails, they have an incentive to fill the space and keep competing at whatever rent they can get. It doesn't force the entire block to get revalued.
I did not say that ground floor retail is inherently unworkable - it obviously works in plenty of scenarios. But the same is true of preserving a historic building, or building to a certain style, or including affordable housing in a development, or building with union labor, or building using only domestic materials: it may be a good idea some of the time, but requiring it (or, possibly worse, contriving complex formulae for when to apply it and when to offer exceptions) just depresses housing supply.
> Just try this quick thought experiment: if ground floor retail was inherently unworkable, then why is there so much of it in NYC? Why is there so much of it in “historic” districts like mine?
Again, it is obviously workable in certain, maybe even most, conditions. But I think that developers are generally smart, informed people looking to maximize their investment, which successfully rented ground floor retail would accomplish.
And the thought experiment isn't very illustrative: I could easily use the same "it works in NYC!" argument to argue for an elevated subway in Duluth, MN, even though that is obviously a poor idea. In fact, I think NYC is unique enough that it is a poor justification for policy in much of the rest of the country at all. I'd be much more convinced if there was strong evidence that requiring ground floor retail has had positive effects in Austin or Nashville than NYC.
> Just two blocks away, are a bunch of brand-new 5-over-1’s. Their lobbies dominate >75% of their footprints, and they have some retail spaces yet to be filled.
Your area has stably supported N storefronts for some amount of time. Someone came in and built a development with some more storefronts right next door, and is having trouble filling them. Your proposed response is "we should require all future developments in this area to have EVEN MORE store frontage than the meager amount of additional capacity we are already struggling to fill". Which is more likely: 1. You find developers that bear this new regulatory burden, they build more storefronts, this somehow induces demand for ground floor business in the neighborhood (how?) and all storefronts are filled, or 2. You scare off would be developers, potential 5-over-1s are not developed, and you constrain housing supply?
I think a much more likely explanation is that adding a 5-over-1 grows your neighborhood's population by some number of people, but grows its demand for walk-in business by much less than what the footprint of the 5-over-1 would maximally support, so you have to find other uses for ground floor real estate. In fact, the best way to get the currently vacant storefronts rented is to surround them with 5-over-1s with little or no ground floor retail: more residents, but no new storefronts, creates more demand for walk-in business, which is what the area seems to be lacking rather than supply.
To be clear, the solution I was articulating wasn't that "requiring all 5-over-1's to use their ground floor on retail" was going to magically make the market clear. You correctly identify that as an absurd and wrong-headed solution.
What I'd like to see is smaller footprints and different financing. The reason why those 5-over-1s' meager ground-floor retail is still unoccupied is because the financing vehicles that created them require the rents to not dip below a certain level -- if they do, then the entire building gets revalued. Also, there's a separate market failure in commercial retail where most leases are signed for 10 years at a time, so tenants that fail can leave a landlord deeply in the lurch, and tenants that succeed get locked in at rents that can become out of step with local market conditions.
So, the reason I was highlighting the waste of ground-floor footprints on big lobbies and unused commercial space wasn't because I thought that we should make MORE unused commercial space, but rather because these mistakes are the visible symptoms of a larger problem that needs to be solved.
And my broader point was that it's a mistake to overrely on this fundamentally flawed and inflexible format to get us out of the crisis, because that'll quite obviously just put us into another crisis down the road. Imagine, for example, that we simply got rid of every single regulatory burden to deliver about 10 million units exclusively in 5-over-1's over the next 5 years. Wonderful, right? Wrong. The rent crisis would probably not subside; what would happen is that we'd build up a crap-ton of excess capacity, with each management company holding units off the market to stave off revaluations. But that wouldn't hold out forever; the revaluations will still have to happen at regular intervals, and so we'd get a wave of devastating downward revaluations that caused a huge crash in the market.
Ground floor retail is workable in NYC, but NYC is the densest city in the United States by far, and also the city with the most transit users, who necessarily walk to buses and trains, right past that ground floor retail. What works in NYC doesn't necessarily work in the California suburban areas where I live.
The two big issues with new ground floor retail where I live are (1) not enough customers, because everyone is in their car, and (2) rents necessarily having to be sky-high because it cost a fortune to build that building. Prop 13 comes into play here in a big way.
I’d be really careful with pushing the FHLBs at this time. FHLBs are the defacto lender of last resort for regional banks and that is because they are MUCH better at lighting fast advances than the Fed. And that is due to the highly efficient systems in place in evaluating collateral (which is typically illiquid longer term loans). There has been a huge run up on institutional deposit dependencies among the regional banks. 22 experienced runs back during the regional bank crisis. But you only heard about 3-4 of those banks. Why? Because the rest went straight to the FHLB.
The Fed in contrast is highly antiquated (see the SVB failure as documented by WSJ last year) in terms of contact, collateral evaluation and execution.
Additionally the Fed still carries the stigma of failure which can create a vicious cycle AND it offers a limited set of products and terms for the banks.
TBC I agree with the philosophy of the article. We already have a mechanism to create standardized MBS and the Fed should be the final lender in a liquidity crisis. They know this and are working on solutions. But I’d wait until these solutions are well tested and accepted by the banks before pushing the fhlbs. They saved us all in the GFC as well.
Western North Carolina will need to build lots of new/brownfield housing. I wonder if this might not be a superb opportunity to experiment with lots of possibilities for increasing housing supply. Perhaps suspend NEPA, perhaps reduce or eliminate union work requirements as well as minority contractor requirements. These are fine goals but lead to far too many expensive lawsuits and oversight which drive up costs.
One of the issues: most housing contractors are busy and/or struggling with labor shortages. Higher priced homes generate higher profits, so they allocate limited resources to higher profit-potential jobs. On a Federal level, advocating and funding for more trade training, both in secondary and community college levels, would be helpful. As would promoting pre-fab housing, which can reduce installation costs. Code requirements have changed over the years, increasing costs in ways such as more insulation, larger electrical service panels, fire detectors, internet wiring, more robust structural requirements, etc. Prefab can address several of these through standardization, but there are significant limitations: availability of regional prefab facilities and contractor reticence regarding new methods among them. And of course there’s NIMBY and local building and fire codes. It’s a complicated problem, and the Harris willingness to step in could lead to solutions.
Comparisons have been done to show it’s cheaper. But there are obstacles: customer reluctance, contractor reluctance, transportation issues, and more. But if there was a standard product with limited options, the costs could be reduced even more. But northern Maine, for example, where affordable housing is needed, there are huge distances to deal with. In cities or suburban areas, those distances would be less of an issue.
The ones I’ve seen have tended to be custom homes, built to order. My point is that standardization will reduce costs for affordable housing. Sears sold half a million homes more than 100 years ago, and they were sold as kits, rather than prefab.
How is this subsidizing demand? What Adeyemo is talking about is making quasi-public financial institutions that are meant to provide financing for housebuilding (expanding supply) actually provide that financing instead of keeping the money for executives.
Subsidize demand… for a larger federal government. You just described a federal official jawboning banks to do something that they clearly lack the statutory authority to make them do. That’s the big idea for addressing a lack of housing supply due to local government regulations? It’s a joke!
“The FHLBs are government-chartered corporations that benefit from both an exemption from paying taxes and the perception of implicit government support that allows them to borrow more cheaply than private actors. Outside experts estimate that the FHLBs receive an annual federal subsidy of more than $7 billion.”
These are banks charted by the government as quasi-private entities. The proposal does not increase the size of the federal government because Adeyemo is not proposing giving more money to FHLBs; he is pushing for them to spend the money they already have in the way that Congress intended.
On local government regulations, if you have some suggestions for how the Treasury Department can make local governments change their laws, please feel free to share. If not, it seems odd to complain about making some progress just because it’s not all of the progress needed.
Are you telling me that the government had the authority to make these banks do more, but is only *talking* about it *now*?!!! I read the article and it says that “Over the last three years, the President and Vice President have focused on doing everything possible to promote housing construction.” So I think you are mistaken, what is the actual statutory authority here to force the banks to subsidize construction? Seems like all they can really do is jawbone about taking away subsidies which presumably requires an actual act of a congress. But as long as jawboning is oversupplied, maybe direct a little bit of it towards local Democrats?
Adeyemo’s entire point is that yes, the government has been neglecting to tell FHLBs to do what Congress chartered them for, and is now making up for lost time.
Is this actually true, though? This quote makes it sound like the FHLB folks are straight-up pirates:
> Last year, the FHLBs provided $792 million to affordable housing programs while giving $3.4 billion in dividends to their shareholders.
If the FHLB's only purpose is to foster "affordable" housing (in the technical sense)? That sounds ... borderline criminal. If they have a broader mission on which they spent some multiple of that dividend, it's not so bad. I haven't had time to read the linked report yet, but I'll get to it eventually if no one else does. If we've been misled, that's going to be extremely bad for the author's credibility.
The word tell is telling. Do you mean to legally order or just to jawbone? I will stop pretending this is a joke if you stop pretending to take it seriously.
This isn't demands subsidization. I think a more accurate criticism would be since it doesn't alleviate the primary costs of expensive housing, it will allocate dollars in an incredibly inefficient way.
What about access to mortgages, i.e., Fannie Mae and Freddie Mac? Kevin Erdmann has been writing a lot about tighter lending standards post GHC have locked a lot of people out of mortgages for starter homes. That seems like a clear lever at the Federal level.
I talked to a couple of market-rate developers a few months ago who told me it had become difficult to get loans, not just for them but for their developer colleagues. The banks just weren't lending, they told me. It wasn't a matter of high interest rates—the banks just weren't lending.
The US has deep financial markets, with basically money available for everyone at the right price. An anocote of one developer not being able to get a loan from one bank shouldn't really change your mind much.
I'm looking around my area, with rising home prices, and seeing NO new applications for market rate multifamily housing. This is not one developer. This is every developer not developing.
Given the housing price increases, it should be incredibly profitable for developers to build and subsequently for banks to finance. That its questionable suggests that the impediments to building are phenomenal.
Prices going up doesn't mean profit goes up. Housing prices have increased, but land prices and construction prices have also increased, and currently interest rates are higher than they were a few years ago. (Land prices are always going to increase if home prices go up, of course.)
But also, residential development is and always will be risky financially, even without the far-too-many government impediments.
My point is that housing prices have been rising way more than most component costs. The difference is that there are increased barriers to building in terms of permitting and entitlements that are the issue. If you removed both the barriers and the enormous time sinks they entail, an enormous number of projects would start to be profitable that aren't today. But at the same time, increasing the borrowing capacity won't mean that much so long as those barriers remain.
This matches what I've heard from developers over the last few years.
My city has seen sharp price increases and the usual array of seller's market phenomena (no inspection, all-cash offers, multiple buyers submitting bids, etc.), yet the four or five developers and builders I've talked to say it isn't profitable enough to interest them. They usually shrug instead of getting into the details (I'm not sure they know or care), so I'm still trying to figure out why and what might change it - these things are clearly part of the story.
I'm sure they know, but they might not want to get into a complicated discussion of why it's not profitable. Labor costs have gone up, and construction materials costs have gone way up. It's hard to get around those. But also, cities put in a lot of barriers to housing: impact fees, requirements for discretionary hearings where a building that satisfies all the listed criteria can still be rejects, parking mandates, development codes requiring expensive construction, and many others.
In my city, it would cost about $1.2 million to build a 1750 square foot townhouse *not including the cost of land or developer profit*. That includes $100K in impact fees.
"But also, residential development is and always will be risky financially, even without the far-too-many government impediments."
Why should this be so with secular rises in housing demand? Assuming a building is permitted, isn't putting up residential buildings on the basis of a good capacity to control costs relative to expected sale price basically the entire reason that developers exist?
Because there are many things that can go wrong in a building project, and they do. A key construction material suddenly increases in price, an issue in the soil is discovered that requires expensive and lengthy remediation, something goes wrong with a subcontractor, rents/prices go down instead of up during the course of construction, the half-completed building burns down, a key component suddenly has a six month delay, outside agencies like the power company drag their feet in approvals or hook-ups, and on and on. There's a big variance in results, which is to say, it's risky.
The value of housing does not appreciate over the lifetime of a house, nor have there been massive improvements in housing construction over the past ten years to justify a large general increase in the value of housing. What does increase in value is land. Unfortunately for developers, the cost of land is passed through them: regardless of whether they build a $150k cottage or a $500k mansion, they have to pay the cost of the plot, which they pass on to consumers in the form of "housing price increases" but don't profit off of.
Intellectually, I know that a $150K cottage is actually a thing in parts of the US, so this is not a criticism, but still, it startles me to see it. It would cost me $300K to put a 500 sq ft ADU in my back yard. That's just the cost I would have to pay, and it doesn't include land because I already own it.
In my (gentrifying) neighborhood growing up, it was quite common for the value of the house to be technically negative — the (very) old stock was guaranteed to be torn down, so a bigger house would incur greater demolition costs to the developer.
Yep! That’s actually the point that I’m making. If the costs of your inputs go up and you pass on those costs to your consumers in the form of increased price of the final product, your profits don’t go up even if your prices do. That’s why higher home prices don’t necessarily signal increased demand or make developers want to build more homes.
Since housing is very important and billions of dollars are needed to increase the supply, what are some of the programs that are not as important and can be eliminated to fund these housing related initiatives?
"Affordable [housing/homes/rental units]" appears seven times in this piece and sixty times in the linked "Federal Home Loan Banks Combined Financial Report" (which is, it must be said, much longer).
Neither defines "affordable", and it's hard to tell whether the authors are using it colloquially, or in the technical sense of "costs no more than 30 percent of income" - the common definition for government programs.
At any rate, I think everyone who pays serious attention to housing in the US knows two things:
- 'Filtering — the process by which properties age and depreciate in quality and price, becoming more affordable to lower-income households — not new construction, is “the primary mechanism by which the housing market provides affordable supply.”' (https://www.huduser.gov/portal/pdredge/pdr-edge-featd-article-061520.html)
- Affordability provisions often frustrate development, both because they make the projects less attractive for investors and developers, but also because they activate NIMBY resistance. Sometimes, NIMBYs even _add_ those provisions to make projects less palatable and harder to finance.
All of which to say is: the exclusive focus on constructing new "affordable" homes seems well-intentioned, but counter-productive.
Nobody is shocked or angry that new cars are more expensive than used ones. But somehow people expect new housing to be as cheap as old housing. It's absurd.
Most of the obstacles to housing supply and lower housing prices are at the state level, but there are some tax policies that artificially boost the market price of housing while having almost no effect on supply. The federal government could stop doing these things. It wouldn't have a MASSIVE effect, but it would have an effect:
1. Eliminate the special tax status of REITs. For those unfamiliar, a REIT is a type of company that consists of at least 75% housing and cash and distributes at least 90% of its earnings to shareholders. As long as it does this, it's exempt from corporate taxation. I'm not a fan of the corporate tax, but as long as we have it, it should be applied equally across the board.
2. Eliminate the primary residence deduction. If you sell your primary residence, you can deduct $250k from your capital gains taxes or $500k if filing jointly. Again, if I had my way, we'd be taxing consumption anyways, but while we have capital gains, they should be taxed the same across the board. For political reasons, current owners would probably have to be grandfathered in. That's fine.
3. Eliminate SALT and MID. Again, you'd probably have to phase them out over time, which is fine.
4. Eliminate steel and lumber tariffs. Self-explanatory.
I think option number two is a terrible idea that will make people much less likely to move, and/or would require much more complex tax implementation.
First, people who sell their houses usually buy new ones and will have to pay an appreciated price for that new house. If you are reducing the capital to buy a new house by 15% because of capital gains taxes, that is going to disincentivize moving considerably.
The second thing it will do is add complexity due to house improvements. If you have to worry about the capital gains taxes on your house, then any time someone makes an improvement, they are going to use that to increase their basis. Which will advantage people who are good at documentation/tracking and filing with the IRS and disadvantage everyone else.
As for the taxation of reits, if you make that change, you'll just move a ton of money out of reits into other advantage tax forms of aggregating capital e.g. partnerships, mutual funds, etc.
Also as for the REIT thing, yeah investors would move on to other stuff. That's good. My point is that we're artificially boosting demand for housing for no reason.
REIT's aren't boosting demand. They are making the capital available to build housing *slightly* less costly by creating a vehicle to combine money and invest it without having to pay corporate taxes. Individuals receiving payouts from REITs still have to pay taxes on the dividends.
So as for capital gains taxation on housing, I actually think that would be a wash for most sellers. Their net worth would decrease, and they'd be selling for less, but then again, the next house they'd buy would be cheaper too. It's a bit more like the question "what if everybody's home equity suddenly decreased 10%? Existing homeowners would lose out for sure, but I'm not sure it would effect liquidity.
As for discouraging improvements, that is a concern I do share, and one reason I favor land value taxes. I don't really like the capital gains tax at all, I'd rather we were just taxing consumption. That way if somebody bought a house for $500k, then sold it for $750k, and then bought a bunch of stuff with that $750k, they'd just pay taxes on that $750k and we wouldn't have to worry about how they got it. BUT, if we're going to have capital gains taxes, I can't think of a reason to exempt housing other than inertia. Like if we were coming up with the capital gains tax for the first time, would we invent a housing exemption? I don't think so.
"I actually think that would be a wash for most sellers. Their net worth would decrease, and they'd be selling for less, but then again, the next house they'd buy would be cheaper too."
Why would the next house be cheaper? Its not like if you are a new home owner without equity a house is cheaper...
And again I'll note that most people put a lot of money into a house paying for upkeep and improvements. That raises the "cost" basis of the house. But few people track that because of the tax exemption on selling. What you're saying is that we should charge the tax and make everyone account for all that investment. I think that's overall a much worse place for the majority of people. It would be good for rich people though who can hire a CPA to handle all that for them.
I’ve put probably 100k into my current house, which was bought as an “as is” property that needed fixing up. I’m fine with reducing or eliminating the deduction as long as my investments are accounted for. Additionally, you’d need to change the backend - people who lose money ought to be able to count that as a capital loss.
But I agree that a consumption tax system would be the better option. If only we could convince the rest of the country.
Yes, if housing was taxed as capital gain, you could absolutely use a loss to offset a gain somewhere else.
Funny enough, some here are basically making the case for LVTs.
Sticking a pin in this because I was to respond later
How would eliminating the primary residence deduction do anything to reduce housing prices?
If you know you can deduct taxes on the back end, you'll be less price sensitive on the front end.
I have to say that this seems like one of those instances in which "people respond to incentives" seems like it's not really true in a substantive way even if it's true in a formal way (put in another manner, the marginal elasticity of demand to this policy may not be literally zero, but I would guess that it's very, very low)[1]. The marginal "need" for price sensitivity when it comes to a purchase the size of a house seems negligible -- saving money is its own reward. Conversely, buying a house to live in it for a few years then flip it as a capital good doesn't really work as a long term business plan -- because (1) the transaction costs of moving are very high, (2) a primary residence is by definition a consumption good (I would argue typically far more than a capital good. The capital good part is just along for the ride and prevents you from being indifferent as to whether the mortgage is underwater), and (3) once you sell you *still have to live somewhere* so you can't just choose to be short the housing market and enjoy your gains in the way that you can cash out of other equity investments.
You could maybe make a case for eliminating the deduction on the grounds of literally having people have less money in their pockets and thereby lowering demand, but I don't think that the foreknowledge that you can deduct taxes when you eventually sell really bears on peoples' ex ante price sensitivity except as mediated through how much money existing homeowners retain. For first-time homebuyers there are far too many other dimensions to homeownership for it be a primary driver in practice even if it's a subsidized class of investment in principle.
[1] I actually think a lot of individually-oriented tax policy is like this because it's too attenuated, temporally remote, or opaque. Not all of it, but a lot of it.
So, I agree the the responsiveness to this policy change would be small, BUT I think there would be an impact because right now, most people who sell their homes have capital gains well under the threshold. So eliminating that deduction would induce taxation at a time where there typically is none. Also, flippers would definitely notice. And even in a market where not everybody is aware of all the contours of the market, the few who are aware will adjust their behavior, and at a certain point, that would be baked in to the price.
"So eliminating that deduction would induce taxation at a time where there typically is none"
Doesn't this create a parallel concern that it's a disincentive to liquidity in a market where transaction costs are already really high?
Possibly? I guess we'd need a real world example. The top capital gains rate is 20%, so somebody selling their house would still be turning a profit, just less of one than before. Either way, existing property owners would see their net worth reduced. If they wanted a HELOC, the amount they could take out would probably be reduced. So I do think there would be an effect before the sale, so that's why I'm not so sure.
Have a needs based first time owner grant program to replace the mortgage deduction??
Kamala is proposing the first part without the second!
Based on the discussion around FHLBs, it seems like the appropriate action would be to remove their tax exempt status and use the taxes gained from them to fund housing programs.
Looks like a big money grab for local banks so they can keep maintaining their opulent branch locations and seats on the local chambers of commerce. I honestly had never heard of FHLB before. Money would be better spent directly getting involved in building the homes via some sort of capital fund. Partnering with the private sector makes sense because reducing the cost of housing and increasing availability benefits them directly. We need to get rid of all of these twentieth century solutions to twentieth century problems that somehow remain. We have newer, more complex modern problems that require sleeker and more sophisticated solutions.
I'd heard of them before, and thought of the idea approvingly - because, as you say, and as I understand it, they are primarily local banks that are more-responsive to local conditions and more amenable to low-dollar loans than the big banks are - however, on the numbers in this article it looks like the government is handing half of the value of the subsidy to shareholders. Maybe that's not such a good deal!
However, we're missing a data-point: what's the multiplier on the capital conversion? If the FHLB's are making many times more $$$ of loans (that they wouldn't have without the subsidy), and returning profits on those, then it still might be a wise use of the the money. (Why wouldn't they pursue that profit absent the subsidy? Maybe the risk profiles, or the administrative costs don't pencil out?)
I don't know the answers to those questions, but it's clear to me that this program deserves some hard scrutiny. It would make a good topic for a future SB column, no?
Am I right to read this that most of these policies are directed towards deed-restricted/below market-rate units? I’m not opposed to that but I think the problem in expensive cities isn’t only that there are too few deed-restricted units but that the market rate units are exhorbitantly expensive due to scarcity. Assuming I have understood correctly, this seems like a major gap in the strategy described above and belies the notion that the administration is truly doing all that it can as the author asserts.
As I understand it, the author thinks the FHLB should be lending more to homebuilders—not just affordable builders, but any builder. Developers have told me that recently it has been all but impossible to get loans from banks, not just "loans at a good rate" but loans, period. And they've been going for other sources of capital, but that's not easy either.
This feels kind of myopic and insider-y.
I don’t mean “insider” as the usual cant the rubes intend, but more as an explanation of why the writer is trying to beat the FHLBs over the head.
I’m sure that they could be doing more, and I certainly support any beatings they receive. But to take a step back… really, man? Is that ALL we can do? I know you’re just writing about immediate and feasible steps, but the juice you’re squeezing is just such an embarrassingly tiny drop in the bucket of 10-15 million units needed.
Not to mention, most of what the FHLBs will finance are just more of those dysfunctional 5-over-1’s — perhaps with slightly more variance in size and footprint, but still roughly the same predictable investment product.
We need WAY more action for financing missing middle housing. If the FHLBs can do that, then great. If not, we shouldn’t waste time beating obsolete incumbents over the head, but rather build new institutions who will do what we need them to do.
What is dysfunctional about 5-over-1? Why is the financing different for whatever you mean by missing middle (some people include 5/1 in that)? My sense is that the financing challenges for smaller buildings are basically zoning, code, and scale, given current interest rates, none of which are really about banks at all.
The main financing problem for smaller buildings is actually that they tend to be nonstandard. Because they mainly serve to fill in suboptimally used interstitial spaces (IE like the space between two adjacent buildings), they don’t have a reliably uniform value proposition. It’s relatively more work to underwrite them than to underwrite a 5-over-1.
My problems with 5-over-1’s are mostly in implementation, not in their impact on local supply. To wit, most of them have glaring flaws in their urbanism: enormous vacant lobbies, putting amenities on the ground floor instead of the second, to the exclusion of retail, not enough variety of ground floor retail spaces, and the twin evils of RealPage and financing vehicles that require the entire building to be revaluated if they ever dare to drop rents.
So, it’s not that I hate them. It’s just that they’re not an unalloyed good; they’re seeding a shit ton of problems we’ll eventually have to deal with. Like the failed public housing projects of past generations, I don’t want this one to come back and bite us in the ass.
I live in the SF Bay Area suburbs, where 5-over-1s are gong up. Sometimes cities require retail on the first floor. It's almost always a mistake and the developers can't fill the retail.
I'm confused when you seem to contrast 5-over-1s with smaller buildings that fill the space between two adjacent buildings. Why wouldn't those infill buildings also be 5-over-1s? I also don't understand why you think a 5-over-1 has an enormous lobby; the ones around here don't, because the landlords/sellers want to sell or lease the valuable space in their expensive buildings.
"5-over-1" is an industry term referring to buildings that typically take up large chunks of an entire block. The term is used to keep separate from the more infill-focused traditional mixed-use format. I'm not inventing anything new here, I'm just trying to be accurate about specific formats.
To be clear, my complaints absolutely do NOT apply to mixed-use buildings.
Also, RE the 5-over-1s around you, I'm not saying EVERY 5-over-1 makes the same mistakes, I'm just saying that they frequently DO make these kinds of mistakes, and that's why it's an inefficient form. If the ones around you AREN'T making those mistakes... well, bully for you! I applaud that. But just because it's being done right in certain areas doesn't mean that they generally aren't being implemented right at the national level. If 70% of them make the mistakes, that means there's still a good 30% doing things right, but I'm pretty sure you'd agree that getting things wrong 70% of the time is A Problem.
5 over 1 is an industry term for a building that is Type 5 (wood construction) over Type 1 (concrete podium). The wood construction will be four or five stories, and the concrete will be one or two stories. They are also sometimes called podium buildings. Sometimes people think the five over one refers to five stories of wood over one story of concrete, but the technical term refers to any wood frame over a concrete podium.
https://en.wikipedia.org/wiki/5-over-1
If you want to describe some other sort of building, use another term. If you object to a single residential building covering most of a block, that's a different conversation.
I'm kinda dubious about a residential building covering most of a Manhattan block, because it would be too thick for residential. That is, I'm surprised someone would want to build one. Do such buildings have central courtyards?
I’m aware that it’s a term of art; but it’s also recently escaped its original context and is now generally used to describe the style of buildings that take up most of a city block (or similarly sized area). I’m not sure why you want a new or different term; the extracontextual meaning is pretty common at this point, and I generally prefer to bow before the gods of common usage.
RE courtyards, I don’t believe they generally use them. Why do you ask?
Is the issue with 5-over-1s or with the more general aesthetic preferences that people have? Which I guess is another way of asking, what is a relatively generic/standard design approach that you think solves for the issues you highlight?
My problem isn't the aesthetics -- I have mixed feelings about that -- but rather that they aren't as resilient of a format as traditional multistory mixed-use. The high-level problem with 5-over-1s is that they take up most of an entire block, and the entire building gets packaged up as a single financial product, which causes a lot of the downstream issues (wasting ground floor space, inflexible rents, etc).
Traditional multistory mixed-use, OTOH, is more flexible and responsive to local markets without tanking the entire block all at once.
Interesting, thanks for sharing. There are definitely trade offs when you have larger buildings of scale vs flexibility. I'm not sure why the rents would need to be inflexible though as a result of that though.
I'd also be curious to understand why you think the ground floor space would be wasted. Given the ability to have integrated planning, I would think you could make more efficient use of the space. Definitely would require planning though.
As a counter: my city requires retail on the first floor of most 5-over-1 projects, and the vacancy rates are depressingly high. It lends a sort of abandoned character to these new neighborhoods, much worse than austere apartment leasing offices or gyms.
The whole point of housing deregulation is to let people build, and for them to figure out what works and what doesn't. I'm sure developers would love to put in retail, all things being equal, and charge rents for what would otherwise be a non-revenue generating building services area. But the fact that they tend not to probably indicates that they know something we don't.
The empty ground floor spaces have to do with a market failure in commercial leasing, not some fundamental problem in ground floor retail.
Just try this quick thought experiment: if ground floor retail was inherently unworkable, then why is there so much of it in NYC? Why is there so much of it in “historic” districts like mine?
I live in an historic district with a lot of new development right next door. In fact, part of our historic Main Street is a rather unusual 5-over-1, which gives us an excellent overlapping control case.
On the Main Street, most of the retail spaces are filled. And on one of its corners is a 5-over-1 that tucks its leasing office into the back, with an interior retail courtyard and external retail, ALL filled stably for years now.
Just two blocks away, are a bunch of brand-new 5-over-1’s. Their lobbies dominate >75% of their footprints, and they have some retail spaces yet to be filled.
Obviously, ground floor retail isn’t magic — there’s no magic law that “if you build it, they will come”. But I think it’s pretty obvious that SOMETHING is going on here, and it’s strongly associated with wasting a bunch of the ground-floor footprint on a lobby and other amenities.
I suspect it has to do with some combination of the financing/revaluation process and the market failure in commercial leasing. But that’s hard to explain; to some extent, we kind of just have to use “wasting a lot of ground floor space on lobbies” as a heuristic for “is this project part of the market failures or not?”. So that’s what I’m doing here.
The 5-over-1s in Main Street fill because it's Main Street and that's where a big chunk of the city goes when people want to do retail-like things. Build ten copies of it next to each other and things won't be nearly as lively.
Like, are the residents above the retail single-handedly of keeping that much retail alive? If not, every time you build one of them the ratio of residential to retail just goes down and down, which is fine if your city is desperate for retail but not in cities where 15% of storefronts are permanently empty like mine.
As I told AlexZ, the problem isn't that they aren't using ENOUGH ground floor space on excess retail, but rather that the financing vehicles used to build these large projects are what forces the landlords to keep them vacant, for fear of triggering a revaluation if they lower their commercial rents to fill the spaces.
The benefit of Main Street's traditional multistory mixed-use buildings is that they're all separable. On my Main Street alone, there are at least a half dozen different commercial landlords. If any one business fails, they have an incentive to fill the space and keep competing at whatever rent they can get. It doesn't force the entire block to get revalued.
I did not say that ground floor retail is inherently unworkable - it obviously works in plenty of scenarios. But the same is true of preserving a historic building, or building to a certain style, or including affordable housing in a development, or building with union labor, or building using only domestic materials: it may be a good idea some of the time, but requiring it (or, possibly worse, contriving complex formulae for when to apply it and when to offer exceptions) just depresses housing supply.
> Just try this quick thought experiment: if ground floor retail was inherently unworkable, then why is there so much of it in NYC? Why is there so much of it in “historic” districts like mine?
Again, it is obviously workable in certain, maybe even most, conditions. But I think that developers are generally smart, informed people looking to maximize their investment, which successfully rented ground floor retail would accomplish.
And the thought experiment isn't very illustrative: I could easily use the same "it works in NYC!" argument to argue for an elevated subway in Duluth, MN, even though that is obviously a poor idea. In fact, I think NYC is unique enough that it is a poor justification for policy in much of the rest of the country at all. I'd be much more convinced if there was strong evidence that requiring ground floor retail has had positive effects in Austin or Nashville than NYC.
> Just two blocks away, are a bunch of brand-new 5-over-1’s. Their lobbies dominate >75% of their footprints, and they have some retail spaces yet to be filled.
Your area has stably supported N storefronts for some amount of time. Someone came in and built a development with some more storefronts right next door, and is having trouble filling them. Your proposed response is "we should require all future developments in this area to have EVEN MORE store frontage than the meager amount of additional capacity we are already struggling to fill". Which is more likely: 1. You find developers that bear this new regulatory burden, they build more storefronts, this somehow induces demand for ground floor business in the neighborhood (how?) and all storefronts are filled, or 2. You scare off would be developers, potential 5-over-1s are not developed, and you constrain housing supply?
I think a much more likely explanation is that adding a 5-over-1 grows your neighborhood's population by some number of people, but grows its demand for walk-in business by much less than what the footprint of the 5-over-1 would maximally support, so you have to find other uses for ground floor real estate. In fact, the best way to get the currently vacant storefronts rented is to surround them with 5-over-1s with little or no ground floor retail: more residents, but no new storefronts, creates more demand for walk-in business, which is what the area seems to be lacking rather than supply.
To be clear, the solution I was articulating wasn't that "requiring all 5-over-1's to use their ground floor on retail" was going to magically make the market clear. You correctly identify that as an absurd and wrong-headed solution.
What I'd like to see is smaller footprints and different financing. The reason why those 5-over-1s' meager ground-floor retail is still unoccupied is because the financing vehicles that created them require the rents to not dip below a certain level -- if they do, then the entire building gets revalued. Also, there's a separate market failure in commercial retail where most leases are signed for 10 years at a time, so tenants that fail can leave a landlord deeply in the lurch, and tenants that succeed get locked in at rents that can become out of step with local market conditions.
So, the reason I was highlighting the waste of ground-floor footprints on big lobbies and unused commercial space wasn't because I thought that we should make MORE unused commercial space, but rather because these mistakes are the visible symptoms of a larger problem that needs to be solved.
And my broader point was that it's a mistake to overrely on this fundamentally flawed and inflexible format to get us out of the crisis, because that'll quite obviously just put us into another crisis down the road. Imagine, for example, that we simply got rid of every single regulatory burden to deliver about 10 million units exclusively in 5-over-1's over the next 5 years. Wonderful, right? Wrong. The rent crisis would probably not subside; what would happen is that we'd build up a crap-ton of excess capacity, with each management company holding units off the market to stave off revaluations. But that wouldn't hold out forever; the revaluations will still have to happen at regular intervals, and so we'd get a wave of devastating downward revaluations that caused a huge crash in the market.
Ground floor retail is workable in NYC, but NYC is the densest city in the United States by far, and also the city with the most transit users, who necessarily walk to buses and trains, right past that ground floor retail. What works in NYC doesn't necessarily work in the California suburban areas where I live.
The two big issues with new ground floor retail where I live are (1) not enough customers, because everyone is in their car, and (2) rents necessarily having to be sky-high because it cost a fortune to build that building. Prop 13 comes into play here in a big way.
That’s incompatible with the fact that ground floor retail is keeping my Main Street mostly occupied.
What is dysfunctional about 5 over 1s, other than that we should allow them to be single stair buildings?
You can make 5-over-1s with ground floor retail. Why wouldn't you be able to?
See my response to Sam.
Thank you for your work on addressing housing costs.
I’d be really careful with pushing the FHLBs at this time. FHLBs are the defacto lender of last resort for regional banks and that is because they are MUCH better at lighting fast advances than the Fed. And that is due to the highly efficient systems in place in evaluating collateral (which is typically illiquid longer term loans). There has been a huge run up on institutional deposit dependencies among the regional banks. 22 experienced runs back during the regional bank crisis. But you only heard about 3-4 of those banks. Why? Because the rest went straight to the FHLB.
The Fed in contrast is highly antiquated (see the SVB failure as documented by WSJ last year) in terms of contact, collateral evaluation and execution.
Additionally the Fed still carries the stigma of failure which can create a vicious cycle AND it offers a limited set of products and terms for the banks.
TBC I agree with the philosophy of the article. We already have a mechanism to create standardized MBS and the Fed should be the final lender in a liquidity crisis. They know this and are working on solutions. But I’d wait until these solutions are well tested and accepted by the banks before pushing the fhlbs. They saved us all in the GFC as well.
Western North Carolina will need to build lots of new/brownfield housing. I wonder if this might not be a superb opportunity to experiment with lots of possibilities for increasing housing supply. Perhaps suspend NEPA, perhaps reduce or eliminate union work requirements as well as minority contractor requirements. These are fine goals but lead to far too many expensive lawsuits and oversight which drive up costs.
One of the issues: most housing contractors are busy and/or struggling with labor shortages. Higher priced homes generate higher profits, so they allocate limited resources to higher profit-potential jobs. On a Federal level, advocating and funding for more trade training, both in secondary and community college levels, would be helpful. As would promoting pre-fab housing, which can reduce installation costs. Code requirements have changed over the years, increasing costs in ways such as more insulation, larger electrical service panels, fire detectors, internet wiring, more robust structural requirements, etc. Prefab can address several of these through standardization, but there are significant limitations: availability of regional prefab facilities and contractor reticence regarding new methods among them. And of course there’s NIMBY and local building and fire codes. It’s a complicated problem, and the Harris willingness to step in could lead to solutions.
People keep saying prefab housing will reduce costs, and it keeps not happening.
Comparisons have been done to show it’s cheaper. But there are obstacles: customer reluctance, contractor reluctance, transportation issues, and more. But if there was a standard product with limited options, the costs could be reduced even more. But northern Maine, for example, where affordable housing is needed, there are huge distances to deal with. In cities or suburban areas, those distances would be less of an issue.
Intuitively, it ought to be cheaper, for a lot of good reasons. But developers keep trying it in the US, and it keeps not being cheaper.
The ones I’ve seen have tended to be custom homes, built to order. My point is that standardization will reduce costs for affordable housing. Sears sold half a million homes more than 100 years ago, and they were sold as kits, rather than prefab.
Can we stop local governments from restricting supply? No, best we can do is subsidize demand for a larger federal government!
How is this subsidizing demand? What Adeyemo is talking about is making quasi-public financial institutions that are meant to provide financing for housebuilding (expanding supply) actually provide that financing instead of keeping the money for executives.
Subsidize demand… for a larger federal government. You just described a federal official jawboning banks to do something that they clearly lack the statutory authority to make them do. That’s the big idea for addressing a lack of housing supply due to local government regulations? It’s a joke!
Did you actually read the article?
“The FHLBs are government-chartered corporations that benefit from both an exemption from paying taxes and the perception of implicit government support that allows them to borrow more cheaply than private actors. Outside experts estimate that the FHLBs receive an annual federal subsidy of more than $7 billion.”
These are banks charted by the government as quasi-private entities. The proposal does not increase the size of the federal government because Adeyemo is not proposing giving more money to FHLBs; he is pushing for them to spend the money they already have in the way that Congress intended.
On local government regulations, if you have some suggestions for how the Treasury Department can make local governments change their laws, please feel free to share. If not, it seems odd to complain about making some progress just because it’s not all of the progress needed.
Are you telling me that the government had the authority to make these banks do more, but is only *talking* about it *now*?!!! I read the article and it says that “Over the last three years, the President and Vice President have focused on doing everything possible to promote housing construction.” So I think you are mistaken, what is the actual statutory authority here to force the banks to subsidize construction? Seems like all they can really do is jawbone about taking away subsidies which presumably requires an actual act of a congress. But as long as jawboning is oversupplied, maybe direct a little bit of it towards local Democrats?
Adeyemo’s entire point is that yes, the government has been neglecting to tell FHLBs to do what Congress chartered them for, and is now making up for lost time.
Is this actually true, though? This quote makes it sound like the FHLB folks are straight-up pirates:
> Last year, the FHLBs provided $792 million to affordable housing programs while giving $3.4 billion in dividends to their shareholders.
If the FHLB's only purpose is to foster "affordable" housing (in the technical sense)? That sounds ... borderline criminal. If they have a broader mission on which they spent some multiple of that dividend, it's not so bad. I haven't had time to read the linked report yet, but I'll get to it eventually if no one else does. If we've been misled, that's going to be extremely bad for the author's credibility.
The word tell is telling. Do you mean to legally order or just to jawbone? I will stop pretending this is a joke if you stop pretending to take it seriously.
This isn't demands subsidization. I think a more accurate criticism would be since it doesn't alleviate the primary costs of expensive housing, it will allocate dollars in an incredibly inefficient way.
I think "subsidize demand for housing" is a fundamentally strange concept.
It's not like you're wanting consumers to buy a new car or whatever.
Probably too late now, but I do wish there had been more campaign messaging about how the ARP was helping build homes! It’s a big accomplishment
What about access to mortgages, i.e., Fannie Mae and Freddie Mac? Kevin Erdmann has been writing a lot about tighter lending standards post GHC have locked a lot of people out of mortgages for starter homes. That seems like a clear lever at the Federal level.
I think I had a wonkgasm reading that.
I was halfway through the article when it occurred to me that didn’t sound like Matts writing and more like a paid article. Not very entertaining tbh.
A multibillion dollar government program fails to accomplish its mission. What a shock!
The right housing policy: “First, do no harm”. Get out of the way and let builders build.
Builders need money to build. When financing becomes hard, building becomes hard even if it is permitted.
I talked to a couple of market-rate developers a few months ago who told me it had become difficult to get loans, not just for them but for their developer colleagues. The banks just weren't lending, they told me. It wasn't a matter of high interest rates—the banks just weren't lending.
"the banks just weren't lending"
This seems implausible to be an issue for anything other than a very short timeframe.
Why? Banks can find other uses for their money other than making what are necessarily risky loans to developers.
The US has deep financial markets, with basically money available for everyone at the right price. An anocote of one developer not being able to get a loan from one bank shouldn't really change your mind much.
I'm looking around my area, with rising home prices, and seeing NO new applications for market rate multifamily housing. This is not one developer. This is every developer not developing.
Home developers?
Given the housing price increases, it should be incredibly profitable for developers to build and subsequently for banks to finance. That its questionable suggests that the impediments to building are phenomenal.
Prices going up doesn't mean profit goes up. Housing prices have increased, but land prices and construction prices have also increased, and currently interest rates are higher than they were a few years ago. (Land prices are always going to increase if home prices go up, of course.)
But also, residential development is and always will be risky financially, even without the far-too-many government impediments.
My point is that housing prices have been rising way more than most component costs. The difference is that there are increased barriers to building in terms of permitting and entitlements that are the issue. If you removed both the barriers and the enormous time sinks they entail, an enormous number of projects would start to be profitable that aren't today. But at the same time, increasing the borrowing capacity won't mean that much so long as those barriers remain.
We're working on it, but Yimby action is the slow boring of hard boards.
This matches what I've heard from developers over the last few years.
My city has seen sharp price increases and the usual array of seller's market phenomena (no inspection, all-cash offers, multiple buyers submitting bids, etc.), yet the four or five developers and builders I've talked to say it isn't profitable enough to interest them. They usually shrug instead of getting into the details (I'm not sure they know or care), so I'm still trying to figure out why and what might change it - these things are clearly part of the story.
I'm sure they know, but they might not want to get into a complicated discussion of why it's not profitable. Labor costs have gone up, and construction materials costs have gone way up. It's hard to get around those. But also, cities put in a lot of barriers to housing: impact fees, requirements for discretionary hearings where a building that satisfies all the listed criteria can still be rejects, parking mandates, development codes requiring expensive construction, and many others.
In my city, it would cost about $1.2 million to build a 1750 square foot townhouse *not including the cost of land or developer profit*. That includes $100K in impact fees.
"But also, residential development is and always will be risky financially, even without the far-too-many government impediments."
Why should this be so with secular rises in housing demand? Assuming a building is permitted, isn't putting up residential buildings on the basis of a good capacity to control costs relative to expected sale price basically the entire reason that developers exist?
Because there are many things that can go wrong in a building project, and they do. A key construction material suddenly increases in price, an issue in the soil is discovered that requires expensive and lengthy remediation, something goes wrong with a subcontractor, rents/prices go down instead of up during the course of construction, the half-completed building burns down, a key component suddenly has a six month delay, outside agencies like the power company drag their feet in approvals or hook-ups, and on and on. There's a big variance in results, which is to say, it's risky.
The value of housing does not appreciate over the lifetime of a house, nor have there been massive improvements in housing construction over the past ten years to justify a large general increase in the value of housing. What does increase in value is land. Unfortunately for developers, the cost of land is passed through them: regardless of whether they build a $150k cottage or a $500k mansion, they have to pay the cost of the plot, which they pass on to consumers in the form of "housing price increases" but don't profit off of.
Intellectually, I know that a $150K cottage is actually a thing in parts of the US, so this is not a criticism, but still, it startles me to see it. It would cost me $300K to put a 500 sq ft ADU in my back yard. That's just the cost I would have to pay, and it doesn't include land because I already own it.
In my (gentrifying) neighborhood growing up, it was quite common for the value of the house to be technically negative — the (very) old stock was guaranteed to be torn down, so a bigger house would incur greater demolition costs to the developer.
>nor have there been massive improvements in housing construction over the past ten years to justify a large general increase in the value of housing
? The price of housing materials and labor can obviously rise? In the case of the former, substantially
Yep! That’s actually the point that I’m making. If the costs of your inputs go up and you pass on those costs to your consumers in the form of increased price of the final product, your profits don’t go up even if your prices do. That’s why higher home prices don’t necessarily signal increased demand or make developers want to build more homes.
Since housing is very important and billions of dollars are needed to increase the supply, what are some of the programs that are not as important and can be eliminated to fund these housing related initiatives?
This is the first I've heard about this FHLB issue. Is there something I can read to learn more about it?
Heres the FHLBs regulator FHFA, with a proposal to clearly define their mission: https://www.fhfa.gov/news/news-release/fhfa-requests-input-on-fhlbank-system-mission