Overpromising and Underdelivering
Biden’s new housing-supply plan would likely have only a modest effect.
On May 16, the Biden administration released its Housing Supply Action Plan, an overhyped but modestly virtuous set of proposals that it says will “help close America’s housing supply shortfall in 5 years.” Sure, it will help, but states and localities will have to do much of the heavy lifting. Even so, the administration isn’t doing all it can to address this problem.
Three broad trends are affecting America’s housing supply. First, there’s a national housing boom. New privately owned housing starts stood at 1.79 million in March 2022, the highest level since 2006. Accommodative post-pandemic fiscal and monetary policy is fueling the trend, but it’s coming to an end to combat price inflation. Still, many households have cash on hand to spend on new housing.
Second, prices are spiking. According to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, prices had risen 19.8 percent in the 12-month period ending in February 2022. The index tracks single-family homes nationwide. Phoenix, Tampa, and Miami led the price rise among cities that the index follows, with year-over-year increases of 32.9, 32.6, and 29.7 percent, respectively.
Third, the costs of building new housing are spiraling upward. According to government data cited by the National Association of Home Builders, the cost of materials inputs to new housing rose by 19.2 percent in the 12-month period ending in April 2022, and 35.6 percent since the start of the pandemic. Services inputs rose by 18.1 percent year over year, and 45.6 percent since the start of the pandemic.
These trends are all about to go into reverse, thanks to rising mortgage-interest rates. The average interest rate for a 30-year mortgage in the U.S. reached 5.3 percent in May, the highest since the Great Recession. The Federal Reserve brings the price level change back within its target range by squeezing housing and other interest-rate-dependent industries, particularly automobiles. If the Biden administration wants to close the housing-supply gap within five years, it should be looking for ways to lower inflation without the need for extended rate increases from the Fed.
So let’s consider the Biden administration’s action plan in that light.
The first element of the Biden plan promotes zoning and land-use reform by providing extra points for reform-minded jurisdictions on certain grant programs related to transportation and economic development. Certainly, the nation needs to make changes to zoning and land-use regulations, but as a veteran of New York City land-use politics, I’m skeptical that the administration’s plan will work. Local governments often don’t understand the effects of their own land-use policies, and those that do can feign compliance while quietly undermining housing construction. Understanding the total effects of local zoning may be beyond the capacity of federal agencies. Moreover, denying the extra points to localities could undermine Democratic electoral fortunes in those places. Would Biden appointees actually do that?
Land-use reform is also a long-term project. The Fed will crush housing-price inflation long before zoning reform has a salutary effect, even in the relatively small number of supply-constrained cities where home prices and market rents are wildly out of sync with the actual costs of building and operating housing.
The second part of the plan is to craft better financing options for nontraditional types of housing, such as manufactured housing and accessory dwelling units (second units on lots typically occupied by single-family homes). This proposal, along with a third initiative to improve coordination of multifamily housing-finance programs, is a good idea and will marginally lower the cost of housing.
The fourth initiative would direct the sale of defaulted properties to homeowners and nonprofits, rather than to for-profit investors. This seems like a sop to leftists, who are hostile to for-profit housing investors. It wouldn’t change the supply of housing, though some houses would sell for less.
The last initiative deals with materials costs and labor supply, both sources of housing-price inflation. On materials costs, however, the administration’s language is vague. In an April 2022 letter to Biden, the National Association of Home Builders asked him to settle America’s dispute with Canada over the price of softwood lumber and lift all tariffs. Given where we are, if Canada wants to send us lumber priced below cost, we should gladly take it. But Biden made no such commitments. On labor costs, the plan promises that the federal government will promote modular, panelized, and manufactured housing, as well as research and development on labor-saving technological improvements. The American housing sector has long resisted productivity improvements, so these are good ideas. Still, it’s not clear that Washington can reorganize the highly fragmented housing-construction industry—particularly when the Biden administration maintains a posture of hostility to large companies, which are capable of reorganizing industries.
In short, though it contains some good aspects, the Biden plan will have only modest effects. The main players remain the Fed on housing-cost inflation and state and local governments on land use. Price inflation will likely abate—but so will housing starts. Five years from now, the housing-supply gap will still be with us.
Photo by Justin Sullivan/Getty Images
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