The Solution to the Housing Shortage

According to the National Low Income Housing Coalition, Texas has a shortage of about 600,000 rental homes that are affordable and available to extremely low-income renters. Across the state, there are just 29 affordable and available housing units for every 100 extremely low-income families. The shortage is slightly more than 170,000 for the Houston-Woodlands-Sugar Land metro area, with only 19 affordable and available housing units for every 100 extremely low-income families.

 The demand for affordable housing for low-income families clearly exceeds the supply. One of the basic laws of economics holds that, when demand exceeds supply, prices will rise. And that is what has happened with rental housing. When prices rise in response to a supply shortage, profits also increase. Higher profits attract investment capital to increase production, and as the supply increases, prices begin to fall. But this isn’t happening with housing for low-income renters. Why? Is there something unique about low-income housing that exempts it from the laws of economics?

If we are to objectively analyze this issue (any issue), we must consider the full context—all of the relevant information. To do otherwise is to blind ourselves to important facts. In regard to the shortage of affordable housing, we must look at all of the costs associated with producing housing.

There are four basic costs in producing housing: materials, labor, land, and regulatory costs. A housing producer can exercise considerable control over material and labor costs. The type and quality of materials, for example, can vary significantly. Wages can also vary according to the skills of the workers used. However, a developer has little control over land and regulatory costs.

It is estimated that more than 70 percent of the land in American cities is zoned for single-family homes. Any other type of housing, such as duplexes or a stand-alone cottage, is illegal. Single-family zoning (indeed, all zoning) arbitrarily limits the supply of land available for housing. When demand for housing in a particular area increases significantly, the price of land can sky-rocket.

A single lot can cost $200,000 or more in many cities. If a developer can only build a single-family home on that lot, the entire cost of the land has to be included in the housing price. Before the foundation is even poured, the cost of that house is beyond the affordability of low-income families. However, if the developer could build five townhomes on that lot, the land cost per housing unit would plummet to $40,000. The price for that housing would become much more affordable.

On top of the financial costs imposed by single-family zoning, other regulations and permitting fees often add 40 percent or more to the cost of housing. The combined costs that result from zoning and other regulations make it impossible for a developer to build housing that is affordable to low-income families. Contrary to what many housing advocates claim, this isn’t a failure of the market. It is the market responding in a rational manner to the controls and restrictions imposed by government agencies.

If we want to solve the housing crisis, then we must acknowledge and address the impediments to increasing the production of housing. Government needs to get out of the way and allow housing producers to do what they do best—produce housing.