Originally published in the Economic Development Journal, Spring 2020 (Vol. 19, No. 2).
We are in the middle of a national housing crisis, both in affordability and availability. While its causes are myriad, few would disagree that one of its primary roots is a severe underproduction of housing units, stretching back nearly two decades over periods of both economic stagnation and growth. In nearly all corners of the country, we are not building enough housing to keep up with growing demand.
Housing underproduction is often most acute in high-demand areas, those with good-paying jobs, strong economies, reliable transit, and numerous amenities. Underproducing homes reduces the number of people that can live in economically vibrant areas and results in higher prices, meaning that higher shares of household incomes are directed to housing and away from other spending. Economists have suggested that the spatial mismatch in labor caused by the housing shortage and associated affordable housing crisis could be a $1.6 trillion annual drag on the national economy.
Up for Growth's Housing Underproduction in the U.S. report put this underproduction in stark terms: from 2000 through 2015, 23 states across the U.S. failed to produce the 7.3 million homes needed to keep up with historic demand. The research found that building these underproduced units over a 20-year period could contribute up to $2.3 trillion to national GDP, a 2.4 percent increase over baseline economic forecasts. Up for Growth is a national 501(c)(3) research and policy organization committed to fostering equitable growth by eliminating barriers to housing.
Housing underproduction has consequences for economic development through reduced spending, lower GDP, fewer jobs, as well as creating stark disparities between the housing haves and have-nots. This article explores these intersections and describes policy solutions that can help improve housing markets and unleash economic growth.
National Housing Shortage
The Up for Growth report found that from 2000 through 2015, 23 states across the U.S. underproduced 7.3 million homes that would have been needed to keep up with historic demand. The shortage was most acute in California, but 21 other states and the District of Columbia fell behind historic housing production trends. These included large states like Illinois and small states like New Hampshire, rural New Mexico and highly urbanized New Jersey. The research suggests that the housing shortage is not unique to booming cities like San Francisco or Seattle. Instead, it is a crisis playing out in states across the country, with real affordability and quality of life impacts that are felt daily.
This underproduction has manifested itself over decades and has many causes. Despite recent trends in urbanization and growing demand for housing in metro areas across the country, it remains difficult to build the types and quantities of housing needed to keep up with this demand. One major obstacle is zoning restrictions that limit development to single-family homes, despite increasing desire for "missing middle" and multi-family housing located close to transit, jobs, and economic opportunity. Another obstacle is that miscalibrated impact fees, development charges, and other costs levied on new construction can limit the feasibility of new projects. In some areas, well-intentioned but ultimately counterproductive inclusionary zoning policies can further reduce production by changing the balance of revenues to costs and hurting project feasibility.
Many communities are realizing that cumulatively, these obstacles can break the housing production ecosystem, and that fundamental change at the local, state, and federal levels is needed.
Housing Needs Are Local
Given the scale and complexity of housing production, and how it varies geographically, the Housing Underproduction in the U.S. report does not really capture the full depth and breadth of the housing crisis. Due to constraints on data, the report focused on state-level rather than regional or metro area production trends. Thus, the research does not account for trends within a city or metro area.
That's certainly the case in Texas. Looking at the historical relationship between housing units and household formation nationally can provide a framework for understanding housing at the regional level. Since the 1960s, there have been 1.1 new units of housing built for every new household formed. More housing needs to be built than new households to allow for a vacancy factor, the demolition of existing units to create new ones, and second/vacation homeownership. Looking at this development cycle throughout Texas, there have been 1.08 units built for every household formed from 2010 to 2017. Although this is slightly less than the historic average nationally, there is a large variation at the county level within the state.
Despite the pro-development attitudes common in Texas, some of the major metro markets have not built enough housing to keep up with household formation in this market cycle. For example, Dallas County produced 0.81 units for every household formed since 2010, and Harris County 0.89 over the same time period. In some of the surrounding suburbs, we see growth over a ratio of 1, but still below the target of 1.1. For example, Tarrant County had a ratio of 1.08 and Collin County a ratio of 1.03 units constructed per household formed since 2010. Travis County has performed differently than other areas of the state, producing 1.2 units per household formed since 2010.
Household formation is not the only demand driver for housing. Job creation and rising incomes also increase the demand for housing. In 2010, there was roughly one primary job per housing unit statewide. Primary jobs are a better measure of demand than total jobs, as it is a count of people with jobs, rather than a person adding multiple part-time jobs. From 2010 to 2017, there were 1.64 primary jobs created for every housing unit. This imbalance puts additional upward pressure on housing demand. The ratio of job creation to housing unit production varies throughout the state, with Dallas County at a ratio of 3.7, Travis County at 1.6, and Harris County at 1.5.
Housing Impacts Economic Development
Housing is one of the largest contributors to gross domestic product (GDP), accounting for up to 18 percent of domestic GDP, with 5 percent directly associated with homebuilding, based on a study by the National Association of Home Builders. Up for Growth's research found that building the 7.3 million underproduced housing units over a 20-year period could contribute a total of $2.3 trillion to GDP, a 2.4 percent increase over baseline economic modeling forecasts.
Beyond contributions to GDP, another major drag on economic growth is the spatial mismatch in labor and housing availability and affordability. The high cost of housing in some metro areas can become a competitive disadvantage, making it difficult for businesses to attract highly qualified employees and grow. Groundbreaking research by economists Hsieh and Moretti estimates that the misallocation of labor resulting from the housing shortage and associated affordable housing crisis is an approximately $1.6 trillion annual drag on the economy. They observe:
Misallocation arises because the constraints on housing supply in the most productive US cities effectively limit the number of workers who have access to such high productivity. Instead of increasing local employment, productivity growth in housing-constrained cities primarily pushes up housing prices and nominal wages. The resulting misallocation of workers lowers aggregate output and welfare of workers in all US cities.
— Chang-Tai Hsieh and Enrico Moretti, Economists
There are many examples of businesses relocating to lower-cost markets which advertise higher "quality of life" absent problems like traffic or homelessness and with plenty of low-cost office space and affordable housing. Expensive rents and mortgages affect where and how businesses can grow, often forcing them to move away from the high-information and talent-rich hubs that would otherwise be ideal locations for headquarters.
Voters Express Their Frustration with Housing
Housing is a top-of-mind concern for the people who ultimately influence economic development decisions for a region: the registered voters who call it home. When a community experiences housing insecurity, virtually every matter of public policy or economic development is viewed through the lens of "how will it affect housing?" Amazon's aborted effort to locate its "HQ2" in Queens, New York, is a prime example. Second only to concerns about the public incentives offered to the company, residents were worried about how an influx of high-paying tech jobs would impact housing in an already housing-starved city.
Even though Amazon's new location in Gotham would have meant thousands of jobs and billions in economic impact that would have rippled far beyond those jobs directly created by the tech giant, a concerted local effort to oppose HQ2 ultimately pushed the company to renege on its plans, putting in jeopardy the commercial real estate investments already made in anticipation of Amazon's arrival. Writing for Vox after initial criticism of the proposed deal made by Representative Alexandria Ocasio-Cortez (D-NY), Matthew Yglesias summed up the crux of the challenge well:
In a slack market, the new rich people don't impact rents very much, but their presence creates new working-class job opportunities. In the right location, in other words, a big new Amazon office park could be a boon. And if greater New York City had the right housing policies, a big new Amazon office park could be a boon. But the city doesn't have either… The economically optimal fix for this kind of problem would be for New York City and, importantly, surrounding suburbs to take steps to make its housing markets less tight.
— Matthew Yglesias, Vox
Amazon's misadventure in New York City is but one example of housing thwarting business and economic development plans. In April 2019, LendingClub (a peer-to-peer lending firm) announced plans to move 350 staff members from its San Francisco headquarters to Lehi, Utah. One of the primary reasons cited was the high cost of rent in the San Francisco Bay area, which the company said had risen by 140 percent in the past nine years. LendingClub was forced to move from the country's tech epicenter because, to borrow a phrase from a former gadfly mayoral candidate in New York, the rent was too damn high. Austin is becoming a virtual Silicon Valley Southwest in large part because many companies are leaving established and expensive technology hubs for upcoming areas where rents are lower, and space is plentiful.
A Housing Shortage Can Also Lead to Misplaced Policy Solutions
Unfortunately, the common policy reactions to rapidly rising housing costs — such as inclusionary zoning or rent control — actually work to reduce overall supply, thereby not addressing the underlying causes of the cost increase in the first place. These knee-jerk reactions, while well intentioned, can often have unintended consequences that further exacerbate the original problem.
By requiring rent-restricted units to be included in all new residential multi-family developments, inclusionary zoning policies can reduce development feasibility by creating an imbalance in the cost of developing a property and the rents needed to pay for the development. As demonstrated in Portland, Oregon in 2017–2019, this can significantly slow housing production when new supply is needed to keep prices down.
By limiting the amount that rents can be increased year-over-year, strict rent control policies across the country have been empirically shown to reduce the overall supply of new housing construction, thereby leading to an increase in housing costs and often having the opposite effect as intended. Like all policies, however, nuanced design can mitigate these negative effects. In 2019, the Oregon Legislature approved, and the governor signed, a relatively modest statewide rent control measure. In this policy, rent increases are capped at seven percent above inflation over a 12-month period, and the policy only applies to buildings older than 15 years. Both of these factors work to reduce the negative impact on future supply. The New York state legislature also passed rent stabilization legislation during its 2019 legislative session, and in 2018, a failed California ballot initiative would have restored rent control.
Businesses Step into the Housing Affordability Crisis
In many cities facing severe housing shortages, businesses and large corporations are also entering housing policy discussions. Rather than being recognized for their positive job and economic contributions to a community, many large corporations are being vilified for the rising cost of housing that is associated with their economic growth. This has manifested itself through attempted taxes on these corporations and demands for action by the frustrated public.
In 2018, the Seattle City Council successfully passed a so-called "Head Tax" on larger, Seattle-based companies. The Head Tax would have levied an annual tax of $275 per employee on businesses located within the city that generate over $20 million in revenue. The revenue would have primarily funded homelessness services, which are seen as a direct consequence of the approximate 65 percent growth in rents in the post-recession timeframe. The Seattle area has become a hub of high-paying tech firms and many voters and residents outside of this industry have been displaced, evicted, and frustrated by the changes that this has brought.
The Head Tax was ultimately repealed due in large part to outcry from local businesses and even some labor unions, but it is a sign that public officials often respond to public pressure in ways that are ineffective and that can exacerbate existing challenges in a community.
Recognizing the housing affordability challenges in the San Francisco Bay area, Apple, Facebook, Google, and Microsoft pledged a total of $5 billion in 2019 to fund housing in the regions they call home. These investments are a recognition that the high cost of housing that, fairly or unfairly, is associated with exponential growth of these companies threatens their future success.
That businesses are stepping into housing policy recognizes a failure of housing policy to meet job and economic growth with homes for those employees. Cities and metro areas cannot have strong, dynamic, and transformative economic growth without also allowing their residential zoning standards to adjust and meet this new demand. In this way, housing can be considered part of urban infrastructure — like roads, electricity, and sewers — that is a necessary element for healthy growth. Cities and metro areas across the country are feeling the negative impacts that this failure has wrought.
While the Current Housing Reality May Be Grim, There Is Light at the End of the Tunnel
During the same legislative session in which Oregon passed rent control, it acknowledged that housing supply is a serious concern when it approved HB 2001, which requires all cities over 10,000 people to allow so-called "missing middle" housing on any lot zoned for single-family. Oregon earned well-deserved praise for effectively ending single-family-only zoning in the communities where the need and demand for denser housing is most acute, recognizing that it cannot grow in population or economic terms without adding more housing in its fastest growing areas.
The city of Minneapolis undertook a similar effort with its Minneapolis 2040 plan, which also ended single-family-only zoning in the city. The Commonwealth of Massachusetts is pursuing similar zoning reforms, while the Republican mayor of San Diego is aggressively trying to eliminate many of the anti-development requirements like parking minimums and height restrictions that contribute to the city's dearth of new development.
Up for Growth Advances Policies to Resolve the Housing Shortage
Up for Growth was founded on the belief that the housing crisis can be solved by bringing together diverse voices in the housing conversation — including major employers and economic development experts — and utilizing the best tools and research to inform decisions. Housing Underproduction in the U.S. provides the basis for our work, but it is only the beginning.
The organization has also produced state-specific reports in California, Washington, and Oregon; developed interactive tools that compare rents and housing markets across the country and put them on our website free to use; and brought together housing stakeholders through briefings and forums both in Washington, DC, and in states across the U.S. Importantly, Up for Growth engages in policy work at both the state and federal levels.
Federal Attention on Housing, Finally
Up for Growth Action, a 501(c)(4) public-interest advocacy campaign associated with Up for Growth, is working to change the conversation in the halls of Congress. For too long, housing has been missing from the policy conversations taking place in Washington, DC. To the extent that housing is debated in Congress or the Executive Branch, it is almost exclusively focused on low-income and public housing. While these topics are certainly important and cannot be ignored, both parties are sitting idly while millions of working and middle-class Americans experience economic hardship brought on by a shortage of homes.
Over the last two years, Up for Growth Action has developed bipartisan relationships on Capitol Hill and worked closely to develop policy proposals that seek to enable housing of all kinds across the country. Our policy agenda focuses on better understanding the causes and impacts of the affordable housing crisis, reducing barriers to housing, spurring transit-oriented development, strengthening existing programs, and improving the country's existing stock of housing.
One of the strongest champions on Capitol Hill of housing affordability is Senator Todd Young (R-IN), who is the lead sponsor of both the Task Force on the Impact of the Affordable Housing Crisis Act and the Yes in My Backyard (YIMBY) Act. The Task Force on the Impact of the Affordable Housing Crisis Act would create a federal task force to examine the depth and breadth of the national housing crisis and its impact on federal programs, including economic development, and provide Congress with actionable policy recommendations.
The YIMBY Act, which is sponsored by Rep. Denny Heck (D-WA), would require recipients of Community Development Block Grants to publicly report on a host of policies that impact housing construction in their community, primarily land use and other exclusionary housing policies. While the legislation would not require the communities to take any specific action, it takes a "sunshine is the best disinfectant" approach that would ultimately force otherwise recalcitrant communities to reassess their approach to housing development.
In addition, we are particularly excited about the Build More Housing Near Transit Act, introduced by Rep. Scott Peters (D-CA). The legislation would make housing a bigger factor in evaluations for transit projects under the Federal Transit Administration's New Starts program (designed primarily for new rail transit). Rep. Peters was motivated to push for such a change due in large part to his past experience as the City Council president in San Diego, telling The Weeds podcast, "You know, no one ever asked us what we were going to build next to this [light rail project]."
Rep. Peters innately understands that transit should enable housing and many other kinds of economic development. But unfortunately, the current results are mixed, indicated by the fact that 84 percent of transit stops built since 2010 are not located in high-density neighborhoods. The Build More Housing Near Transit Act would send a clear signal that federal investment in transit should create new housing of all types and spur regional economic development, particularly within close proximity to transit stations.
Improving Existing Housing Programs Is Essential
Up for Growth also understands that we must invest in the programs that are working well in existing neighborhoods. Two additional bills in Up for Growth Action's legislative agenda are the Affordable Housing Credit Improvement Act and the Neighborhood Homes Investment Act.
Introduced by a strong bipartisan coalition, the Affordable Housing Credit Improvement Act would increase the credit authority for the Low-Income Housing Tax Credit (LIHTC), which is the primary way the federal government supports the development of low-income housing. LIHTC has come under increased strain amid growing demand for these credits, with its allocation easily exhausted every year. This bill would help the private sector build more affordable housing across the U.S. — an estimated 500,000 more homes than current projections — while boosting both GDP and job growth from increased construction spending.
The Neighborhood Homes Investment Act recognizes that the housing crisis is not necessarily directly related to supply in every part of the country. In some places, housing may be abundant, but it is often low-quality or in neighborhoods that have seen disinvestment. This legislation would provide a tax credit to homeowners for improving the existing housing stock in distressed neighborhoods, with the idea of ensuring that people can stay in their homes and ultimately revitalize the surrounding community. It is sponsored by Rep. Brian Higgins (D-NY) and Mike Kelly (R-PA).
Taken together, the passage of these bills would represent significant, pro-housing steps by the federal government. However, they alone will not solve the problem. It will take local governments changing policies that dictate where, how, and what kind of housing is built. And it will take a willingness from state governments to take bold action when housing does not keep up with new household formation. The federal government must realize that it has the obligation to respond to what has become a national crisis.
The Economic Consequences of Housing Underproduction Are Clear
Recognizing that housing is an essential component of economic development can go far in helping to address housing shortages and the spatial mismatches in jobs and housing affordability. This, in turn, could reduce cost burdening and increase discretionary spending, while also allowing households to move to the most productive job centers across the country. Businesses and large corporations have waded into the housing policy debate recognizing that it is critical to their ongoing success and survival. Cities facing housing shortages and strong price appreciation are already losing business growth to up-and-coming cities advertising the absence of big-city ills like traffic, homelessness, or high taxes. By supporting policies aimed at improving housing production and increasing supply, businesses, corporations, and economic development policymakers will likely reap benefits in job and GDP growth.