Barriers to Affordable Housing – Econlib

Housing affordability has been a hot topic of debate recently, with arguments suggesting that when factors like size, quality, and household income growth are taken into account, the situation may not be as dire as it seems at first glance. While home prices have indeed risen in dollar terms, they have also seen an increase in size and quality, and the average household income has also seen a significant rise.

However, it is important to acknowledge that there is indeed a housing affordability problem, especially for working- and middle-class individuals in certain metropolitan areas. A study by Bankrate revealed that the household income required to afford a median-priced home in America has surged by 50% since 2020, now standing at $117,000.

The economics behind housing affordability are quite straightforward. If prices have gone up, it is either due to an increase in demand or a decrease in supply, or a combination of both. While supply constraints play a significant role in the affordability crisis, buyers also contribute to the market shifts. Housing, being a normal good with a long-run income elasticity of demand close to one, sees demand rising in tandem with household income growth.

To address the issue and bring prices down, builders need to increase the housing supply more than buyers are shifting the demand curve. This would require less restrictive zoning, especially for multifamily units, streamlined licensing and permitting processes, relaxed building codes and energy standards, more open markets in labor and materials, and potentially a shift towards smaller, simpler homes that consumers are willing to accept.

Three major factors are identified as driving housing unaffordability: zoning regulations, building codes, and the trend towards larger home sizes. Zoning restrictions have long been recognized as a key factor limiting housing supply growth and raising costs. Cities like Houston, which lack traditional zoning regulations, have demonstrated that a more flexible approach to housing development can lead to increased affordability.

Building codes have also played a role in escalating costs, with continuous updates and stricter requirements adding to the overall expense of construction. Studies have shown that government regulations, including zoning and building codes, can account for a significant portion of the sales price of a new home.

The trend towards larger homes, with average sizes increasing over the years, has also contributed to the affordability crisis. A push for more affordable housing should focus on smaller and simpler homes, which could be built and sold at a lower cost compared to larger, more elaborate properties.

In conclusion, addressing the housing affordability problem requires a reevaluation of existing regulations and a shift towards a more flexible and efficient approach to housing development. By incentivizing the construction of smaller, more affordable homes and reducing the regulatory burden on builders, governments can help ensure a steady supply of affordable housing for those in need.