Transcription
This is one of the most important charts of our generation. This trend has become the rocket fuel for disruption, displacement, and unrest. The cost of housing to buy or to rent has far outpaced income growth. As a share of our income, we're now spending more on housing, a basic need, than at any other point since World War II.
In response to this crisis, some cities are actually trying to build more houses. But then we end up here. You're thinking that just increasing the supply of housing in this high-demand area will bring prices down. If you build more housing, you're going to bring more people in, and it's going to get more expensive. We could end up with all this density, all this market-rate housing, and really no more affordability.
So residents block new housing, and I get it. It seems like every time we try to build more housing, it ends up looking like this: million-dollar condos and upscale town homes with luxury finishes. It's an a trendy, hipstery, yuppie neighborhood with handcrafted dog treats and blue matcha lattes. OMG, you have to try this! It's not affordable, and it just kind of feels bad. We're trying to make housing affordable, and yet we just keep building expensive things.
So what actually happens when we build that expensive housing, and can it do anything for [Music] affordability? To start, we're going to take a look at the extreme end of housing unaffordability: homelessness. Every year, communities across the country conduct the point-in-time survey on the exact same day, counting the total number of people experiencing homelessness. And when we dive into the data, we notice some really interesting trends, like the fact that San Francisco has almost five times the rate of homelessness as other cities like Chicago.
So why is that? Well, when we cross-reference these statistics with other data sets, we can actually get a clue as to what fundamental factors drive homelessness. Before we get into all of the data, I'll pose this question to you, dear viewer: What causes high rates of homelessness in a city like San Francisco? Or rather, what do people most often think causes high rates of homelessness in a city like San Francisco? If you want to guess, pause the video right [Music] now.
All right, time's up. Here's what people think causes high rates of homelessness, and one other we'll get to later. Before we dive into the data, here's a quick statistics rule of thumb: You can look at a scatter plot and kind of eyeball whether there's a link, with all of the points lined up or not, with everything randomly scattered. But the R-squared is the more precise way to tell if there's a link. Here's the exact definition of R-squared, but super loosely: zero implies no direct correlation, and one is total correlation.
All right, let's dig in. First up: drug use. For each of these charts, we have the homeless rate on the Y-axis, and for this chart, we have substance abuse rates on the X-axis. Each dot is a city or state in a particular year. And with an R-squared of 0.06, the data shows virtually no link. And then there are places like West Virginia, which has the highest overdose death rate, the fewest people receiving treatment, but despite that, it has some of the lowest rates of homelessness. And to that point, when you look at homeless populations with substance abuse issues, only 1/3 had substance abuse problems before they became homeless, and 2/3 developed these problems after they became homeless. If anything, homelessness seems to cause substance abuse, not the other way around.
All right, next chart. This plots homelessness rate versus the rate of severe mental illness. Again, there's no correlation. Look, I'm sure you've seen mentally ill people on the street, especially if you're in a place like New York City or San Francisco. And frankly, the media loves to cover this sort of thing: "Get the mentally ill homeless who are a threat off the street!" "A mentally ill homeless guy!" "The street crime, the drugs, the filth!" "Mentally ill homeless!" All of it. It's something that seems much bigger than it actually is because of how visible it is. There are plenty of places like Alabama that have higher rates of severe mental illness, yet lower rates of homelessness. But homelessness is far bigger than just mental health issues. Severe mental illness just doesn't seem to be much of a driving factor behind high rates of homelessness.
Next, we have welfare. And for welfare, there's this idea that because places like New York and California offer more support and safety nets, they then become magnets for homelessness. So here's a chart that plots homelessness rate versus welfare benefits, and yet again, the data shows virtually no link between homelessness and amount of welfare. And as for the idea of people picking up and moving to states with generous welfare benefits, it turns out that as people's income drops, it generally becomes more and more difficult to move. A study found that at least 90% of people in California lived in California before losing their housing. They didn't move there for welfare; they were already living there.
All right, next up, we have weather. I promise you, the nice weather in Cali, California, began long before the homelessness crisis. Let's take a look at these two maps. One shows climate, and the other shows homelessness. New York, Vermont, Massachusetts have among the highest homelessness rates in the country, and their winter beach season is well... And the data, R-squared is 0.008, virtually no link at all.
All right, next chart: homelessness versus poverty. And finally, we start to see a link. It's also the most obvious explanation. If poverty is what drives homelessness, then you'd expect the places with a lot of poverty should also have a lot of homelessness. But it's actually the other way around. More poverty often means less homelessness. And that goes against intuition. For example, let's focus in on this dot. This dot represents Detroit in 2018. One out of every three residents was living below the federal poverty line, yet Detroit had one of the lowest rates of homelessness. People experience poverty everywhere, but the consequences of being poor in a rich area appear to be much more profound. Homelessness seems to be a symptom of affluence, not of poverty.
So we know it's not drug use, it's not mental illness, it's not welfare, it's not weather, it's not poverty. None of these are driving high rates of homelessness. So what's left? Let's take a look at our final chart of homelessness versus median rent. And here, it seems like we finally have our answer. With an R-squared of .57, high rent is strongly correlated with homelessness. As rent goes up, as housing becomes less affordable, more and more people eventually end up without a home. This economist story captures it well: Few Americans lived on the streets in the early postwar period because housing was cheaper back then. Only one in four tenants spent more than 30% of their income on rent, compared with one in two today. The best evidence suggests that a 10% rise in housing costs in a pricey city prompts an 8% jump in homelessness.
So what did we learn? What drives homelessness? Rent. It's too damn high. So that brings us to the next key question: How do you stop the rent from being too damn high? Well, here's what at to brazy for you has to say: "When you move into an apartment, you got to shoot in the air every couple weeks, make sure the rent don't go up, huh?"
All right, that's it. That's the whole video. We found the solution. Thanks for coming to my TED Talk. But seriously, other cities have successfully kept rents low by adding more housing. Minneapolis added 8% more housing and limited rent increases to 1%. Portland added 7% more housing and kept rent increases to 2%. Tyson's, Virginia, added 23% more housing and saw rent increases of only 4%. It's even more impressive when you realize that during that exact same time frame, the US added only 3% to its housing stock and saw prices skyrocket by over 30%.
To be clear, many homeless people need additional forms of support, but housing is a crucial component. So adding housing can help keep rent prices in check. But is that still true when that housing is luxury housing? Does high-end housing do anything for affordability? Let's go through the theory and then see what the research actually says.
So for the theory, let's say Alex moves into a brand new building. Now his old unit is available for rent, and Bailey moves into it. This place is more expensive than Bailey's last spot, but cheaper than Alex's new place. Then Charlie will move into Bailey's old unit, and that chain continues with several more moves, each from older and more affordable spots. The chain will finally end when Tyler moves out of his mom's basement and gets his own spot. His mom sets up an animal rescue in the basement, and no humans move in. That's the theory: new units open up older, cheaper units.
So let's get to the research. Here's one of the top studies on this topic. Researchers looked at 52,000 people who moved into new market-rate units, that's brand new, shiny apartment buildings. Once these people got settled in, researchers then looked at their mail forwarding addresses to see where they actually moved from. And then they looked at who moved into their old unit, and then followed the chains all the way back to the end, to the Tylers of the world. Remarkably, what the researchers found is that every hundred brand new market-rate units frees up 70 units from below median income neighborhoods. It also opens up 39 units in the lowest income neighborhood. So those in the bottom 20% of incomes. The study shows how tightly connected the entire housing market is. So building new housing, even at the higher end, results in housing in low-income areas opening up. When it comes to providing affordable housing, building 100 new market-rate units is effectively as good as building 39 units of housing in low-income areas.
The study isn't alone. Studies from around the world also found very similar results. And while that study looked at a 2 to 5-year window, we actually see the same thing happening over much longer time frames too. When we build enough housing, the expensive housing of yesterday becomes the cheap housing of today. And conversely, when we don't build enough housing, the cheap housing of yesterday becomes the expensive housing of today.
Let me show you a few examples. Here's a luxury apartment complex in Houston in 1978, featuring a country club community with cathedral ceilings, decorator carpeting and draperies, and wood-grained cabinetry. Ooh, that was the expensive housing back then. Here they are today: the esteemed Luxury Pines Apartments. This doesn't quite look like the luxury of today, and in fact, it's actually renting for $840 for a one-bedroom, which is well below median market rate. That's an example of luxury housing of yesterday becoming the affordable housing of today.
What about the other way? Here's a starter home that was affordable to vets in the 1950s, advertised as "bargain for budget-wise vets with no down payment." Here it is today. These houses are selling for $800,000. That's 500%, 500% above its inflation-adjusted price. It's now unaffordable. The same kind of people, people who would have been able to afford it decades ago. That affordable housing of yesterday became the expensive housing of today, and it's all because the region didn't build enough housing to keep up with demand.
You see, if we don't build housing to meet demand, it's not like people just magically disappear. The demand doesn't go away. Instead, high-income residents turn to older units and bid up the price. The only way to keep rents low for everyone is to build more housing. Only abundant housing supply relieves market rent pressures.
If you want to rent out your place to someone, you're going to incur some expenses to do so. Things like basic maintenance, cleaning between renters, showing the place, the risk of property damage. Sorry, Pop, I was trying to miss the chandelier. It's not necessarily a lot, but it does set a floor on how low the rent can go before it becomes cheaper to just leave the place empty rather than renting it out. But that floor is also a lot more than some people can afford. So if we want to house everyone, we still need other support systems for very low-income households. But by building more market-rate housing and making housing less expensive, you can actually make those support strategies more effective, by having a bigger impact with the same budget.
Take Houston, for example. They've allowed a ton of housing to be built, and that makes it far cheaper to house the homeless in Houston. $10 million was enough to create over 130 housing units at a cost of about $775,000 per unit. In contrast, LA has severely restricted the supply of housing for decades, and when they spent even more than $10 million on a very similar project, they ended up with only 38 apartments at a cost of $340,000 per unit. So Houston was able to house 4.5 times as many people per dollar than LA, and they were able to do that because Houston's private sector has built so much more housing than LA's. It's worth noting that this is far greater than the cost of living differences between these two cities. And by the way, cost of living largely comes down to the cost of housing, but we'll save that as a conversation for another time.
So even if you want the government to step in and ensure that everyone has housing, that kind of intervention will be much more effective if it's also accompanied by increased housing development in the private sector. From my time serving on city council, I'm very well aware that many people are quite skeptical that simply adding housing supply will do anything for affordability. For whatever reason, a lot of people have just made up their minds. So if that describes you, all I ask is that you keep an open mind and let evidence, and not ideology, inform your opinion.
So with that, let's go through the four main objections.
Objection number one: "H, that's not my experience. We built a ton of housing, and prices just keep going up." So check this out. UC researchers did a nationwide survey and found that 30 to 40% of Americans believe in a sort of supply skepticism. It's this mistaken belief that if a lot of new housing were built in their region, then rents and home prices would actually go up. And that's, quote, "contrary to basic economic theory and robust empirical evidence." And that is an academic burn if I ever heard one.
What's really interesting about this supply skepticism is that it's seemingly limited to housing. Most people were able to correctly apply the law of supply and demand to things like cars, grain, plumbers. But when it came to housing supply, it just broke people's brains. Whereas 85% of respondents said that a snag in the supply chain for cars would cause the price of used cars to increase, less than half of people were able to apply that same logic to the housing market. And to be fair, many of us look around our communities and see these new developments popping up, and rents that just seem to keep rising alongside them. It honestly does kind of look like these new buildings are causing rent to increase.
But this actually gets cause and effect backwards. Rents usually start rising years before these new developments start showing up. It was the rising rent, the increased demand for housing, that attracted the developers to build a new building, not the other way around. Now, to be clear, if we're just looking at that one building, that new building is probably more expensive than whatever was there before it. New things generally cost more. And then if it makes a space more walkable with a park or restaurant, fountains, trees, the sidewalk, well, people pay a premium for walkable spaces. As a side note, we haven't built enough walkable spaces, and that premium actually means we need to build more of them. But the key point here is that while that immediate location might become more expensive, the new building ends up helping lower rents across the region, meaning there are fewer people that are displaced. The entire area benefits. Or, if we wanted to put it another way, well, housing costs might be going up, but if that building, that additional housing hadn't been built, rents in the entire region would be even higher. It's easy to see all the increases in supply, the new buildings coming up, but it's a lot harder to spot the increase in demand. So if you look around and see a ton of new housing going up, but your rent keeps going up anyway, it means that even this development hasn't been enough.
But let's just say you don't care about your region, you only care about your specific neighborhood. Even then, on a neighborhood level, "supply has not been shown to cause significant displacement of lower-income households, and indeed, some studies find new buildings have been shown to reduce the probability of displacement." The UC researchers found that supply skepticism may make people less likely to support apartment and home construction. The real tragedy here is that these supply skeptics are often well-intentioned. They want to stop housing from becoming unaffordable, but they incorrectly blame the new development and then they end up blocking the one solution that could have actually addressed rising housing costs in the first place: building more housing.
Objection number two: "Isn't this just trickle-down economics?" The second objection is partly triggered by this paper from Sweden. This research has an excellent data set, but it also has a fairly unfortunate choice of words: "Overall, we conclude that new homes trickle down to the poor." Maybe that doesn't set off alarm bells for Swedish people, but I know for many Americans, there's sort of a knee-jerk reaction to that. And just to be super clear, trickle-down economics during the Reagan era was about giving tax breaks to the wealthy, with the theory that rich people would then spend money on other things like businesses, and then that would help the poor by creating more jobs and such incentives for business to encourage production and hiring of the unemployed. But building more homes that people then live in is not trickle-down economics. It's equivocating on the words. Trickle-down thrift stores have trickle-down clothing. eBay has trickle-down books. Rainwater trickles down my window. Same words, but they're not the same thing as trickle-down economics. We're talking about building more housing, not giving tax breaks to the wealthy. I just blame the Swedes on this one.
Next objection: "Investment banks are just buying up all the housing anyway." The third objection focuses on the institutional investors and hedge funds that are just gobbling up housing stock. It's this idea that if hedge funds are going to buy up housing anyway, they'll more housing won't help the average person. A lot of firms are buying up properties, but Blackstone is going so far as to build an entire company out of this strategy. Last year, partnering with Invitation Homes, $4.5 billion later, the firm has become the biggest buyer of single-family homes in America. Well, here's what Invitation Homes disclosed to investors: "We have select markets that we believe will experience strong population, household formation, and employment growth, and exhibit constrained levels of new home construction." Exhibit constrained levels of new home construction. They are specifically targeting places that don't build enough housing, acknowledging that this is what makes prices rise. They even warned investors: "We could also be adversely affected by overbuilding, which could result in an excess supply of homes and reduce occupancy and rental rates." Continuing development will increase the supply of housing and exacerbate competition for residents. So they even concede the flip side: building more housing is what keeps rents down. Hedge funds would not be buying up homes unless there was something really messed up about the housing market that made them a lucrative acquisition. So if you really want to stick it to the greedy hedge funds, make housing not profitable: build more of it.
Objection number four: "We already have enough homes. They're just sitting vacant or abandoned or as Airbnbs or even as second homes." It kind of is shocking, nearly 10% of the homes in the US are vacant. So why would we build more housing when we already have enough homes that are freely available? It's free real estate.
There are a few things wrong with this line of thinking. First of all, we do need some degree of vacancies. If we lived in a world with no vacancies, it would be incredibly difficult to move. You'd practically have to find someone to swap houses with, or maybe set up some sort of hermit crab-like moving chain. They're lining up with one aim: to exchange properties. In fact, market vacancies actually give renters more leverage to keep prices down. With more options available, renters can then choose the best deal, as landlords have to compete on price. And this is exactly what happened in New York City during the pandemic. A higher market vacancy rate meant lower rent.
But even though these vacancies can be good, they're often in the wrong places. Areas where we see the highest vacancy rates aren't usually near job centers. Telling a marine biologist in Miami that she can then get a cheap house in the Rust Belt city of Gary, Indiana, doesn't really help her situation. Now, the vacancies that really rile people up the most are the places that are sitting empty for most of the year. These are second homes, investment properties, Airbnbs. Then look, if we ban Airbnb, it does seem to lower rent a bit. It brings more supply onto the market, and more supply helps lower the rent. That is absolutely true. But the effect is pretty small. When Irvine, California, banned Airbnb, that brought back about 460 units of housing back onto the market. That's awesome, but they're expecting to need over 23,000 more housing units to address population growth in the coming years. That Airbnb ban achieved less than 2% of what they need.
And there's a similar story in Metro Vancouver, where both the city and the province implemented a vacancy tax, and they brought back thousands of units onto the rental market. Again, that's great, but they're expected to need over 274,000 new homes in the next decade. So that tax helped them with about 6%. They'll still have to shore up the other 94% of housing, or else their housing crisis will get worse. Policies like these can shuffle some housing units back onto the market, but it's not nearly enough to solve the housing crisis on its own. We still need a ton more housing, and the only way to do that is by building more housing.
So yes, adding more homes, even the high-end ones, can help reduce housing costs in our region. But it doesn't have to be just high-end homes. What I'm advocating for is more homes of any kind. If your city can only build new market-rate units, that's fine. But if it can build social housing, like what they're doing in Montgomery County, Maryland, that's great. It tends to be easier for localities to approve the luxury housing at developers' expense versus the social housing at taxpayer expense. But it doesn't mean that we just have to do one or the other. We just need more housing.
Our cities are on the brink of a major transformation. 83% of Americans live in urban areas, and that number will jump to almost 90% in the next 25 years. That means an additional 65 million people in our city centers, and we're already short by over 4 million homes in these areas. So to put that in perspective, it's as if every resident in Los Angeles County was suddenly without a place to live. Imagine the chaos if we stood by and just watched. This isn't a distant problem; it's a crisis that's unfolding right now, and it's growing every single day. Putting this in numerical terms understates the real human suffering behind that number. These are young adults who can't afford their own space, people who are sleeping in their cars, essential workers enduring painfully long commutes and contributing to even more sprawl, single mothers staying in unsafe living conditions just because they have no other options, or people losing their housing altogether. These aren't just uncomfortable living situations; these are lives filled with conflict, stress, and uncertainty. Lives where people can't gain autonomy, where financial security is forever out of reach, and where pursuing your dreams becomes a distant afterthought.
And even from a purely self-interested perspective, not having enough housing means you have to pay higher prices for everything else you buy. To all of us, even those who own our own home, are paying for for the high cost of housing because we pay the cost of housing in every purchase we make. You're paying for your grocer's rent, your landscaper's rent, your barista's rent. Their wages pay their rent, and your purchases pay their wages. It also means that your city will have to pay more for teachers, construction workers, emergency service workers, and that means your taxes will increase to cover those costs. The high cost of housing hurts us all. We've inflicted this problem on ourselves, but together, we can also solve it. By promoting and implementing policies that encourage more housing, luxury or otherwise, we can begin to tackle this crisis and ensure that everyone has a place to call home, not just for the sake of our cities, but for the well-being of everyone who lives in [Music] them.
It's so much easier to stand up at a public meeting and say no to new development than it is to say yes to new housing and cite the latest research findings out of Sweden that highlight the importance of housing supply. People tend to fear how change might affect them personally rather than embrace all the benefits that their community could stand to gain. I was recently elected to city council here in Falls Church, Virginia, and I am getting a ton of flak for this. This building hosts 394 apartments, 27 of which are subsidized, along with restaurants, exercise studios, spaces for public events. It generates over half a million dollars a year in net revenues for the city. But some neighbors are unhappy with its appearance. It's definitely taller than some of the single-family homes nearby. They're also frustrated that some of the storefronts are unoccupied, and they don't like the yellow brick. Fine. One person even told me that they missed the gas station that used to be here because at least they could get gas there. They were nostalgic for a gas [Music] station. With attitudes like that, it is so incredibly challenging to get the housing that cities across our nation so desperately need. The rent is really high, actually. There's not even inventory. Like, how are people surviving? I want to know.