The housing market remains in terrible shape, and yet has been puzzlingly absent from policy discussions in the presidential campaign. In the next term, Barack Obama or Mitt Romney will have to take steps to get housing out of its slump, construction workers back to work, and Americans into new homes.
To do so, the next president should copy the “Race to the Top” contest that the Obama administration ran in education, and give out grants that reward state and local governments for policies that encourage new construction — particularly in urban cores where demand is strongest.
Housing has consistently been one of the darkest spots in the lukewarm economic recovery of the last three years. In July, the Census Bureau reported new housing starts at an annualized rate of just 746,000 homes. That’s up from a trough of 478,000 in April 2009. But from 1959 to 2008, the figure never fell below 798,000. The all-time average has been 1.5 million. We are still building only half as many homes as usual.
Two of the factors that stop Americans from buying new homes are well understood by national policymakers. One is the general economic slowdown. When consumers face income shocks, they cut back especially on major capital items whose purchase can be postponed, like new homes. Actions that boost short-run economic growth will boost home sales. But Washington has failed to find economic solutions for the last three years and shows no sign that it is about to take strong action now.
A second factor is a rise in mortgage credit standards that have made it harder to get mortgages on favorable terms. Those who can borrow can do so at extremely low rates, but many first-time buyers lack the credit necessary to qualify. The tighter standards are probably necessary — overly loose ones fueled the housing bubble — but they have hampered the housing market.
Yet there’s another factor that is often ignored in Washington, but could be fixed in a relatively painless way: state and local regulations inhibit the construction of new homes in the places where they are most demanded. Washington could jump-start home construction by pushing states and cities to simply allow more building.
Some exurban communities are full of unwanted homes built in the peak of the last decade’s housing boom. But in large cities and close-in suburbs, demand for housing outstrips supply. The limit on home construction in these places is political, not economic. People would happily buy new homes there, but current residents won’t let them.
In highly productive coastal cities like Boston, New York, San Francisco, and Los Angeles, most of the value of a plot of land comes from the right to build a home. Home prices typically exceed construction costs by hundreds of thousands of dollars. Even if the national market remains weak, allowing more building in these cities would unlock pent-up demand and lead to construction.
State and local governments are often resistant to up-zoning. Incumbent homeowners are wary of construction noise and new demands on local services. They also know that restricting the supply of new housing will drive up the price of their own homes.
That’s why states and localities need a federal nudge to allow more building. The prospect of federal grants could be enough to prompt significant reforms; to compete for “Race to the Top” money, states adopted new academic standards and lifted restrictions on charter schools.
In the same spirit, grants to encourage housing could be linked to the quantity of new construction and, under the right rules, could be steered toward overpriced markets where the pent-up demand for new housing is greatest.
As it happens, both presidential candidates have relevant experience on this issue. As governor, Mitt Romney argued that restrictive zoning drives Massachusetts’ unaffordable home prices. He advanced incentives for cities and towns to approve more homes, particularly in transit-accessible locations. Several components of Obama’s stimulus bill aimed to promote transit-oriented development as well.
“Race to the Top” showed that the federal government could push states to improve policy without spending a lot of money. A similar program that rewards jurisdictions that loosen zoning — and that actually achieve increases in new home construction — could be similarly effective.
Josh Barro blogs about economic and fiscal issues for Bloomberg View.