What Is Driving America’s Housing Crisis? A Long-read Q&A with Lynn Fisher

The United States is in the grip of a housing affordability crisis, especially in its high-productivity cities like San Francisco, Seattle, and New York. In addition to harming individuals, this is also having a deleterious effect on the country’s economic growth. But what is behind this problem, and what can be done to remedy it? Lynn Fisher joins the podcast to discuss.

Dr. Fisher recently joined AEI as a resident scholar and co-director of the Center on Housing Markets and Finance. Before this she served on the faculty at Washington State University and the University of North Carolina, and was director of the Housing Affordability Initiative at MIT.

What follows in a lightly-edited transcript of our conversation. You can subscribe to my podcast on iTunes or Stitcher.

As I put together these questions, a lot of them had to do with what’s going on in these high-productivity, booming cities. San Francisco is always in the news, for example, about their housing crisis. This is concerning for economic growth and innovation if people can’t move there, but there’s also a broader housing problem in America.

We had this housing crisis back in 2008 and you would have thought given its central role in the Great Recession that a lot of US politics would have been about housing policy in the past years, and it really hasn’t been. And now we’re here in 2018 and if you talk to economists about one of the central challenges in the economy, it’s housing again, though maybe in a different way.

So just initially, why do you think this hasn’t been a bigger part of the public policy agenda, even though it seems so core to our economic lives?

It’s a great question. I think the piece of this that stayed in the narrative and the conversation that we’re having was certainly on the finance side, because the mortgage crisis was so intimately tied to the overall boom and subsequent recession. But we never talk about things like housing supply and homebuilding. It’s not sexy. It’s something we didn’t pay much attention to for the last 10 years because we overbuilt and so we had to have a period of reabsorption of all of that stock.

But then you look around one day and all of a sudden we have a millennial generation that’s trying to leave their parents’ homes. They want to form households and we haven’t paid much attention to our housing stock. So you’re right, it’s been out of the dialogue, we haven’t paid attention to it, and now it’s caught up with us again.

If you just do a quick Google search on affordability issues, you see all these stories with these sad looking pictures of millennials in the New York Times saying, “I’ll never own a house. I’ll never have the kind of life my parents had.”

So is there a longer term systemic problem with housing in America right now? Or is it more just a short term thing: We’re still getting our bearings after the Great Recession and things will change or stabilize. Is it that or is there really a long-term issue here?

No I think there’s a very fundamental and very long term issue and it’s something unfortunately that’s not going to be easy to fix. And that is: we’re not good at building new supply. We’re not good at letting our cities transform themselves, remake themselves over time. We tend to use rules. We tend to have all sorts of land use regulation, zoning, et cetera, that locks in our city.

So what’s built is there and we like it. People who occupy it say, well, I don’t want my home to change. I don’t want my neighborhood to change. And so our cities become ossified. They’re not allowed to be redeveloped or to change over time.

I was just doing a little bit of research on condominiums, and because I’m familiar with it I’m using a Boston data set. And if you look at downtown Boston, the median condo was built in 1905. This is stuff that’s right downtown. It’s right by Boston Garden. It’s beautiful. It has all sorts of great amenities attached to it. But we haven’t redeveloped any of that into higher density to provide more housing, and to do other things. Maybe it should be office space now. I don’t know. Cities evolve. We have all these rules, all of these desires really to keep things as they are. And that’s not going to work out so well.

Are we talking mostly a city problem, or is it also a suburban problem and exurban problem?

That’s a great question too because when you talked about productivity a moment ago, we think of cities as being our productive engines and certainly cities are where the problem is most acute. But if you talk to folks right now about just doing a housing sale anywhere — even upstate Michigan for Pete’s sake — people will talk about really tight time on the market and cash sales and people bidding in really bizarre parts of the country. So there’s other things that are going on and it’s more wide reaching than just cities.

Is it just a supply problem? I mean is that really the issue, and why? It seems like one thing we should know to do in this country is build homes. Why aren’t we building a lot of homes?

If you talk to developers, they’ll say it’s hard to tie up land. It’s hard to find land, and it’s expensive. But even if you get hold of it and you find the opportune site, it takes forever to get it permitted, to get permissions to do that. There are all sorts of extra costs that go along with that, to access water, to build roadways and access points. And certainly if you take that to a city, that all becomes more intense, and more costly. So all of those costs have gone up and it’s just become incredibly costly to build. So even though prices are high, costs are high.

Have these costs gotten markedly worse over the last five years or so, or is this just a continuation of existing trends?

It’s a little bit of both, but I think largely it’s the slow accrual of all of these rules that we put in place, all of the land-use regulations. And certainly a lack of attention to infrastructure means that cities are looking for ways to fund development. It’s easier to go to a developer and say you pay for making our water system bigger or improving our sewer system in a particular place, instead of fundamentally thinking about how property taxes and other things are going to be used in a budget to do that.

So we tend to underinvest in our city infrastructure and then we try to find other ways to actually put that into place. And that increases the cost of new housing and means we need higher price points in order to justify that new housing.

If you look at what’s happening in American housing, is that replicated in other advanced economies? Is this happening in Great Britain and France?

If you think about Great Britain, they have a greenbelt around the city now, so you can’t build outside of London very easily. And these are places that if we think we have high land-use regulations, their land-use regulations are even more intense. So it is an issue around the world.

But there are other places that have figured it out. We don’t think about Japan as a place with high population growth, but if we look at Tokyo, Tokyo has continued to expand; it’s grown over time. And they do a tremendous amount of redevelopment of different parts of Tokyo at different points in time. Places in these neighborhoods don’t become ossified in a sense. They’re always being redeveloped into a different use or into a more highly dense use.

And so there’s places in the world where this has been figured out, but it’s certainly not part of the DNA of the US homebuilding system.

I think it’s interesting that Monica Prasad over at Northwestern University has written a lot about why the US welfare state has developed differently than in Europe. And she talks a lot about what she calls mortgage Keynesianism — that rather than having this big giant safety net and welfare state like they have in Europe, we decided to focus more on giving people consumer buying power. And one way we did it was by helping people buy homes, spend money on homes, and so forth. And we had this huge mortgage credit system.

So we have a big chunk of our economy which has been built on encouraging people to buy homes, and yet we find ourselves here in 2018 with that being a huge problem that you can’t do even if you want to.

And that’s a great point. Right now we are doing things to increase mortgage availability even as there’s no supply. And so we know that that’s just going to be impounded into prices and that makes affordability worse. We think we’re trying to help first time home buyers and in fact we’re just putting them in a more precarious position, stretching them further, etc.

But to your point about putting all of this on the demand side of the equation and ignoring the supply side, you have to keep the incentives in mind because those with the home already benefit from house price appreciation. And who’s making the rules about what’s happening in your neighborhood? Well those that own the homes. And so this desire to kind of pull up the drawbridge —

It’s a very powerful desire, let me tell you, especially for those of us, I’m not going to name names, who may have bought a home right at the tippy top of the market. So everything you’re saying sounds great. Increase demand, constrain supply, prices go up.

I was talking to someone the other day who knew I worked at a think tank and asked, “Oh, are we going to have another housing crisis? That’s kind of what it sounds like — lots of lots of credit out there, housing prices going up.” Is there a risk that we’ll have another big drop?

My concern right now is that house prices — for whatever reason, I think it’s a combination of the supply then adding additional mortgage credit to a constrained supply — are accelerating again, which is kind of weird this far into the recovery. We might have expected the fast house appreciation early in the recovery, but then slow down a little bit. And so if you look at all of our house price models and forecasting, every model keeps predicting a slowdown and yet it doesn’t happen because we keep just incrementally adding more credit. We’re doing this pro-cyclical mortgage credit thing that we like to do.

How are we doing that?

On all sorts of margins. The thing we’ve been watching a lot lately is debt-to-income ratios. So for every dollar of income people have, we allow them to have a little bit more debt, so they can pay more for a house and in a supply constraint place that’s immediately capitalized into house prices. And so the Federal Housing Administration, you can go up to a 57 DTI, you can pay nearly 60 percent of your income toward housing, which does not sound sustainable to me in any way, shape, or form. About 20 percent of new lending out of FHA has DTI greater than 50 percent right now. So that’s scary that we’re allowing that much.

I thought that after the financial crisis we weren’t going to do that. We were going to go back to the way they used to, where if you want to buy a home, put down 20 percent. It’s going to be a very solid traditional mortgage. But we’re not doing that.

No. Well we have a rule, the ability to repay rule, that’s supposed to limit a debt-to-income ratio to 43 percent. But then we carved out exceptions for the GSEs, for the other government agencies that backed loans, and they have used that to lean into the housing cycle instead of holding firm. We’ve even seen Fannie Mae for example allow DTIs to go up to 50 in the end of last summer without as many compensating factors.

It used to be you could get a little bit more DTI, but in some other area of the underwriting they’d make sure you had some compensating factors there. They took that away. Their DTI jumped from like 6 percent of their lending up to over 20 percent of their lending overnight because people are in places where they’re fighting bidding wars for houses. It’s like, man, I can get some more debt. Great. I will in a heartbeat. Now, Fannie in fairness has dialed that back. We haven’t seen exactly what the result is, but they were surprised, I think, even by the amount of uptake.

Is this a risky situation?

We just juiced the economy. We had tax reform, we took some of the bounds off our budget. We’re spending more, so we’ve added this juice to the economy right now and some people are worried we’re on a bit of a sugar high. And if the economy slows down in a year or two when we’re off that sugar high, then some people will lose some jobs, maybe income, maybe we get some wage growth but maybe that slows again, and folks then are in a precarious position because they’ve bought a lot of houses and some of them won’t be able to make their payments. At the same time, time in the market will start extending for some houses and we’ll get a house price dip just based on that cycle.

What share of Americans own their own home? How does that compare to before the Great Recession? Are we back to where we were at?

No, no we’re not. We’re not back to where we were. Prior to the last run up we had a home ownership rate of around 64 percent. We used lending to get that up to close to 69 percent. Now obviously it dropped way down again. Now that stabilized; we’re a little over 63 percent now. Long run, for the US under normal lending conditions, it’s probably about 65 percent. That might be kind of a norm. So we’re right there. But there’s a lot of folks who would like to enter that market that have no hope of doing so with prices where they are.

I think some politicians say we’d like people to own homes. It’s good for communities. There’s all these spillovers. People still want to own homes. We should try to get that number back up. It didn’t work out so well last time, but just economically is it really good if a lot more people own homes? Doesn’t that also make it so you have less churn and it’s hard to move? Or is it just necessarily better to have a higher home ownership rate, if you can get there without crazy lending practices?

We as a society have believed that homeownership is good. That’s just part of the US belief system, but we certainly proved that we can push that too far over the last crisis. Having stable communities, having people be invested in their neighborhoods — there’s a lot of good stuff that comes out of that. Investment in our kids, providing them stability and a neighborhood, etc.

But surely you can push that too far. I think the big piece that I’ve taken a look at over time is mobility; we definitely know that homeowners are less mobile than renters. Now, part of that’s by choice. You choose to settle down, have kids, and do your thing. But you can certainly push that too far and make it difficult for people to chase a new opportunity, to go find a better way or a better situation for them. Where that perfect spot is I don’t think is perfectly obvious. Like I said, 64 to 65 percent seems to be something sustainable.

If I just look at my Twitter timeline on a daily basis, I follow a lot of people who live out in California and there is always a stream of conversation about San Francisco and the housing there. What is happening out there in California? It seems like it is bad for the economy.

If you have a strong economy, a productive economy, you want to continue to grow that economy. You can’t do that without housing. I mean, it’s just a one to one correspondence. If you want a household, you need to have a housing unit. And if you can’t expand that supply, then you’re certainly constraining different places. Now there’s some studies out there that talk about how much we’re losing by not allowing people into more productive places. I think those numbers are up for debate as to exactly the scale of that effect. But certainly —

We’ve mentioned in the past the Enrico Moretti numbers —

That number is a little crazy but these are the engines of the US economy. Some of these places, you have to be careful, I think San Jose is a place with maybe a little bit more elastic housing supply. But all of these places are seeing incomes go up at quite a good clip. And so we would expect house prices to go up faster there than other parts of the country.

And that is something we have to come to grips with — that as we urbanize we’re going to be facing higher house prices in the future, period. We’re all going to pay more for housing if we want to agglomerate in these place. That’s just a fact of life.

The economist would say this is a good thing. We don’t want people necessarily living out in the exurbs. We want them to move to cities, bring all these economic agglomeration effects. And that’s a good thing. Some people say forget you economist. We don’t want that. People want to live in homes out on a third of an acre. They want to have lots of parks and they like that kind of suburban living. But economists say, no, that’s not good for the economy.

So we’re coming to a point where we’re going to have to rethink this and I don’t know who’s going to lead that charge. I think we’re going to have to have some demonstrations on a very local scale. Maybe it’s a bigger scale. Maybe someone like Amazon says, gee, we can’t house all these people we want to bring to our new second city that we’re going to inhabit. Maybe we need to think about some deals that allow a housing supply to get built. Certainly some mayors and some governors who want to think about economic development are going to have to rethink the way in which housing supply is done, but how you overcome the home voters is hard given that they are entrenched and benefit.

But it’s even more complicated than that because there’s other folks who say some of this old, maybe low density housing is actually the affordable housing in our community and we want to preserve that. So it’s not all just “I want my house price to be higher.” We get stuck in these ruts and we don’t understand that we’re affecting the entire supply.

If you’re the housing tsar of San Francisco, what do you do?

It’s not clear that you can actually build enough housing there to do it, but I think you have to start allowing just higher density by right. Cities have accrued a lot of bargaining power over time relative to home builders and developers. We used to create a zoning map and the map says you can have this many units of this land use type and that was by right.

Now a lot of that stuff’s conditional, meaning that there’s a lot of bargaining that happens that increases the cost of supplies. So I think you have to have more by right zoning, which means you don’t have to bargain for it. It’s a right of the landowner. Whoever has control of the land can say you can build 20 units per acre, say. You don’t have to go in and bargain over that and give things away and basically bargain part of the surplus from doing that away.

And so even if it’s just incremental density at this point, allowing townhomes and duplexes and places that were originally single family homes to be redeveloped into 20 unit buildings, I think you would see the market take care of itself.

Will the market take care of itself with enough deregulation and private sector solutions or is there something government should be doing? Should there be government built housing, or rent control to make things more affordable?

The role of government and housing really ought to be a coordination function. Housing is the canonical externality example of where you might see government intervention. If I build my house on this lot, my investment is fixed; I can’t pick it up and take it with me if I don’t like what happens around me. And so having some expectations about what can happen next door or across the street or how transit is going to evolve in the future is important to making good investments.

You need some certainty around investment in order to allow the market to do its thing. But given the opportunity to develop, the market can absolutely produce the housing that we need to produce. Others at the center like Ed Pinto would talk about building economical housing, so housing that serves lower-middle income folks, but without all the bells and whistles. We don’t need granite countertops. We don’t need these gigantic unit sizes. The market could figure out how to serve a lot more people if just given the opportunity.

Speaking of government action and the recent tax bill, there was a change in the mortgage interest deduction. What is going on with that, and how is that affecting home buying?

Well, the world has certainly not ended since that happened despite a lot of predictions that we heard from some folks. Maybe half as many people are taking the mortgage interest deduction as before. So it has been a change. If you have a greater standard deduction then on the margin a lot of folks who used to itemize don’t need to itemize anymore.

That’s actually really good for folks right on where we think would be the margin of home ownership. Perhaps those folks now have more money in their pockets so that they can make whatever housing choices they want to. It could be as a renter, could be as an owner, but they have a greater ability to make that decision. Where the changes to the mortgage interest deduction and to the deductibility of other taxes really hit was at the higher end of the market, but that’s a relatively small percentage of overall US housing.

The market hasn’t collapsed.

It’s amazing. The city of Seattle and San Francisco had 14 percent year over year growth in the first quarter of this year. I don’t think they even saw a road bump from this. So, thus far it hasn’t been an issue.

If we actually phased out this mortgage interest deduction over 25 years, some long period, would we really even notice?

It we phased it out, I don’t think there’d be a whimper as it was done and it might actually help our deficit situation.

What would be the impact on Washington DC, already a place with high housing prices, if suddenly Jeff Bezos drops a major corporate headquarters with thousands of thousands of workers? What would be the impact on a housing market like this, which is already pretty built up?

For the DC area, it could be pretty traumatic coming in; they’re talking about more housing than we’ve built in the last couple of years being needed almost instantly. So I don’t think I have a good elasticity point estimate for you there, but it would certainly be something. And it’s more than just housing. I mean, we need housing, but we would need transit. How do we get people from point A to point B? I think all of that’s impacted by these decisions and they just can’t be taken lightly.

I think at the end of the day, housing’s going to have to factor pretty highly into Amazon’s choice. If they don’t see where new housing could be added to the market, I don’t see how they could expect to be able to get the employees that they need for this new production.

To what extent is this really kind of a federal issue versus a local issue? I mean, what can the federal government do to help create more housing? Mortgage interest deduction aside, it seems like fundamentally a local issue.

There’s huge tension here. At least in the US it has fundamentally been a local issue because localities have largely had the ability to determine land-use regulations, zoning, et cetera. And in some places that’s more of an issue than others. Some places are super highly fragmented like New Jersey where you have tons and tons of cities over a very small land area. In California, it’s more county oriented, so it’s bigger based and you have a little bit more thoughtfulness about some things.

But the tension of course is that for the federal government to tell local communities how to zone would be a disaster. I mean, people would really I think be quite up in arms about that kind of oversight. And that’s certainly one of the reactions we’ve seen with some of the affirmatively furthering fair housing proposals: this concern that the federal government is starting to try to dictate in some ways what happens at a local level.

People will say we should do some kind of race to the top program with incentives for states or for local communities to loosen these land-use regulations. Whether it’s by carrots or sticks, the federal government must nudge these communities.

Federal government or state governments. State governments ostensibly control who has the right to zone and enact land-use regulations. I think the trick to that would be allowing locality’s to figure out how they were going to respond to a mandate for more housing, to allow them to figure out here versus there and not micromanage it — not require a lot of planning, not require a lot of bureaucratic responses to rules that people can game.

If I was tsar for the day and said, here’s how we’re going to create more housing, I would think that the new housing that was created would have to serve a greater distribution according to income than it does right now, which means you would have to rethink things like how California now wants to require solar on all new houses. Some of those things would have to be rethought and there would have to be some minimal amount of housing that will be built.

Pick whatever carrot or stick that you want but I would say you have to build more housing, and we’ll come back in five years and see how you did. We don’t want to create something terribly rule oriented.

What are the odds that if we come back 10 years from now there will be big changes and there will be more housing built? Or is this going to be the way the United States is — you will have these cities, they’re going to be super expensive, and many people won’t be able to move to them to take the jobs they want.

I think there’s a couple of points. I think that there’s going to be enough demand that there will be a political voice there at some point. Individuals who are not already into home homeownership will have some ways to try to raise their political voice.

Like millennials.

There’s a whole group of young people who probably don’t want the world to work this way, and people who might be interested in some innovative products and some new stuff; we could experiment. We’re creative people. We could do that given the chance in some cities. So I think that group of people has a voice to exercise.

But the economic push back that you’re talking about, when cities start to realize that they’re not growing in the way that they should, that real wages aren’t growing — there is some feedback here that suggests there are some places that could start innovating, but it probably can’t come from just individual localities because there’s a coordination problem. If one tiny community says people can build anything, then they will and they will be overburdened.

So there is a need for coordination and that probably does have to come from a state or federal entity to try to do some nudges. But we need some experimentation. We need some mayors maybe to step up and say, we’re going to do things a little bit differently — maybe a place like Denver that has a pretty big millennial underpinning might be able to do something that. They’ve done some things like make it easier to build condominiums.

So it’s not intractable problem, if for no other reason than if something can’t keep going on it won’t.

I’m trying to put a silver lining on it but in the near term it’s really hard to see how this changes over the next five years. This is a longer term problem that’s going to require probably some serious upheaval to get people to pay attention.

You started out today by saying why does no one talk about this? Well, because no one wants to talk about it. It’s like Whack-a-Mole. It’s much easier to say, let’s make housing finance easier, that’ll fix the problem. Or let’s try to build more subsidies into the system. Let’s subsidize more housing and we build three new housing units for an exorbitant price. It always feels easier to try to find these financial mechanisms or to put the problem on someone else, but the bottom line here is we need more supply and it’s going to have to come from everyone.