Housing Complexity



As some of you know, I officially started my one-year sabbatical this week. I plan to start traveling to conduct interviews in mid-August, with the goal of wrapping up my travels and interviews sometime around February 2023. Before traveling, though, there’s still a lot of preparatory work to be done (and posts/newsletters to write). So, I now find myself at home, similar to my situation over most of the past couple years. 


Being able to work from home is a privilege that is not available to everyone. Having reliable shelter is not something we should take for granted. I am lucky to now be able to afford a home in the Boston area, and not have most of my household income and savings go towards debt payments or rent. But, of course, many people are not as lucky, so I thought I would devote today’s post to another key aspect of universal basic services: housing.


With the economy likely heading towards a recession (if we’re not there already), housing prices have been in the news lately—namely, that these prices are declining in many areas. While that might seem like good news for prospective homebuyers, on the flip side interest rates for mortgages are also higher than they have been in recent years. As many homeowners know, over the life of a mortgage you can end up paying more in interest than the actual value of your home. In other words, you end up paying more to the bank when the interest rates are higher.


But homeownership is the crux of the so-called American dream. It’s almost hard-wired into us; we hope or assume that one day we will have a home to call our own and pay it off in 30 years. In this country, homeownership is the engine of a household’s wealth accumulation. A residence—whether it’s a house, apartment, or some other structure—is one of those rare assets that appreciates in value over time (even though its material aspects may physically depreciate). Your car, on the other hand, basically loses half its value once you drive it off the lot.


Why do home values appreciate over time? There are many reasons. One is that the housing stock available is not keeping pace with population increases. That is, scarcity: more people are searching for housing than we have housing available. This is particularly true in areas with a high concentration of job opportunities. 


Another reason is competition from other buyers—specifically, from financial institutions. In cities like Boston, it’s not rare for homebuyers to face competition from each other, competition that leads to a bidding war where the ‘winner’ pays well over asking price. But more frequently now financial institutions are also purchasing homes. 


As one might imagine, a bank has more money than normal people, so they can bid up the price and win the home. Ultimately, financial institutions turn these homes into profitable rental units that ensure themselves a steady (and increasing) stream of income. Meanwhile, supply is lowered, indirectly raising prices on remaining homes. This phenomenon also happens outside of cities and may even be more prevalent there.


Of course, a third major reason for appreciation in home values is zoning—which feeds scarcity. Many parts of the country enforce single-use residential zoning, often with minimum lot sizes (e.g., 1/4, 1/2, full acre). Those zoning restrictions result in fewer, but more expensive, homes being built in a given tract on land. There’s also significant evidence that such zoning restrictions have led to class and racial exclusion.


The ‘simple’ solution to lowering housing prices would be to build more housing. This could be done by changing zoning to allow a higher-density of housing in a given space, e.g., accessory dwelling units, more apartment buildings, condo complexes, etc. Personally, I support building more housing and increasing the density of our cities and towns. In theory, more housing should lower prices (both for purchasing and for renting).


In practice, this is difficult to implement, to say the least. Arguably in the Boston area there are lots of new housing units being built, except these housing units are typically in the luxury (“market rate”) category. A sizable body of research argues that luxury units are lowering prices (here too) by adding supply and freeing up existing housing units for others to purchase. 


But, if like me you’re one of many people skeptical of these findings, other research indicates that building luxury units primarily affects prices only at the top of a segmented housing market, with much less impact at more affordable segments of the market. As the author of the above-linked article states, perhaps we need to think of housing a bit beyond simple supply and demand. (In economics-speak, see cross-price elasticity of demand.)


For high-end housing, many developers argue that, given zoning requirements and lawsuits they may face from cities and community groups, they can only make a profit on high-end housing. Many people don’t want new developments, whether luxury or not, in their neighborhoods for fear of being displaced (e.g., higher property taxes, higher rents, increased traffic congestion) or because such developments will alter the ‘character’ of their neighborhood—many define this latter category of people, typically homeowners, as NIMBYs, or not-in-my-backyarders (see here, for example). For some homeowners, preserving the neighborhood ‘character’ is code for maintaining existing racial and/or class compositions, an action that I consider morally wrong. However, I would hesitate to describe a significant proportion of homeowners as falling into that category, without further evidence.


Though I do think more housing and density is needed to address our housing crisis, I can see a bit where opponents of new developments are coming from. It is hard to buy a home and keep up with your payments, but that home represents a form of long-term financial security. For many, a 20% down payment is only feasible after many years of sacrifice—and even these folks are lucky compared to others who could save for decades and still not afford a home on reasonable terms.


As mortgage payments are made, homeowners build equity in their home as their home values appreciate. Many homeowners then borrow against that equity for future purchases: starting a small business, sending kids to (increasingly expensive…) college with less debt, and, sadly, paying for major medical expenses, like an unexpected cancer diagnosis. Some take on a home equity loan to pay off or restructure other debts. Home equity can provide ‘security’ but it’s also a risk: fail to meet those home-equity loan payments and the bank could repossess your home.


Protecting your home equity and ensuring your home’s value appreciates is one of those things that can be considered individually rational but, ultimately, collectively irrational. Many homeowners dream of passing on their home (and its accumulated wealth) to their children, understandably. But building more housing units in an area might jeopardize one’s property value or one’s ability to pay off a home or its property taxes. It is troubling that one of the key engines of household wealth accumulation in this country is so correlated with the continuing scarcity of reasonably affordable housing. As shelter is a basic human need, I do think our society needs to do more to ensure that everyone has decent, dignified shelter, across all segments of the housing market.


But even if we lived in a world where somehow everyone could own a decent home—even an affordable, net-zero, energy-efficient apartment—does it make sense that homeownership should still be the generator of household wealth and long-term financial security? Are there not other ways to provide some of the things that home-based wealth would otherwise purchase? Would there be less opposition to building if homeownership wasn’t so necessary for wealth accumulation? If everyone owned a home and was creating wealth through it, I suspect that many people would still end up left behind in our society.


In the coming months, I look forward to meeting with housing organizations that have helped people to build and inhabit their own homes as well as those who have coordinated across myriad agencies to shelter the homeless. Through their perspectives, maybe it is possible to reimagine American society to one where homeownership is decommodified and wealth accumulation is not joined to it—or perhaps a society where wealth accumulation is less essential to leading a healthy, dignified life.