As housing prices continue rising, even in the face of high interest rates, there are many calls to increase housing construction. But some voices, including on the progressive left, oppose development, wrongly saying it won’t help affordability. What is the source of this “supply skepticism”—a belief that increased housing supply won’t affect prices?
There’s no question we’re in an affordable housing crisis. In September, the S&P CoreLogic Case-Schiller Home Price Index was 3.9% higher than one year ago, and it is up by 15% over the past two years.
Home prices have risen even in the face of costlier mortgages. Driven by the Federal Reserve’s relentless interest rate increases, average 30-year mortgage rates have more than doubled in two years, topping out at 7.8% in late October. These are the highest mortgage rates in 22 years.
Higher housing costs are a major contributor to inflation. Overall, housing makes up about one-third of the Consumer Price Index (CPI), the most widely watched inflation gauge. And the housing measures enter the CPI with a time lag, further complicating our analysis of inflation.
Economist Alan Reynolds has argued that we should consider adjusting the housing component of CPI in order to get a more accurate and timely measure of inflation. That could have encouraged the Fed to moderate its interest rate increases sooner, and lessened their economic damage.
Analysts blame several things for higher housing costs. Many current homeowners are sitting on low mortgages, obtained prior to the jump in interest rates. In July , a Zillow survey found that “about 80% of mortgage holders reported having a (mortgage) rate less than 5%,” making them reluctant to sell since a new mortgage would be significantly more costly. As a result, sales of existing homes are at a 13-year low point.
For economists, there’s a simple remedy for higher prices—increase supply, in this case by building more housing. It’s a simple idea. (So simple that Saturday Night Live comedian Don Novello’s character of Father Guido Sarducci, for his “five minute university” said: “Economics? Supply and demand. That’s it.”)
But many people—including some progressive advocates for affordable housing—don’t believe increased supply will help lower rents and house prices. Their opposition has become known as “supply skepticism,” and an excellent new paper from New York University’s Vicki Been, Ingrid Gould Ellen, and Katherine M. O’Regan explores this issue.
Supply skepticism is well documented. Scholars Clayton Nall, Christopher Elmendorf, and Stan Oblobdzijasurveyed of thousands of people about it. Respondents stated a good deal of skepticism that increased housing supply would lower housing prices, with these beliefs “widespread and absolutely real,” not confined to any particular subset of opinion or demographics.
Their findings are even more puzzling because survey respondents believed in supply and demand in other markets. Unlike with housing, respondents said increased grain supplies would lower prices, and problems with new car supply chains would cause used car prices to rise. The researchers concluded: “do people think about housing in the same way they think about other markets? No.”
NYU’s Been, Ellen, and O’Regan first wrote about supply skepticism in 2019. Their new review analyzes the ever-growing body of research showing increasing housing supply slows growth in rents; frees up existing housing for others to rent; and isn’t associated with “significant displacement of lower income households.”
So why don’t people, especially affordable housing advocates, believe in supply and demand, at least when it comes to housing? It isn’t fully clear. Of course, some opponents of building housing are homeowners who simply want their property values to stay high and profit from a lack of competition.
But even advocates of more affordable housing refuse to change zoning to allow more supply. Los Angeles Mayor Karen Bass, very progressive on many issues and elected in part to address homelessness and affordable housing, has ordered streamlined approvals for affordable housing and homeless shelters. But she has exempted neighborhoods with single-family zoning from these provisions.
Such exemptions have major consequences. According to the Othering and Belonging Institute, 74% of Los Angeles’ residentially zoned neighborhoods are for single family housing only. That means a lot fewer places to build affordable housing. Housing advocate Maria Patińo Guitierrez fears the zoning barriers mean accelerated affordable projects will land in lower-income neighborhoods, with “L.A.’s wealthy neighborhoods…preserved at the expense of low-income ones.”
So supply skeptics are holding down housing supply, and in effect causing housing prices to rise. That’s true even for sincere affordable housing advocates. By clinging to supply skepticism, they end up in a strange alliance with wealthy homeowners, and make our housing affordability problem worse.