A New Report Exaggerates the Problem of Housing Affordability To Push Expensive Federal Interventions
The 2018 "Out of Reach" report ignores the many options available to workers about how they live, work, and spend
The average American needs to earn $22.10 an hour in order to afford a place to live. Minimum wage earners would have to work three full time jobs in some states just to afford housing.
These are some of the audacious claims made in the 2018 "Out of Reach" report from the National Low Income Housing Coalition (NLIHC), which proports to show that millions of Americans can't afford a place to lay their head, a problem that will only be fixed with a massive infusion of federal cash.
"In the richest country in history, no family should have to make the awful choice between putting food on the table and keeping a roof over their heads," writes Sen. Bernie Sanders (I –Vt.) in the report's preface. "This is America. We have the resources to solve the affordable housing crisis. We have the solutions that work. What we need is the will to do what is right."
The media were quick to jump on these findings.
"Bleak New Figures Show Just How Unaffordable Rent Is In Every U.S. State," reads the headline over at HuffPo. "Where is all the affordable housing? Nowhere," declares The Outline. "A minimum-wage worker can't afford a 2-bedroom apartment anywhere in the U.S.," says The Washington Post.
From Oregon to Indiana, local papers fretted that rental housing was out of reach for even median wage earners.
Yet in order to reach its conclusion about American's housing woes, NLIHC's report constructs a deceptive and arbitrary standard of housing affordability that ignores the options available to even low-income workers for how they live, work, and spend.
The "Out of Reach" report assumes that housing affordability looks like a person spending no more than 30 percent of their income renting out a two-bedroom home or apartment—which costs in the 40th percentile of area rent—all to themselves.
When the report's authors claim that you need to earn $22.10 an hour to afford housing—what it dubs a "renter's wage"—that's what they envision you renting. When they say that a minimum wage worker in California has to work 116 hours out of a 168 hour week to afford a place to live, this is how they envision that worker spending his or her money.
All of these assumptions are problematic, beginning with the idea that you should only spend 30 percent of your income on housing.
This 30 percent rule has its roots in income eligibility standards for public housing assistance established by the Department of Housing and Urban Development back in the late 1960's. It can be useful in a pinch to compare rents between cities or states. It should not be treated as some eleventh commandment dictating how much people can or even should spend on housing.
For starters, almost no one actually spends 30 percent of their income on rent. Indeed, there is a good reason why people might choose to spend more.
The University of Virginia's David Bieri has argued that focusing on housing affordability as some arbitrary percent of income ignores the non-housing benefits folks receive from living in higher-cost cities. Writes Bieri, "local differences in the quality of life compensate households for below-average housing affordability, as approximated by the housing cost-to-income ratio."
In other words, people are willing to pay more to live in cities like New York, Seattle, or even Washington, D.C., because of the amenities, people, and opportunities they can access living in those cities. You can see this within metro areas, too, with some people choosing to pay more expensive city rents in order to be closer to the office, the train station, or the bar, while others might opt for less convenient—but cheaper—housing out in the suburbs.
Equally as arbitrary as how much income people should be putting toward housing is the report's focus on renting out a two-bedroom apartment all to oneself.
Renters have way more options, and way cheaper options than that. For starters, people are not stuck living alone. They can instead split the rent with a partner or roommates. That's not going to work for everyone, but for a lot of low-wage workers, who are disproportionately single and young, that is perfectly practical, maybe even desirable.
The addition of just one roommate drops that renter's wage from $22.10 to $10.05 an hour, a figure that looks a lot more affordable for a lot more people.
Low-income workers can economize on quality too. The "Out of Reach" report measures the price of units by looking at units priced in 40th percentile of rents. A lot of minimum wage earners might be in a bind trying to find something in that price range. They mercifully have the option of shopping for the 40 percent of units that costs less than that however.
In short, the report zeros in on the lowest paid workers in the country, artificially caps the amount of income they should be spending on rent, and then posits that they should be trying to rent some relatively expensive options. This is not a realistic portrayal of housing affordability. It's a numbers game.
NLIHC's solutions involve more games: increasing the minimum wage and dolling out more federal dollars to build below-market housing units. If people don't earn enough to afford housing, why not just use legislation to increase their wage and lower their rent?
What is so maddening about these policy prescriptions—aside from the normal complaints one has about the minimum wage—is that it totally ignores why housing is so expensive in the first place: zoning laws that constrain the supply of housing.
In Los Angeles, some 57 percent of residential areas are zoned exclusively for single-family homes. In growing Seattle, it's 69 percent. In San Jose, three-quarters of residential land is restricted to just single-family homes. Preventing the construction of cheaper, multi-family units predictably raises prices.
The picture is particularly bad in a number of California cities—the third most unaffordable state according to the "Out of Reach" report—where the effects of tight zoning laws are compounded by a lengthy approval process and onerous development fees.
The average fees on development in the state clocked in at $23,455 for a single-family home and $19,558 for a multifamily unit—which the U.C. Berkeley's Terner Center found was three times the national average. In the ultra-expensive city of San Francisco for example, less than four percent of housing projects over 10 units are completed within a year. A plurality (roughly 15 percent) take four years to finish. Over half of projects take six years or more, according to a study from U.C. Berkeley's Terner Center. Other cities are not much better.
Reason has covered a number of individual examples of this, from a San Francisco man spending four years and almost $1 million trying to turn a laundromat he owns into an apartment building, to the ten years and counting it's taken a government agency in Los Angeles to get permission to build an affordable housing complex on a vacant lot.
The Cato Institute's Vanessa Brown Calder summarizes the academic findings on the effects of all this zoning and regulation in an October 2017 white paper:
"A study by John Quigley and Steven Raphael estimated that each regulation in Californian cities is associated with a 4.5 percent increase in the cost of owner-occupied housing and a 2.3 percent increase in the cost of rental housing… Edward Glaeser and coauthors estimated that zoning rules pushed up the cost of apartments in Manhattan, New York; San Francisco, California; and San Jose, California, by about 50 percent. A study by Salim Furth found that residents of high-cost coastal cities would pay 20 percent less in homeownership costs and 9 percent less in rent if cities adopted zoning regulations typical of the rest of the country."
It is true that many people pay far more for housing than they otherwise would in the absences of taxes, fees, and regulation.
The response to this however should not be to fiddle with policy dials until some arbitrarily chosen housing option eats up an arbitrary percentage of one's earnings. Rather, policy makers should focus on deregulating land use as much as possible so that a wide variety of housing options can be built as quickly and inexpensively as possible.