This hurts the U.S. economy and our international competitiveness.
Evidence is emerging that the country’s most expensive metropolises are hog-tied economically because millions of potential workers cannot afford housing.
High-interest rates increase variable-rate mortgages, which hit American homeowners’ pocketbooks. Their home values are also hit because fewer people can afford home loans. So the value of homes falls, while the cost to most purchasers increases due to higher interest.
A year ago, the average 30-year fixed mortgage rate was 2.88 percent, while now it is 6.29 percent. That could decrease demand for home purchases significantly.
With falling home values and more expensive business loans, developers have less incentive to build new housing. That makes it harder for new entrants into the housing market. Fewer rental properties will be built, which will increase asking rents as the population priced out of buying a home increases.
In other words, the Fed’s monetary policy is not fixing but instead hurting the healthiest solutions to shelter inflation, which are those on the supply side.
Whatever one thinks of the advisability of the federal stimulus spending in the first place, once spent, the Fed should have allowed it time to work its way through the system. The increased discretionary income that resulted in higher shelter prices (where we are now) would have increased building, which would have increased construction jobs and wages (a good thing that should not be seen as inflationary and therefore negative), and produced new housing stock to bring down prices. That’s the virtuous circle that stimulus spending attempted.
Instead, the Fed is short-circuiting this market-driven process with sudden rate increases that will likely stall the economy, destroy jobs, and thus decrease people’s ability to build, buy, and rent homes.
The Fed is sucking all the grease out of the U.S. economic engine in a misguided attempt to slow it down. It’s not a pretty sight, including in housing markets.
“Land-use restrictions and a lack of public investment in roads, rail and other infrastructure have made it harder than ever for developers to find sites near big population centers to build homes,” according to a Sept. 25 article in The Wall Street Journal.
Migration to the Sunbelt’s fast-growing urban centers, like Phoenix, Austin, and Tampa, increases land prices and worsens housing shortages.
In Nashville, according to the Journal, “A shortage of development sites and surging land prices, plus high construction costs, mean developers haven’t been able to build enough housing to keep up with demand.” As a result, apartment asking rents increased 31 percent since the year ending in June.
“Most economists say municipalities need to relax zoning rules and other restrictions to bring down land inflation and build more housing,” according to the Journal. “But these changes are often unpopular with homeowners, who benefit from rising land values and make up around 65% of U.S. households.”
“Those starter homes came in all kinds over the years: mill worker’s cottages, shotgun homes, bungalows, ramblers, split-levels, two-bedroom tract homes,” wrote Emily Badger. “American families also found their start in brick rowhouses, cozy duplexes and triple-deckers.”
Paving the way for more housing also requires more expenditures on infrastructure, which is resisted by existing taxpayers who benefit little from the result. Unions resist inexpensive non-unionized labor that could bring down the price of housing and employ people to boot.
Thus, not only should zoning laws, building codes, and the permit process be liberalized, but construction and carpenter unions should voluntarily back off for the greater good.
Existing local taxpayers should not have to fund new housing infrastructure, like schools, hospitals, sewage, and drainage. That could instead be paid by developer contributions or new bonds paid by property taxes exclusively levied on the new property owners who benefit.
The federal government can and should subsidize this infrastructure to kickstart solutions to a housing crisis that threatens the economy beyond the housing sector.
The United States needs a strong economy—not only for the immediate satisfaction of renters and buyers, but for national security purposes. Our economy (including the construction industry) funds our military, which must be more than world-class to defend against our biggest adversaries in China and Russia.
Federal, state, and local governments must ensure that U.S. developers and construction companies are free to build what the United States needs to employ and house all of us, not just those with the deepest pockets.
In addition to the promotion of building more, Harker specifies several measures to spur construction and affordability, including allowing homeowners to rent their “garages, basements and other excess spaces.”
Harker moots the idea of “shifting from a property tax to a land value tax [that] could encourage small, high-quality housing in a more compact footprint.” He said this would disincentivize “landlords from letting their existing properties fall into disrepair or from leaving land vacant.”
Harker called shelter inflation “a moral issue” and said that citizens should be enabled to continue living where they grew up through the construction of more affordable housing. He said, “Simply put, in a country as wealthy as ours, Americans should be able to put a roof over their heads.”
The Philadelphia Fed, at least, is right on the money.
