Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


How Government created Homelessness and the Housing Problem

The housing crisis and its ugly stepchild, homelessness, are finally getting noticed by the big media. Reporters are doing a pretty job of exposing the problem, but are not talking about its causes.

CNBC’s Realty Check just noted that around one in five (or nearly nine million) of America’s 43 million households that rent are cost burdened. That means the rent is so high they have a hard time paying it. The obvious reason for this is that the demand for rental units is outstripping the demand.

What is not so apparent is why there is a shortage of housing in our free market economy. The major cause is a number of government policies that discourage, and in some cases, prevent a free market in housing. If we want to understand the root of the housing crisis, we need to take a look at these policies.


Government Policies that Created the Housing Crisis

The government policies that created the housing crisis include:

  1. Zoning and land use regulation

The biggest cause of the housing shortage in many American cities is the current zoning regime in many communities which effectively prevents the construction of new multi-family housing in many areas. During the summer, an advisory committee to Seattle’s mayor pointed out that one reason why rents are so high in that city is that it is illegal to construct anything but single family homes in most neighborhoods there. When the committee recommended changes in zoning, it faced a veritable lynch mob of libertarians and right wingers falsely accusing it of trying to destroy the American way of life.

Zoning often makes it impossible for landowners to build anything but a ranch house, even if it makes no economic sense. It is particularly damaging in built-out areas with no undeveloped land because nobody can simply tear down a few ranch houses and put up an apartment house on the lots. To make matters worse, there are even some municipalities in California where it is illegal to build an apartment house.

Elimination of the zoning status quo would be the cheapest and most effective solution to the housing crisis. It would also be the hardest because of political resistance, both from homeowners afraid of lower property values and the real estate industry.

  1. Lack of Developable Land

Another problem that is not talked about is the lack of developable land. There simply is no empty land upon which to build new housing in some older metropolitan areas, such as San Francisco and New York. Developers may have to go hundreds of miles outside the city to find a place to build.


In other places, such as Summit County, in Colorado’s ski country, there’s plenty of empty land, but it is all part of the National Forest. That means there is not enough private land available to build affordable housing on. An obvious and politically difficult solution would be to simply convert enough forest service land to private to allow for housing. No politician would suggest that these days for fear of being lynched by environmentalists.

Yes, there is a lot of empty land in America, but it is in places such as Lander County, Nev. or Sheridan County, Neb., where nobody wants to live. Our old housing policy, based upon unlimited amounts of land, is no longer working in places like New Jersey, which is built out or close to built out. One obvious solutions in some areas will be to start tearing down existing housing stock or buildings to replace it with something new.

  1. Lack of Transportation

America’s failure to invest in transportation infrastructure contributes to the housing crisis by encouraging gentrification. The real reason why housing costs are so high in central cities is that upper class people are willing to pay more to live closer to work and amenities, such as shopping, entertainment, restaurants, and sports, economists Lena Edlund, Michaela Sviatchi and Machadoof noted in a recent paper for the National Bureau of Economic Research.


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They found that housing prices in neighborhoods, close to high paying jobs, increased in areas with long or difficult commutes, according to Huffington Post. Here is what they wrote about the cause of gentrification:

“One of the simplest ways to control commuting is to live close to work, which for skilled workers, may mean the city center,” they wrote. “There, by definition, land is scarce and higher demand translates into higher land rents. In time, local amenities adjust, boosting the attractiveness of the locality, further fueling the gentrification process.”

They found gentrification occurring in Brooklyn, a short subway ride from Manhattan, but not in Staten Island, which is a long ferry ride or drive away from Wall Street and Madison Avenue. A similar phenomenon is occurring in Denver, where the most gentrified neighborhood is the Highlands, a short walk or drive from downtown. Just 20 years ago, the Highlands was the Barrio. Yet gentrification is not going on in decaying suburbs such as Commerce City or Northglenn, which are a 40-minute drive from downtown.


Get the picture, folks? The executive or lawyer that hates a long commute can move downtown or to a nearby neighborhood. The janitor and the security guard who can no longer afford to live there end up far out in the suburbs with a long commute.

One reason why commutes are so long and unpleasant is that America has greatly underinvested in transportation infrastructure. Freeways are crowded and unrepaired, and mass transit is nonexistent or hopelessly antiquated. A New Yorker that hates a long commute has little choice but to live in Brooklyn. Some studies have also suggested that gentrification is not occurring in Japan, which has an excellent transportation system.

  1. Demolition of Public Housing

Cities all over the United States have been blowing up or tearing down public housing and not replacing it. New Orleans has demolished 4,500 public housing units since 2007 and Chicago has ripped out 79 public housing projects.

Cochran Gardens, St. Louis. Wiki Commons

Obviously, many of those public housing units were eyesores or decrepit and should have been torn down. Some of them were little more than illegal drug supermarkets or Indian reservations for poor people. The problem is that they were not replaced, leaving the poorest of the poor with no place to go besides the shelter or the streets.

A big problem has been the failure to replace the old decrepit, crime-ridden public housing with something new in some cities. Another has been the failure of authorities to reform or clean up public housing; much of it is poorly managed and maintained. Lack of public housing also increases rents because it forces poor people to compete for housing with everybody else.

  1. Slum Clearance and Urban Renewal

Back in the 1960s and 1970s, a number of cities effectively demolished many poorer neighborhoods, including some that provided housing to the poorest people in the form of cheap hotels or tenements. A classic example was Bunker Hill in downtown Los Angeles, where housing was torn down to make way for an office tower that sat empty for years.

Cities like Los Angeles and Denver effectively tried to clear people out of downtown to make way for offices. More recent efforts have been “redevelopment” in which authorities try to take land, sometimes through eminent domain, in order to get property to redevelop for commercial use to increase the tax base. This makes the housing crisis worse because such eminent domain for profit is almost always directed at poor or working class neighborhoods.

  1. Rent Control

Rent control is only a short-term fix for a housing shortage. Rent controls often work well when they are first imposed, as was the case in New York City in the 1940s. Rent controls can also be effective if there is a surplus of housing.

Rent control fails in the long run because controls do not keep up with the pace of inflation. Eventually the cost of maintaining housing units outstrips the rents. In such a situation, the only property owners that make money are slumlords that refuse to maintain buildings.


When rent controls are imposed, there is a strong incentive not to build housing. To make matters worse, there is a strong incentive to tear down rental housing or convert it to other uses, such as condos. An even worse situation occurs when cities impose laws making such conversions difficult or illegal. Many landlords simply abandon buildings or fail to maintain them until they become unlivable creating urban blight, such as the South Bronx of the 1970s.

As you can see, government policies are at the root of our housing crisis. Therefore, only serious changes to government policy will end that crisis; unfortunately, many of those changes could be politically impossible in today’s America.

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