Market Mad House

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


Steps the Federal Government can take to alleviate the Housing Crisis

Some parts of the United States, such as California, are now facing a serious housing shortage that threatens the economy.

Economic growth in the Golden State will slow in coming years economists, at the University of California (UC) at Riverside and UCLA concluded. Job growth in California will slow to 1.7% in 2017 and 1.1% in 2018 largely because of high-housing costs; a report from UC Riverside forecast, California’s job creation rate was 2% in 2016.

Disturbingly none of the presidential candidates; even President-Elect Donald J. Trump who is in the housing business, mentioned the housing shortage during the campaign. Partially, I suspect because much of it is beyond the federal government’s control.

Much of the problem is created by local governments with zoning and other land use regulations. In many areas of the country; such as Seattle, zoning makes it impossible to build multifamily housing – such as apartments or townhomes. Zoning regulations such as height restrictions; density limitations and mandatory parking requirements, often make it unprofitable to build high-density low income housing.

That limits the amount of housing in the market and gives rise to problems like homelessness. One way this occurs is by greatly increasing rents – sometimes beyond the average income. Another is to greatly increase home prices; which destroys the economic incentive to demolish older homes, and build apartments in their place.

Yet another way that high property values raise housing costs is to drive up property taxes. That forces landlords to raise rents in order to pay the higher tax bills. Another effect of property taxes is that they discourage governments from promoting low-income housing because they make less money from it.

Despite that there are some steps that the federal government can take to alleviate the housing crisis. These steps might not be politically feasible but they are certainly worth considering.

Steps the Federal Government can take to Deal with the Housing Shortage

Here are few measures to alleviate the housing shortage that are within the federal government’s power:

  1. Make landlords’ income from units that rent below a certain price (say $1,000 a month) exempt from the federal income tax. That would give landlords a strong economic incentive to keep rents low; and property owners a good reason to preserve low income rentals. It would also create an economic incentive to construct more low income housing. This would also give landlords a reason to lobby local governments for the preservation of low-income housing.


  1. Provide developers with low-interest loans and tax breaks to finance the construction of low-income housing. One means of achieving this would be to make housing loans part of President-Elect Trump’s $500 trillion infrastructure proposal.

  1. Create a program of housing bonds that would finance construction of low-income housing by private developers or local governments. This would give Wall Street an incentive to encourage construction of low-income housing and provide financing for it.


  1. Place a cap on the federal-income tax deduction for mortgage interest. A good level would be $150,000 for each individual or married couple. One reason why home prices are so high is that all mortgage interest is exempt from the income tax. That gives the affluent a strong incentive to pay as much as possible for housing, which drives up home prices. This limits housing stock because it is most profitable for developers to build expensive homes for the rich.


  1. Tax high rents and home prices. One solution would be a federal tax on rents that are over $5,000 a month. Another would be a federal sales tax on homes that sold for more than $500,000. Like the mortgage-interest cap, this might eliminate some of the economic incentives for building expensive housing. Moneys generated can be used to finance the construction of low-income housing.


  1. Pass a federal law mandating that property tax rates can only be based on the last actual price a property sold for; and not on “assessments” based on some bureaucrat’s reading of the market. The current property-tax system hurts lower income people by giving many governments the power to raise taxes at the stroke of a pen.

  1. Have the U.S. Justice Department use existing federal civil rights legislation to challenge zoning. Many zoning restrictions are blatantly discriminatory and some of them are downright racist. Putting local governments on notice that they will face expensive legal challenges to unreasonable zoning might change some local laws.


  1. Have the U.S. Justice Department investigate; and if possible challenge local and state property tax laws. The objective will be to lower property taxes. Many of these taxes are highly discriminatory and might be unconstitutional. Local governments should know that they will pay a stiff price if they try to use property taxes to drive out the poor.

  1. Increase funding for transportation infrastructure including mass transit, high-speed rail, highways and next-generation solutions like the Hyperloop. If commute times were greatly reduced, many workers would be able to move to areas with excess housing stock or more cheap open land for development. For example if LA workers could commute from Bakersfield or Las Vegas or New Yorkers could travel to Rochester in a reasonable time frame. Hyperloop would make such commutes possible because it can theoretically travel at hundreds of miles an hour. So can some high-speed rail systems that employ technologies such as Maglev. This would give average people access to more affordable housing and drive down costs in many cities.


  1. Tie federal aid and grants to local governments to model property tax and zoning laws. The model property tax law would base rates on the last price sold. Model zoning laws would encourage high-density housing. Governments that passed them would get more federal money. Those that refused would get less or better yet none.


Some of these steps are radical but they might be necessary in order to create a country in which all Americans can afford a decent home. If nothing is done, California’s present will be America’s future.