If the solutions were simple, there wouldn’t be problems.
This column is a companion to the WSBS (860AM, 94.1FM) radio show, It’s Not That Simple, on the air every other Friday at 9:05 a.m. Listen to the podcast here.
This is the second part in a series of columns that will look at the housing shortage in Great Barrington. Read our first column here where we talked about what the town has done the past few years to encourage housing construction. Future columns will look into possible remedies that have been suggested here in the Berkshires and the rest of the country, as well as other ideas suggested by readers.
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One doesn’t have to be Ronald Reagan to believe in the free market. The cost of producing goods — the wages for those who make them and a return on investment to the producer — will be covered by a price consumers are willing to pay and that price will be set by the law of supply and demand. But one doesn’t have to be Karl Marx to understand that it doesn’t always work. Right now, the free market doesn’t appear to be working for housing. But can it?
“The dominant view today is that if the housing system is broken, it is a temporary crisis that can be resolved … with better construction technology, more homeownership, different zoning laws, and fewer regulations … But the crisis is deeper than that.” That is according to “In Defense of Housing,” by David Madden and Peter Marcuse, published by Verso Books in 2016.
The thesis of their book, which we recommend you buy and read, is that housing has become primarily a commodity. (Merriam Webster defines commodity as “an economic good; something that is bought and sold.”) Like all commodities, the price of housing is set by “the market,” which responds to supply and demand. So why isn’t that working with housing?
Madden and Marcuse continue: “The commodification of housing means that a house’s function as real estate takes precedence over its usefulness as a place to live. When this happens, housing’s role as an investment outweighs all other claims upon it, whether they are based on right, need, tradition, legal precedent, cultural habit, or the ethical and affective significance of the home … There is a world of difference between economic demand and social need. Many people need more housing than they can afford.” [Emphasis added]
In other words, the free market is serving the needs of the commodity called housing, and setting the price accordingly, not the needs of people seeking shelter. And indeed, investors might be quite happy with how the free market is handling housing. But what of people’s need for a place to live? Does the market even consider that? And if not, why not? The free market works for other commodities that also have a use. What’s so special about housing?
This week we invited Assistant Professor of Economics at Bard College at Simon’s Rock, Dr. Daniel H. Neilson, to It’s Not That Simple. (Find his book here and his newsletter here.) We asked him why supply and demand isn’t solving the housing problem. He answered immediately. “No practicing professional economist will make the argument that markets always work everywhere. There are limitations to what makes markets work well.”
Here’s a quick lesson in supply and demand in case you were an English or film major (like Pedro and Ed, respectively). People want a thing. Other people make and sell that thing. (For some reason, economists call this hypothetical thing a widget, so we’ll do that here.) If more people want widgets than there are widgets available, the price will go up. Higher prices will convince some people to not want the widget anymore, lowering demand, and it will also convince other people to get into the widget business and make some of that widget money, increasing supply. When the supply of widgets goes up and/or the demand for them comes down, the price of widgets will go down. At some point (and it’s a moving target) the price will reach what economists call equilibrium. There will be enough widgets for the people who want them at a price that widget sellers need to cover their costs and make a profit. And everybody will be happy.
As Dr. Neilson tells us, there can be limitations that interfere with the market. When it comes to housing, these limitations are significant. On the supply side, land is scarce and we cannot create more of it, no matter the movement of prices or the demand. In fact, housing production nationwide decreased by half in the last decade as compared to 2000–2010. Since the supply side of the equation, land, cannot adjust much, when demand increases prices increase. Sometimes dramatically. And there’s no guarantee that wages will increase at the same time.
The flexibility on the demand side of the equation is also limited. Land and the structures on them are fixed in their locations. Someone looking for a home in the Berkshires isn’t going to move to Iowa because houses are cheaper. That won’t help if your job or family or community is here. Also, people need homes. “Housing does not easily substitute for something else,” Neilson said. “We’re talking about an extremely local market.” Because of our need for our housing to be where we live and work, and the fact that we can’t decide to do without, as one can with most widgets, demand won’t decrease as prices increase. So there’s no guarantee that real estate prices will reach an equilibrium that is within the means of people living on wages.
Demand isn’t decreasing the way the free market says it should, and exacerbating the problem, there are new pressures pushing demand for housing up even while prices rise. That shouldn’t happen, according to supply and demand theory. One problem is that while housing has always been sold to the highest bidder, not all that long ago the only bidders were people who needed to live in it. As a commodity, housing is now also a safe place for investors to put money.
There have been other influences as well — demographic, cultural, and technological — that have exerted upward pressure on demand. These include:
- Older people who are staying in their homes longer, due to better health and the age-in-place movement
- Millennials, a large demographic who are in their 20s and 30s, are now in the housing market
- Remote work, allowing people in cities to compete with potential home buyers in more rural areas
- Low interest rates reducing the cost of mortgages
- An increasing wealth gap enabling more people to buy second homes
This means more bidders, and bidders from economic communities that have more money, are competing for too few houses. What this adds up to nationally is an estimated shortage of housing units to the tune of 3.8 million homes.
Now, let’s go back to the idea of housing serving two purposes. We’ve just seen that if the function of housing is to house people, the market doesn’t work. But if the function of housing is to get the “right” price for a house as a commodity, it works beautifully. You can get higher and higher prices because demand for housing as a commodity is now virtually unlimited. As a commodity, one doesn’t need to live in the house, or near the house, or even in the same country, to bid up the price.
“The issue is that housing is allocated to people who can pay and not to the community as a whole,” Neilson stressed. “As a product that puts a roof over people’s heads, a warm place in the winter or a place to store your stuff, the housing market is not working all that well. There’s a real gap that has opened up between housing as investment — a commodity — and housing as a service necessary for human life.”
“Particularly since the beginning of the pandemic, the Berkshire property market is working to bring wealth to people who are in that commodities market (the housing market),” Neilson said. “If you bought a house a couple of years ago, you probably have made money on the property value.” Bidding wars that drive up the price of housing are an illustration of the commodity market working. One of the functions of supply and demand is to set prices. The market is doing that.
Before we start picturing evil capitalist real estate investors and landlords living in lavish mansions, (or our local version, rich city folk) let’s broaden our view just a bit. Any of us fortunate enough to own our homes do so not just for the shelter, but for the tradition of wealth-building that comes with the investment. Be honest, would you choose to sell your house for less than the market would bear? Of course not.
There is plenty of evidence that the free market is not helping with housing diversity or affordability and that some type of intervention is needed to separate housing from the cycles and pressures of the market. In other columns we have focused on affordable housing created by nonprofits such as Community Development Corporation of South Berkshire, Berkshire Housing, and Construct, with considerable taxpayer support. But for all their efforts and success, they are not meeting the demand.
More intervention is needed. It is the job of communities and governments to address failures in the market. When the price of gasoline went up, the government released oil from national reserves. Where is the intervention for housing? On the federal level it has dried up. Interventions to decouple housing from the market have been tried with some successes and failures and what we’ve learned is that their success depends on the sustained commitment to the creation and preservation of that housing.
“Using the tax system and other levels of government to push against the market to respond to community values, and not just wealth, is a way of decoupling from the market,” Neilson said. “We have a very long tradition of town government in New England solving community problems. That’s not the market. That’s people talking to each other.”
The last point Dr. Neilson brought up struck us as the most important, and should motivate all of us to care about housing all of us. “A large part of Berkshire property values come from other things that are not on the lot. Value comes from being part of a functioning community. If we don’t have a community, all the property values come down.”
He continued: “We need to think about who’s going to work here. Who is going to pull the espressos, sell the lift tickets or do the landscaping? How are they going to live comfortably as equal members of this community? If people can’t afford to take a job on Main Street in Great Barrington, then what is going to be left in the town? A lack of housing diversity and affordability affects all of us, so enhancing housing options is in the interest of everyone in the community. It’s going to require an organized, community-driven response that sees value as coming from the community as a whole.”
Assistance for the preservation of all types of housing should be a top priority for all of us. Our own self interest is tied to the fates of our neighbors.
Neilson concluded: “We are trying to respond to a problem [housing scarcity and affordability], understanding that by doing so we are working against wealth. Since houses are not worth much without a functioning community around them, we need to go into this with the mindset of bringing the whole community along, listening inclusively to all the stakeholders, recognizing that some people’s wealth is going to be reduced by this, but make the point clearly that real and enduring wealth is in the community.”
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