Salim Furth (Senior Research Fellow and and Director of the Urbanity project, Mercatus Center) joins the podcast to discuss his background as a macroeconomist turned urban economist and a variety of topics in long-term housing market trends and urban policy, including zoning, LIHTC, rent control, and institutional investor single family rentals, some of which we argue are shaping macro trends in home prices.
Jon: “Welcome to he Capitalism and Freedom of the 21st Century podcast. I'm John Hartley, your host. Here we talk about economics, markets, and public policy. Today I'm fortunate to be joined by Salim Furth, who is a senior research fellow and director of the Urbanity Project at the Mercatus Center at George Mason University. Welcome Salim.”
Salim: “John, thank you so much for having me on.”
Jon: “Salim, I want to get back just a little bit into your background before we jump into topics like zoning and housing and urban economics. You grew up in Boston. You did your PhD in economics at the University of Rochester, where you were a Mark Ayer student. And then you went to work at Mercatus—sorry, you went to work at Heritage before joining Mercatus. I'm curious, I know you did some work in macroeconomics before focusing on urban economics. I'm curious, tell me a bit about your intellectual trajectory, how you got interested in economics and macroeconomics and urban economics. I'm curious, do you think that macro and urban maybe should talk to each other a bit more in the sense that I think we often—these fields, macro and sort of applying micro, urban, are often in academia thought to be very separate, even in think tanks are sort of kept very separate. But I think in recent years, I've started to hear more from central bankers, economic policymakers who sort of sit on the macroeconomic side of things to talk about things like supply constraints being a big factor in driving housing price growth that we've seen over the past couple of years. I'm curious what your thoughts are about these fields and how—what your experience has been like sitting in both of them.”
Salim: “Thanks. Great series of questions. I'll try to zip through some of those. I think my interests are really daisy-chained. When I started college, I wanted to do international affairs that became more like international economics, which is what I worked under Aguilar on, and then that morphed at Heritage more to domestic economic policy. And then I really saw just how big of a deal housing was as a cost to families. And this kind of goes to your final question is, should macroeconomists be talking more to urban? And in my case, it was basically a macroeconomist becoming an urban economist. And there were maybe some good career reasons to do that. It's a lot more fun to work on urban economics than macro in the environment today. I think macro—I think it's had an identity crisis since the fallout after the 2008 recession. One of the things that I think academic macroeconomists realized was you can get almost anything out of a model. Right? And once you get good at modeling, you kind of know that which ingredients you put in will kind of determine your output. And so I think in that environment, it doesn't make all those papers wrong, but it makes it really hard to distinguish between two equally good, disagreeing answers. So I'm really glad to kind of not be in macroeconomics. I'm not smart enough to be one of the people who's designing the new macroeconomics and end up a path away from that impasse. But urban economics is so much fun because we've got tons of data. You can frequently be the first person to use a high-quality data set. And every city is unique, but then they all have similarities, so you've got some sort of specificity and generalization that you can do from empirical work. And then urban economics kind of touches and interacts with almost every other branch. Like there are urban labor markets, urban housing markets, urban poverty and social mobility issues, urban transportation issues, urban investment. So you touch everything, but you're thinking about it in this very sort of real context. And it's a lot more fun to meet non-economists because they used to have no idea what I did, and now they're like, oh, houses. I know what a house is. I live in a house. Let's talk about houses.”
Jon: “Absolutely. I mean, I feel like it's a super exciting time to be an urban economist or to be a housing economist. I think urban economics in general, I think, has a lot of subfields. I think just talking about housing, I feel like it's just one of them. We think about things like transportation, or I mean, there's, I feel like, so many topics in urban economics. I guess like one, like there's one issue I think that often these macroeconomists will point to is that, I guess, when trying to criticize applied micro economists, that maybe there isn't enough external validity in, for example, if you only look at one city, you know, how relevant are those results to looking at other cities. On the other hand, I think for part of what you're getting at in terms of some part of your disenchantment with parts of macroeconomics, which I can relate to as well, I think is this whole identification problem. I think if the Nobel Prize of the recent years and the work that it celebrates reflects any of this, you know, there's been a massive shift to empirical work. I think macroeconomists in general have been a bit slow to embrace things like good identification strategies and so forth. I think even that's starting to change a little bit now. We have things like, I guess, local projections and things like that, which I think are really just macroeconomic rephrasing’s for good identification strategies, things like different deaths and so forth. But I think urban economics is very exciting, and I think, one, you're doing, I think, some of the most interesting work in urban economics. And you're, I think, one of the most knowledgeable and thoughtful people I've ever spoken with about these topics.”
Salim: “You should get out more.”
Jon: “Well, why don't we get into some of the work that you've done, and Mercatus, and some of your own research? I think it's really interesting. And I'm curious, like, what do we, what do you think we know about urban economics? And what do you think about the things that, you know, we know about supply constraints, how maybe damaging they are, or to what degree they are contributing to how expensive it is in many of these metropolitan areas, primarily on the coasts. You know, we can't, in Washington, D.C., where we are today, you know, you can't build anything higher than the Washington Monument in Washington, D.C., proper. You look to San Francisco, you know, there's been no net new population growth in San Francisco, as well as Oakland, as well, and it's the same population, basically, since 1950. And these are some of the most expensive places out there. But I guess, you know, with urban economics, are we learning new things? And on the policy front, do you think that we're making progress?”
Salim: “Yeah, so I think the real progress is being made in connecting urban theory to empirics. So those two things, and, you know, maybe I'll get in trouble with a previous generation, but I'd say to a first approximation, those two things kind of grew up separately. People would kind of generally estimate a theoretical model off of data, but, you know, as long as the fit was kind of generally good, they'd say, hey, this is a good theory. They didn't worry too much about the refinement. They didn't worry too much about kind of the gritty details of what makes a city a city. So the D.C. height limit is a fantastic example, and, you know, not to embarrass you, but tons of people studying urban phenomena get basic facts wrong. So there's an urban method that has to do with the Washington Monument. It doesn't. The height limit is a fire safety code from 1910 that Congress put in place when Congress basically made all the kind of like day-to-day decisions for life here in D.C., and it has to do with street width. So the building can't be taller than the width of the street that it's facing. So you get slightly taller buildings and wider streets. It looks pretty much like a flat surface if you look at it from across the river or something because the streets are all approximately the same width, so you don't get a real urban height. And now people defend it because it makes the monument stand out, but we're just getting to the point where we're starting to see papers where someone's like, okay, I've actually read the code. I understand exactly what the binding constraints are, how to model them. So there's literally a paper by a GWU grad student about the D.C. height limit where he's accurately modeling how many stories you can build on each parcel, and then trying to use that to try to measure some externalities, so something interesting about how people value sight lines out of their windows. It's like when a neighboring building gets built, they pay less in rent. All that is connecting these kind of rich, useful theory concepts we've had for a long time to the new data availability. And the lynchpin here is going into those city codes and actually understanding what are the rules that say I can build a seven-story building but not a 12-story building, and what are the rules that say that I can build up to, you know, 15 feet from the sidewalk but no closer, but also not any further than 25 feet from the sidewalk. And then some people have tried to connect that to industry data. This is still, I think, a serious weakness. We don't have good industry data on, for instance, what different methods of construction cost, right? So if you build a taller building, you need to often switch from timber frame to concrete frame construction. There's some books that publish past estimates, but they're not that accurate, and they're kind of immediately out of date. And I think that's maybe the next stage we'll be going from, all right, we've got the economic theory tools, we've got the statistical toolbox, we've got the gritty details of how the city regulates things, and now we need to really understand how industry works when they're looking at building science.”
Jon: “Got it. You know, it's interesting, the one thing I think about it that makes it so at times difficult is how multidimensional it is. You know, there's all sorts of different types of land use regulations, you know, from minimum lot sizes to height restrictions, you name it. It seems interesting, like, just looking at some of the job market papers of, you know, people who are on the market this year, I know one, I think, trick that people are starting to use is using things like machine learning and satellite imagery to sort of understand, you know, where single family, you know, lot size regulations kind of exist. It's difficult in part also because, you know, we don't really have any kind of time series data whatsoever, at least certainly much that goes to the present. But I guess, you know, it's interesting, like, with this history of zoning, you've done a bit of work on this. For those who aren't familiar with the history of zoning, you know, it sort of starts in the 19, early 20th century, early 1900s. You know, the 1920s saw, you know, rapid adoption of zoning codes. There was essentially the administrations at the time were very supportive of zoning. I think there's some evidence that in part, was a reaction to immigrant flows at the time in the early 20th century. And, of course, what we're talking about is Euclidean zoning, which is different from the racial zoning laws, which were overturned by the Supreme Court, I think, in 1917. But after that, there was this massive adoption of Euclidean zoning, which perhaps partially was a result of, in part, to replace some of those racial zoning laws. But I think more broadly, I think the dominant factor was that there was a lot of immigration going on at the time. And in these Euclidean zones, putting industry goes here, residences go here, that's how we're going to design a city.”
Salim: “And Euclidean here is a plan, the name of the city of Euclid, Ohio, which was the famous court case where this was tested. It had been in place maybe for six or eight years by the time it got to the Supreme Court. And the court actually flipped on the issue. At first, they were going to say, no, it's unconstitutional. The lower court judge, Weston Haver, said it was unconstitutional. And the advocates of zoning, who were really progressive scholars and kind of outstanding citizens, they came in with a full court press and made this kind of convincing argument. And so the Supreme Court, and I guess one justice left, Sutherland, and said, yep, the use of zoning where we separate different uses, including treating apartment houses as fundamentally different than single family houses. And I think that's kind of the original sin of American zoning is that it didn't treat all residential zones or all residential uses equally. There's an interesting argument. I think the presence of immigrants was clearly the reason that New York City adopted the first comprehensive zoning ordinance. The Fifth Avenue merchants didn't want industrial workers on their lunch breaks and after work filling up Fifth Avenue and scaring away their clientele. And they tried first via private action to say, OK, we'll all agree not to buy from any garment manufacturers who locate above such and such a street. But there were too many of the clothing boutiques, which is what Fifth Avenue was lined with, and there were defectors who could get quicker delivery as their stock was changing during the course of the day from essentially sweatshop factories in the tenements just behind Fifth Avenue. And so they would defect. So essentially this private cartel solution failed. And so then they had a Baptists and bootleggers alliance with the good government progressives to say, well, instead of trying to self-regulate industry, let's have the government regulate. And it put a kind of a nice face on what was essentially an invidious motive. But then outside of New York, there's some evidence that it was cars and trucks that really motivated people to want to separate industrial from residential uses, right? So this is the case that Bill Fishel at Dartmouth makes, that it's the automobile, and there's a lot about automobiles in Euclid, the decision, where it used to be that you knew where factories were going to go because they had to be on the rail line, right? A factory off the rail line was useless, and so you could kind of safely build your house if you were five blocks from the train station. You knew that no factory was going to come there, and anything that was large-scale was going to stay near the trains. But once there are buses and trucks, then industry and apartment houses become untethered from train lines, and so people sought to sort of replace that security with regulation.”
Jon: “Interesting. I mean, it's so fascinating, just even going through some of the historical documents from around this time. I mean, it's interesting, you mentioned the New York City case, so I was just thinking about Streets of Gold, the new book by Ron Abraminsky and Lena Bustan on the history of immigration in the U.S. and sort of on immigration economics and trying to essentially summarize their research and sort of overturn various immigration sort of myths, and it's so interesting. You know, one thing that their research focuses on is the 1924 Reed-Johnson Act, which was one of the, essentially when the Customs and Border Patrol was created and basically created sort of modern borders as we sort of know it for the United States, and they also dramatically reduced the number of migrants coming to the U.S. from, I think, maybe like a million a year to a couple hundred thousand a year. It's interesting that these two things were happening at essentially the exact same time. That's right. Both all the zoning and then Andover's Euclid, the Supreme Court ruling didn't happen until 1926, but I think a lot of the zoning had happened even prior to that, but it's also interesting too that Herbert Hoover was then the Secretary of Commerce and was leading a lot of these charges in terms of getting states to adopt state-enabling laws that would help municipalities adopt more zoning codes, and it's so interesting when you mentioned about the original sin of American zoning and treating residential and apartment buildings as different sort of distinct uses, you know, to imagine, you know, how different things would be now had, you know, had that been different, that would be very interesting. Or if the Supreme Court, I guess, had returned zoning to begin with in 1926.”
Salim: “Yeah, it would be really interesting to see what we would have gotten. So all of this stuff, right, so like, I think there's a, you know, maybe getting out of So I feel a little, there's a big part of the modern American psyche that I think dates from this era, is the desire for safety, right, so like, if you go before 1920, we're really not that worried about chemicals and weird stuff in medicine, we're not that worried about war tactics, right, so like, World War II tactics were much more built around protecting the American soldier versus World War I tactics, they just treated them like they were expendable. Industrial safety, you know, rules were, kind of, came in in the 20s as well, so I think like, some of this stuff is good, right, I'm glad we have, you know, people making sure medicines are not full of lead or something, and I'm glad that buildings don't fall down routinely or something like that.”
Jon: “Or that people aren't getting tuberculosis.”
Salim: “People aren't getting tuberculosis, yeah, but at the same time, that same desire for safety made us do things like exclude immigrants and build up a zoning state that was, you know, essentially designed to exclude, it was designed to protect the people who were making the laws, which was essentially homeowners, from people who were not in the room in the law. And I think that's just, that's fundamental to our psyche and, you know, you can, I can rail about it on a podcast if I want, but if we're going to go out and make policy, we can't just tell homeowners they're bad people and they, you know, shouldn't want security and shouldn't be afraid of the unknown. We have to actively make the case that a more inclusive city can be built that does preserve your security, your low traffic street, you know, your children's ability to safely walk to school. Those are legitimate, real concerns in a culture that has only become more and more concerned with safety and loss aversion, even within our own lifetimes.”
Jon: “Got it. Yeah, I mean, sort of pressing you a bit more on the policy front, you know, moving forward a hundred years here from the 1920s now to the 2020s, you know, there's been a lot of, you know, rumblings with the YIMBY movement, the Yes In My Backyard movement, you know, being diametrically opposed to the NIMBY movement, the Not In My Backyard individuals who are in favor of, you know, land use restrictions and keeping things the way they are or tightening land use restrictions even further. I'm curious, what is your assessment of the, I don't want to use the word YIMBY necessarily because I think there's a lot of things that can get packed into that, like whether you're in favor of public development versus just allowing people to build. I think these two things are a bit different, and sometimes I think they can get very much lumped together in this YIMBY movement. I'm curious, when we think about the Minneapolis 2040 change, which now is allowing single-family homes to be built, it's eliminated some single-family zoning and is allowing more multifamily housing to be built. I know there's been some discussion recently about how maybe the progress on that has been a bit underwhelming, or I think the policy change first came in January of 2020, or over two and a half years later, and there's only been so many single-family permits that I think have been issued since. So there's been some little developments, but some people argue there's been a lot more multifamily development in response. Obviously, we've got all these pandemic population shift dynamics going on, too, which complicates things. And then on the other side of the country, we have California, too, which I think earlier this year adopted this duplex sort of law, allowing duplexes to be built. And I know just a few days ago I think made the California State Legislature, I think just passed a bunch of laws more broadly, allowing for more building and more supply. I'm curious, like, what's your assessment right now in terms of how much progress has been made in terms of reducing the burden of land use regulation on growth of the housing stock?”
Salim: “Great question. So just to back up a little for some of your listeners who might not be super informed of the Indian Movement. There's a 2014 blog post by Kim Mycutler called How Burrowing Owls Leads to Vomiting Anarchists. And I think this is really the ur-text of the Indian Movement. There's always been people who advocated for affordable housing. There's always been a handful of libertarian law professors saying that zoning is an illegal taking, that we shouldn't have it. But there was never anything like a political movement of kind of non-interest group politics that said, it's too hard to build housing, we need to change that. And things that people like Kim My and a few others, that kind of, it just congealed in San Francisco. And it just got to this point where with very small catalysts, people said, oh man, that is the biggest thing in my life right now. And the fact that I'm overburdened by rent despite splitting a house with six other strangers, that's not actually a natural state of affairs. I have a good middle-class job. This is something dysfunctional, and now somebody's telling me that there are some straightforward policy levers to change it. So I think that's a really interesting movement to look back on now. There was some interesting criticism. I'm blanking on his name, but one right-of-center columnist was saying, hey, the Indy movement's been underwhelming. They haven't accomplished much. And people piled on him on Twitter, and it's easy to show lots of evidence. Like you mentioned Minneapolis is upsetting. California has passed dozens and dozens of laws chipping away at this edifice of NIMBYism. Lots of other states have done things. Massachusetts passed the Trans-American Development Bill. North Carolina and Utah have banned minimum home sizes. So a home has to be a big mansion to develop in your town. Texas and Arkansas and Utah have banned aesthetic requirements on homes from government. The AJA can do it, but not the government. So there are lots of bills that are being passed that are really trying to address this, and I think the YIMBY political movement has flexed political muscle and shown that even with very small organizations and not a lot of infrastructure, they have the energy and the moral high ground of this particular moment to get things done. The best defense of this kind of like, oh, YIMBYism is underwhelming view is that so far there's been too little to avoid massive rent increases during the pandemic. So you and I are meeting right now in a shared office space by a fantastic company called Industrious who's got a nice spread out there that we can enjoy after the podcast, and places like this got hammered during the pandemic. People wanted more residential space. I didn't predict this. Nobody predicted it. We all thought there was going to be a recession in 2020, and instead housing prices went up because people, just like we needed more toilet paper at home, the toilet paper crisis was because usually we do half our business at the office, and with a lot of other home needs, we need space to sit down, set up our desk, have our recording equipment, and all of a sudden people who were roommates didn't want to be roommates anymore. People who were in a one-bedroom said we really need a two-bedroom, and all of that kind of like everyone shifting and flexing their shoulders at the same time has really, really stressed the residential market, which also has some supply disruptions that interrupted construction, obviously, but to me that's the case against kind of when the effectiveness is like, yeah, that's great. You guys are passing laws, but it was too little too late. Maybe it came too late to really help ahead of the pandemic, or you can't build houses fast enough to respond to something as fast-moving as a pandemic. So that's my kind of two-handed take. I call myself a BNB. I'm unapologetically a member of the BNB movement. I think we're doing great things, but I do think we need to be realistic about what we can accomplish through changing government laws.”
Jon: “Interesting. I wonder, you know, when you think about the history of, like, housing prices, you know, I think of the Case-Shiller Price Index, there's that famous paper by Case and Shiller that extended their time series back to, I think it was 1870, and they brought it all the way to, and you can extend it since they wrote the paper to current day, and it's interesting because it's basically looking at 150 years of home prices in the U.S., and if you look at the chart, real home price growth from, like, 1870 to 1970 or so was essentially flat, and then you look at the period after that, it's just rising enormously, so it seems like there's something very different that's going on since that period of time, and even though a lot of the zoning and use zoning started in the 1920s, a lot of the things like minimum lot sizes, growth restrictions really, I think, came in in the 70s, that's my sort of understanding of it. I guess when we talk about housing, I'm curious, like, you know, sometimes, you know, there's obviously, it's certainly a big political issue, and I think the YIMBY movement has been successful in communicating that this is, you know, that supply is an urgent factor, and that's a factor that needs to be addressed, but I'm curious about some of these other factors that kind of come up, and I personally, I think that these are not the right solutions, but I think they get a lot of political headwinds and a lot of attention, and I think it's important to talk about these things, so, you know, one thing, for example, is the whole topic of institutional investor single-family rentals, this is a very, very significant trend that's been going on over, really, since the financial crisis, where institutional investors, whether it's invitation homes and their financial sponsor, Blackstone, or, for example, Pretty and Partners, which was started by Don Mullen, who actually was working at Goldman Sachs at the same time I was, we briefly overlapped, he was the head of the mortgage trading division, he left in 2011, right after the financial crisis, and he just decided to start a private equity company that was going to go up across the nation and buy homes that had seen their prices totally battered in the sunbelt, whether it's, you know, Las Vegas, you know, parts of Florida, Arizona, and my understanding is that a lot of these institutional investors are really buying in those areas, have been buying in those areas pretty significantly, and are still doing so, but at the time, they were so battered that sort of their, I guess, user cost implied price, you know, fair valuation was so out of whack with the market price that they felt that it was essentially an arbitrage opportunity in some sense, but I'm curious, like, now, you know, 10 years later, I think a lot of those, you know, quote, arbitrages have gone away, if you will, it's not like a perfect arbitrage, but there's mispricing’s that sort of disappeared a bit, but at the same time, the single family rental institutional investor share seems to be continuing to rise. I think there's some data from the National Association of Realtors that I think now over 10% of all the new purchases are being made by institutional investors, all the new single-family purchases are being made by institutional investors. Do you think that this may indicate that there's some issues of concentration, that this is kind of, quote, rent extraction? I know that like a lot of, we don't have exactly a great deal on this, but certainly in House Financial Services Committee on the Democratic side, I think this is a huge topic for them. What to you to those who fear that institutional investor single-family rentals are driving up home prices or rents to some degree?”
Salim: “Great question. So the first thing I do is kind of like check if they're a wolf in sheep's clothing. So a lot of times, anti-investor sentiment is just a politically correct mask on anti-renter sentiment, right? The investors only work because there are people who want to rent homes. And single-family houses are rented by their occupants, it's maybe 20%. So the market is still overwhelmingly single-family owner. And if you look at a lot of the numbers of how many homes in one area a particular company has, it sounds like a big number when you're comparing it to the one house that a single-family homeowner owns. But it's actually not a big number of units compared to a typical apartment complex. So if you say, oh, huh, this company owns one apartment complex's worth of homes in the Atlanta area, well, it suddenly doesn't sound like systemically important data. So I guess my assessment of the data, like you said, is really poor. My assessment of institutional investors has been they are a really, really tiny share of the market, but they're growing fast. So they bear watching. I think treating them as if they're moving major things in the national market right now, I think is incorrect. Treating them as an area worth focusing on and keeping an eye on, because if they keep growing several percent a year for several more years, then they will become a significant player. So I think it's interesting. To the extent that it's an arbitrage opportunity, it's that people need shelter. That's a basic human need. Getting a mortgage is one way to do it. Renting is another. A lot of times, we have somebody looking at a home, and they can afford the monthly payments of either rent or a mortgage, which are often quite similar. But they don't have the down payment or the credit to get the mortgage. And so that's a case where we sort of feel a little uncomfortable. And my colleague, Kevin Erdmann, I think he'd go a lot further than me and say, we overreacted to the 2008 financial crisis, because we significantly increased the barriers to getting a mortgage. So even when mortgage rates were very accommodating, they were accommodating to people like me who could make a down payment and had good credit. They weren't accommodating to people who had iffy credit and little or no down payment. So where does that leave us? We have a class of people who, maybe if we were a little more generous, a lot of them would get mortgages, but then their credit's not that great so a good number of them would default. So if we really want to stop people from defaulting, which is another thing that I know the House Democrats really care about, right, then we need to not give these people mortgages because the reason that they can't get mortgages is, you know, they've got a history of losing jobs or not being able to repay and if there's big costs to defaulting, then you don't want to kind of guide people into, here's a great way to own a home, but oh, actually it's not sustainable for you. I don't know how to split the baby on that. It's a, you know, so I think that's the tough question is, are we making it too hard to get a mortgage? One thing that I'm actually curious about is, since the Fed raised rates so much this summer, and, you know, rent continues to be up quite a bit, home prices haven't moved that much this year, and what that would tell me as an investor, if I was a cash investor, I'd say, wow, now the people who are mortgage dependent are facing higher costs, so their bids are going to be lower, but my renters are still paying just as much as they were before or even more, and so if I can buy these homes with cash, now that's a good deal in a way that it wasn't, say, a year ago. We might get an increased back-up to 2019 rates of investor purchasing, which were down early in the pandemic and unclear at the beginning of this year.”
Jon: “Got it. So moving on from institutional investor, I assume family rentals, I'm curious, what do you think about some other just like policies in general? We talked about monetary policy. I think in general, I think monetary policy maybe gets blamed a little bit too much for swings or increases in housing prices, which have been largely a secular phenomenon rather than a cyclical one. Of course, that being said, I think raising rates will likely prompt some sort of a cooling in housing markets. You're already starting to see it with mortgage rates rising, anticipating more or continued elevated inflation and rising rates. I'm curious what your thoughts are on sort of various other policies. We think about things like rent control. I think Orlando is starting rent control. At one point, I thought it was sort of a consensus, at least in the economic academic community, that rent control, reduce supply and reduce the rental supply or essentially subsidize incumbents, but keep things just more expensive for everybody else. And I thought that was kind of the common wisdom. But there's other things like the low-income housing tax credit, that sort of affordable housing sector. And you also have things like housing vouchers and so forth. These things have been around for quite a while. Do you think that some of these things contribute to – and these are national policies with the exception of rent control – low-income housing tax credits, housing voucher section 8, these things have been national housing policies for decades. Do you think that those have contributed at all to the affordability problems that we see today?”
Salim: “I wouldn't put much of a finger on sort of the low-income housing supports. It's certainly there. The big problems with LIHTC are its administratively cumbersome and you end up spending a lot of money just in kind of putting together your financial stack to finance a LIHTC project, but I would think basically those products are usually in their own sub-market. They're not really competing with the main production builders. So if you think about for a low-income person, what are their housing options, it might be a newly built LIHTC building, but it's more likely a 70-year-old triplex or something like that, and old housing stock doesn't respond very much. It responds a little bit, but it doesn't respond very much to competition. So you're not going to see too much of an effect there is my guess. Rent control, on the other hand, is just extremely destructive, and I think what's especially disturbing about this round of rent control, we saw it in St. Paul, you mentioned Orlando, a bunch of California cities are doing it. They're kind of going back a generation, right? Usually we sort of update policies and say, okay, well, we tried this 40 years ago, it didn't quite work, but that's because we hadn't thought about this complication, now we'll fix it and it'll be better, and sometimes it isn't, sometimes it isn't, but in this case, they're actually discarding the lessons that were learned in the 50s and 60s and going back to pre-Stagflation policies that, when Stagflation and inflation hit, were massively destructive, where there weren't updates to inflation, vacancy, decontrol, exemptions from newly built buildings. If you don't exempt newly built buildings, nobody is going to build a building, right? Buildings, when they're built, are very hard to fill, right? So you might actually have significantly lower than market rents the first year your building is open. Well, if you've got rent control, you can never raise those, so you're never even reaching the market rent that you would normally be having, or maybe you'll say, okay, well, there's rent control, so I'll start with this very high rent and just fill the building slowly and suffer that way, but in either case, it's taking a big bite out of your bottom line. So I think St. Paul is very foolish for the policy that they pursued and a lot of others, and I think it's unfortunate, part of the politics of the YIMBY movement is that in blue states, they see the people who are kind of, you know you know, leading activists, they see their political threats coming from the left. They're worried that affordable housing advocates are going to say, ah, you're not really pro-housing, you're pro-developer. And so they kind of get Finland-ized into supporting or at least being silent on rent control, even though I think most of them know that it's incredibly destructive and will lead to worse problems down the road. It does cause affordability, right? So if you have rent control over time, renters will pay much less, but usually the quality is declining as well. So it's not clear that their real rent is actually declining as much as, you know, the unit quality is falling apart. They're in a location that they wouldn't be in otherwise. And so, like, yeah, it works out, but it's not actually that great of a gift to renters.”
Jon: “It's fascinating, just all these topics. I feel like housing is so, so timely, given just the astronomically high rates of housing growth that we've seen, even, you know, net of inflation, which is elevated now as well. Really fascinating topics and certainly a lot of key policy discussions. Well, thank you so much, Salim, for joining us. It's been a real pleasure to have you on. This has been another episode of Capitalism and Freedom in the 21st Century, where we talk about economics, markets, and public policy. I'm John Harley, your host. Thanks so much for joining us.
