Jan 21, 2019

Microsoft's Affordable Housing Plan Addresses a Government Failure

Salim Furth Senior Research Fellow

Writing in the New York Times’ blog, The Upshot, Emily Badger contrasts Microsoft’s pledge to invest $500 million in affordable housing with the long-term decline of federal spending on public housing. Microsoft is not, as Badger claims, addressing a market failure but a government failure. And the principal government failure it is addressing is not the long-term decline of federal spending but the strict regulations that Washington’s state and local governments impose on all housing construction.

Lack of shelter is a great evil, but it is not a “market failure” in the technical sense. Housing for the poor is not scarce because of incomplete information, moral hazard, monopoly power, or any of the usual catalog of ways that markets fail to live up to the ideal. In fact, the housing market’s greatest deviation from the textbook model of a perfect market is that homes are durable and immobile, so their prices can fall far below the cost of production. In lightly-regulated housing markets, older housing is much cheaper than its construction cost, so people can afford larger, better accommodations than they could pay to build.

Society’s ability to provide shelter even for the very poorest is underlined by the concentration of homelessness in a few highly-regulated areas of the US. Residents of cities and states with permissive building policies would be shocked by the prevalence of homelessness in Seattle and other strictly-regulated West Coast cities. According to the best estimate of the Department of Housing and Urban Development, 10,621 people in Washington State were unsheltered on a single night in January, 2018. Texas, by contrast, had slightly fewer unsheltered people among a population four times larger. Mississippi, the nation’s poorest state, had just 621 unsheltered people.

Not only are market-rate and charitable housing more affordable in lightly-regulated places, federal housing subsidies go much further when regulation is light. When the supply of land on which apartments can legally be built is restricted by local government, federally-subsidized apartments will crowd out private ones. Evidence consistent with this effect has been found in the US and France.

Homes are so expensive in the Seattle area because growth is strictly controlled. Most of Seattle is zoned to allow only single-family homes. And Seattle’s suburbs are restricted from outward growth by a state-imposed “urban growth boundary.” Like Oregon and California, Washington has made a political choice to preserve both nature and suburban-style living at the expense of affordability. Texas regulates much less: it allows both sprawl and density. As a result, a larger share of Texans than of Washingtonians lives in apartments, and Texans also have access to affordable single-family homes.

Microsoft’s laudable generosity aims to address a regulatory failure imposed by Washington’s state and local governments. To call the West Coast housing affordability crisis a “market failure” is to blame the victim.

Disclosure: This blog post was composed in a Microsoft product.

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