Jerusalem Demsas on Problems in the US Housing Market and How to Fix Them

Jerusalem Demsas is a policy reporter for Vox and joins David on Macro Musings to discuss the state of housing in America and its implications for policy. Specifically, Jerusalem and David discuss the current state of the housing market, whether there is a housing bubble, how the housing shortage creates avenues for discrimination, the dynamics of racism in the US housing market, the impact of zoning laws, and much more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Jerusalem, welcome to the show.

Jerusalem Demsas: Thanks for having me. Glad to be here.

Beckworth: Glad to get you on the show. I've been following your work. You've been doing a lot of interesting articles on housing, on infrastructure, and the broader implications for the economy. We've covered housing on the show before, this show is called Macro Musings, so there's some macro tie ins, but we're going to dig a little deeper today with you into the weeds and get to some of the more micro, structural issues that are effecting housing, but it is a hot topic, right? Just recently we're seeing how important housing is as a part of the debate about inflation. Our housing prices are going to seep into the CPI. Should the federal reserve cut back on its mortgage back security purchases, is that also making it too easy? So there's a lot of conversations going on here about housing, and of course the last two recessions ago was a housing recession. So housing is a big part of macro, it's a bit part of our conversation today, so I'm delighted to get you on the show to talk about it. I want to go to your first article we're going to cover and that is, “Is There a Housing Bubble?” So first off, Jerusalem, define for us what is a housing bubble, or how do people define housing bubbles?

Is There a Housing Bubble?

Demsas: That's the million dollar question. So as I'm sure a lot of your listeners will know, there's not a strict academic definition of what a housing bubble is. But that's not to say that, it's obviously used in common parlance all the time by folks so clearly there's some meaning people are ascribing to it. What people generally agree on is that there has to be some sort of rapid rise in prices, that seems general agreement. But along with that, when you listen to average folks talk about there's a housing bubble, there's a bubble in whatever asset they're talking about here, they're ascribing some sort of irrationality to the phenomenon. There's something going on that has nothing to do with the value of the asset people are getting into it.

Demsas: There was a viral video the other day on TikTok where this guy was talking about how there's obviously a bubble because his friend just bought this house, it's falling apart, and he spent $600,000 and they didn't get an inspection or any of this stuff, and what that person's communicating is that they feel like the price of that house is completely disconnected from the fundamentals of what would ascribe value to the asset, and beyond that, that the person who was buying the asset was being irrational in some way. So those are sort of the kind of components there that when people are talking about it. When you look at economists, there's the same kind of belief that there is a rapid rise in prices and of course some sort of irrational exuberance as well.

Beckworth: I like in your recent article how you reference Robert Shiller on the definition of an asset bubble, and you mention his work on epidemiology, you're using that as a way to think through asset price surges. Maybe talk to us about that.

Demsas: Totally. I was talking to him for this article, and he said that obviously COVID is on the mind for him and he feels like that is a really good metaphor, an epidemic is a really good metaphor for what a housing bubble or an asset bubble is. And the quote from him was, "Blooms and speculative bubbles are sort of epidemic of an idea, of a feeling of what one should do with one's life or leisure or what's cool." And that seems really accurate to me, that when we're talking about bubbles it's not just something is very expensive, because things become expensive all the time. Used cars are very expensive, but you don't hear a ton of people talking about oh there a bubble in used cars, even though a lot of the same components of a bubble are present in that market as well. So there's very much a cultural aspect to bubbles and also of course there needs to be some sort of centrality of the asset to people's lives. People need to care a lot about it for it to become something that people are engaged in this debate about.

Beckworth: And housing obviously is an important part of our lives. Most Americans, their wealth is tied up in their housing, and we've lived through again the 2008 crisis, so this does seem to be a pertinent discussion and topic. But I love how he, Robert Shiller, talks about contagion, the spread of euphoria. I've got to get to the house before you do. Let's use that as a segue into the evidence. We'll make the case for a bubble and then you'll make the case against the bubble. So walk us through some of the evidences out there for making a case that there is a bubble in housing.

Demsas: Yeah. The first fundamental box is checked, prices have risen astronomically. CoreLogic's index over a year recorded a 13% annual gain. You look at certain sub markets, it's even more stark. You have I think nearly a 30% increase in Iowa, 20% increase in Arizona, you look closer even at certain localities, it's near 30%, in some cities as well. So very clear it's a rapid run up in prices of homes. And of course there is this contagion factor. I think anyone who has had a friend who was either a real estate agent or has tried to buy a home or sell a home over the last year has several stories that they can tell you. One of the most stark ones for me was I was driving through northwest DC and I saw a few people actually camped out in front of a house, at least in the early hours of the morning, to see an open house.

Beckworth: Wow.

Demsas: Yeah. This in northwest DC. I actually stopped to talk to one of them, I'm like, "Where are you from? Where do you live?" And this person lives in Bethesda, Maryland, which is like 10 miles away for your viewers who aren't local to the city, not even 10 miles, like two miles away from the location that I was at. So that's kind of absurd. There are other things, Washingtonian Magazine chronicled some story from a realtor having to act as a bouncer because you're having all these buyers trying to cut in line and there's concerns about fighting over these homes. And of course I think everyone saw Redfin CEO Glenn Kelman's tweet about one buyer promising to name their firstborn child after the seller.

Demsas: So anyway, there's so many of these anecdotes, but of course you can also just tell some of these less ridiculous ones is this contagion phenomenon that Shiller was discussing is that a lot of people all of the sudden have decided that right now is the time to get into the housing market. A lot of the fundamentals that we'll talk about in the case against seeing today's market as a housing bubble did not just suddenly arise in 2020. There's been a shortage for a long time. Millennials have been aging into their prime home buying years for a few years now. It didn't just all happen last year. So there's something else going on here that has led a lot of people to decide that it's important to be getting into the home buying market and I think that those are two of the big reasons that you should think it might be a housing bubble right now.

There's been a shortage for a long time. Millennials have been aging into their prime home buying years for a few years now. It didn't just all happen last year. So there's something else going on here that has led a lot of people to decide that it's important to be getting into the home buying market.

Beckworth: It certainly seems that way based on impressions. So this is anecdotal, in my day-to-day life, in my neighborhood there's been several houses that as soon as they're on the market they go and there's multiple bids. It's really a great time to be selling your home. It's a tough time to be trying to find one, move into a home, and I'm in a very different part of the country than you, I'm down in Tennessee right now, so it's just striking. You definitely increase the impression, and I think that whole contagion flavor has some merit because even if there are some fundamental stories we can tell, just the sense that something is up.

Demsas: Yeah.

Beckworth: It's a good time to refinance, a good time to sell, and you gave another illustration of this, just in terms of how many people bought a home without actually seeing it. Like a majority of homes in 2020 were bought without actually being seen.

Demsas: Mm-hmm (affirmative). And this is Redfin data, it's roughly two thirds of people who bought a home, they made an offer on a house that they have never seen in person. So maybe they didn't get that house-

Beckworth: Okay, they made an offer.

Demsas: At some point in their buying history never walked into this house, never went in person to see the outside of the house, and yet still made an offer on the largest asset they will probably ever own. That's kind of wild.

Beckworth: It is, it is wild. Again, most Americans have their wealth tied up in their homes and they're making a bid on something they haven't seen, that's pretty striking. Okay. So those are the evidences we can check off for a bubble like experience in housing, but let's make the case against it. Why do we want to have some caution before we jump the gun and say there is a housing bubble?

Demsas: Yeah, I think that I'm probably in team it's probably not a bubble. I think I'm pretty much convinced by the current evidence. So it's pretty straight forward. There has been a market under supply of housing for decades, and you have low supply, and then you have increased demand, and what happened last year is that people saw personal savings go up, they saw interest rates come down, so it became cheaper then to buy the house, and it's just kind of a fundamental supply-demand story here where there is a large demand for very few properties available to people and COVID also gave people the opportunity to purchase homes because they were needing to up size at the same time, because they were working from home a lot more, and of course, millennials as I mentioned earlier, have been aging into the prime home buying years for a few years now. So there's a large market of millennials, we're the largest generation in American history, a lot of people are entering into the market.

Demsas: So it really is a fundamental supply-demand story here, and it does feel to me like a lot of these fundamentals explain a lot of what we're seeing right now. That doesn't mean that there aren't some people acting potentially against their interest irrationally by waiving these inspections that can speak a lot to the value of the home, especially when you have an aging housing stock like we do. But the rapid rise in prices I think is predominantly driven by the fact that we haven't built enough, and there are more people than ever that want to buy a home.

Beckworth: Is it fair to say we are in the midst of a perfect storm of surging house prices? You mentioned the decades long under supply of housing, number one, but then on top of that we have this pandemic shock, we have the millennials aging, as you mentioned, so all of these things are coming together kind of in a perfect storm, and that's why it may seem like man, something's different, but really it's just fundamentals all parked together at the same place, same time.

Demsas: Yeah. I would definitely say that's the case. And of course, the Fed has, as you mentioned at the top of the show, has been really pushing down mortgage rates. They bought I think roughly over a trillion in mortgage backed securities last year as the pandemic started, and that has made it cheaper to buy homes. I think some people will say that's not a fundamental, the Fed is the one setting interest rate, but I don't think there's a natural rate of a mortgage rate. So I don't know what that's supposed to mean. So it feels like fundamentals are clearly what's at play.

Beckworth: Yeah. Let me mention some of the stats you bring up in your article. So you mention the Freddie Mac report that said in 2018 there was, they estimated, two and a half million shortfall of homes. And then 2020 it jumped to 3.8 million. So the shortfall has been growing. You also mentioned that 40% of homes built in 1980 were starter homes, only 7% in 2019. So even the homes that are available in the market, they're not starter homes. So it's your first time moving into a house, it's going to be hard to find something you can afford.

Demsas: Mm-hmm (affirmative). And so there's a large conversation around the lack of affordable housing and a part of that is just that it's really, really difficult right now for builders to build smaller homes, build homes that are affordable to kind of first time home buyers, and so all of these millennials coming in, they're not all equally dispersed along the housing stock and just trying to buy any house, they're concentrated among starter homes, and there are even a larger shortage of those than there is shortage generally of homes. So those stats really paint a picture of how dire the situation has been, and it seems to me clearly that even if the price appreciation happened really quickly last year, that if all policy remained the same, without COVID we would have seen that price appreciation over the course of the next few years anyway.

Beckworth: Yeah. So take a young millennial who's recently out of grad school, highly skilled, wants to get a high paying job, they're going to have to move to a city, right? But the city is where you find these problems most pronounced, is that right? So it's hard to find that starter home in San Francisco maybe, or DC. They're going to be priced out of the market coming in as a first time buyer.

Demsas: Yeah, totally. It's very clear that just there's increased demand in these places. I'm sure we'll talk more about zoning over the course of this conversation, and it's not specifically that zoning laws are somehow worse in San Francisco or LA or DC of Boston, these kind of superstar cities, but it is the case that the effect of them is a lot worse because the demand is so high in these places. You don't really feel the effects of restrictive zoning laws in rural, smaller town because supply isn't really an issue for these places. But in places like San Francisco that has seen significantly increased demand over decades without responding appropriately and loosening zoning laws so people can build more market rate housing to cater to the new population, you're going to see this run up in prices, and we've been seeing this for a long time in these places.

It's not specifically that zoning laws are somehow worse in San Francisco or LA or DC of Boston, these kind of superstar cities, but it is the case that the effect of them is a lot worse because the demand is so high in these places.

Beckworth: And just to circle back to the big macro implication of this, so we've talked on the show before about how labor mobility in the US has declined over the past few decades, and this is one reason. It's hard to move to the better paying job in a city if you can't afford to live there. There's a famous study, I know you're familiar with, by Enrico Moretti and his co-author talked about how constraints on housing stock has lowered US growth by 36% from 1964 to 2009. So a sizable chunk of GDP is missing because the supply of housing hasn't been there. That's huge. Our standard of living, on average, could be higher were it not for housing.

Beckworth: In fact, kind of stepping back, I think a bigger takeaway, and correct me if I'm wrong here, is a lot of our problems in America are tied to housing. It seems a lot of our inequality, a lot of structural problems are tied to housing. Not in everything, but any problem you have, there's some angle housing can be tied to it. Is that fair?

Demsas: Yeah. I'm biased because I'm in this stuff every single day, but especially relative to it's discussion among policy makers, it is probably the most important policy issue right now, and I think that, when talking to policy makers, especially federal ones, they want to keep this a local issue because the politics of it are so dicey to deal with. The types of voters that we're talking about here who are defending the current zoning regime are often prominent voters, they're people who vote often, these are upper middle class individuals who are especially important to the electorate for both local elected officials and also federal ones. Because of that, without really much policy justification, we've classified this as a local issue. But as you mentioned, this has massive labor market implications, this has massive implications for GDP, the paper with Moretti and Chang-Tai Hsieh that you just referenced also shows declines in wages, well we would have seen higher wages if we had gotten rid of restrictive zoning laws. And I think that the paper that really got me interested in housing policy to begin with is actually a law review article by professor David Schleicher who I know has been on this show before-

Beckworth: Oh yes.

Demsas: And he wrote this paper called “Stuck!” that kind of chronicled how for a long time labor mobility for lower wage workers was, his paper, “The Law and Economics Residential Segregation,” showed that lower wage workers could move from a rural town to an up and coming city, a superstar city, and the cost of living increase would be made up for by the increased wages. But over time we've seen the cost of housing rise to the point where lower income workers are not able to make up for the increased cost of living with higher wages, and that's created I think a bunch of political issues. His paper came out in 2017 which I think was quite timely for a lot of the political discussions we were having at the time, and it just, this is not a topic to me that is local. This is something where there are four or five cities that have a great deal of power over the rest of the United States' economic wellbeing, and I think federal policy makers ought to take note of that.

Over time we've seen the cost of housing rise to the point where lower income workers are not able to make up for the increased cost of living with higher wages, and that's created I think a bunch of political issues.

Beckworth: Yeah, that's a great segue into my colleague's work, Kevin Erdmann. I know you've cited his work before. He talks about these closed cities, or closed access cities. New York, San Francisco, LA, help me here, a few others.

Demsas: Boston, yeah.

Beckworth: Boston, yeah. Because of zoning restrictions, that they can't supply sufficient stock but those are the cities people want to move to for work, so it forced the migration out into these other cities like Las Vegas, and those cities, they're the open access cities and they had the big housing boom. So even part of the great recession can be tied back to the housing story, in a subtle way that maybe isn't as obvious to most people who think about housing in 2008. So stepping back again, the takeaway from all this is this is not sustainable, right?  Let's talk about your article titled, “The Housing Shortage Makes Housing Discrimination Much Easier.” So walk us through that. What is one of the big implications of this housing shortage for discrimination?

Implications of the Housing Shortage for Discrimination

Demsas: This article came about because I saw a tweet by Redfin CEO Glenn Kelman about how a woman had promised to name her firstborn child after a seller if they promised to pick her bid. And that got me starting to think about buyer love letters, which if your listeners don't know about this, this is a practice that is relatively common, not a lot of data around it, but there's a lot of anecdotal evidence that this is something that people often use in order to increase the likelihood of their bid getting picked, and what they do is along with their bid they'll write a whole letter talking about how much they love the house, how much they'll take care of it, how much they promise to keep everything the same. And in that letter they often include things about their family's religion or makeup or ethnicity or where they went to school, a lot of indicators that are often create avenues for discrimination.

Demsas: Now these types of things would not really be that big of a deal if we didn't have a housing shortage. When you have a housing shortage and what we've seen over the last year is that people are empowered to discriminate on things other than just price. So you have a situation, I've heard often, of different people getting several different offers that are essentially the same on price, there's several thousand, sometimes even 100,000 above asking, they've waived inspections, they've promised various things to make it easier for the seller, and the seller has absolutely no way to discriminate between these multiple different offers.

Demsas: So what they end up doing is they try to figure out a different way to pick the individual. And that's where the buyer love letter comes in because you're essentially trying to sell your family as this sort of product. And of course, after the story published, I had a bunch of people reach out to me saying that this has happened to them, I had a friend of mine say, "Oh my goodness, we actually got our home when I was a kid because the seller was like, oh we wanted to sell it to this nice Catholic family that was moving in because they were a Catholic family." And all these things, sometimes they can work even in nice ways, like someone wants to help out a single mom or someone wants to help out someone who has a disabled child. It's not always something that's super nefarious but it's so emblematic of a larger illness within the housing market, it's very clear that this sort of thing wouldn't be happening if sellers did not have this out sized influence and power over who they were picking. So I think the anecdote really sparked a lot of interest.

When you have a housing shortage and what we've seen over the last year is that people are empowered to discriminate on things other than just price...it's so emblematic of a larger illness within the housing market, it's very clear that this sort of thing wouldn't be happening if sellers did not have this out sized influence and power over who they were picking.

Beckworth: So Jerusalem, this is the first time I've heard about these letters. In my previous attempts to buy homes I never used them because among other things, I didn't know this was a possible way of getting a home. Is this something that's been done for a long time? What's the history of them?

Demsas: So it's not something that I've found data tracking. The National Association of Realtors last year actually warned it's members that buyer love letters could open up realtors and clients to legal liability because it might have fair housing act implications, and on top of that, there's a bunch of anecdotal evidence about it, there's also evidence from Redfin that, yeah, there's data from 2018 that they found that writing a personal cover letter increases the odds of winning a bid by 52%. It wasn't the highest thing that you could do, obviously a higher offer is usually more determinative. They've actually stopped tracking that data because they were worried that they were incentivizing people to use buyer love letters by putting that stuff out.

Demsas: But it's clear that it was significant enough that most realtors I know talked about this kind of thing, but there was also a bunch of people on Twitter that said the same thing that you did, that they had never heard of this, they had never seen this be done, that they had never used it when they were purchasing a home. So it's definitely not ultra common. I think it's something where just anecdotally a lot of the people that were saying this to me were people that had bought homes within really, really competitive markets, people from DC and San Francisco, which I think strengthens the point that this is a shortage problem.

Beckworth: Yeah. The problem is more pronounced in those areas that you mentioned, and therefore this makes more sense to do that, but I mean look, honestly, when I moved into a house in Texas, I know the person who sold us the house was an old lady and she found out via the realtors that I had three little kids, and I think it touched her heart, so she took our offer. It's not the only reason, of course, but I'm sure that played into it because she later wanted to meet my children. But that's the same kind of spirit of this here. You send a signal somehow to the seller, well I'm this type of person, I have these features, I have children, and in a very competitive market, it opens the door for more discrimination. So it's a great point.

History of Racism in the US Housing Market

Beckworth: That's a nice segue into your related article that's titled, “America's Racist Housing Rules Really Can Be Fixed”. So you go into a history of racial problems in housing in the United States and I'm going to go through that with you, but I want to begin with this story that you start your article with, and that's with a lady named Kennetha, is that right?

Demsas: Kennetha.

Beckworth: Kennetha, yes. So tell us her story.

Demsas: Sure. So I found Kennetha actually on a Facebook forum that helps individuals who are homeless or soon to be homeless or trying to apply for section 8 housing or for other kind of help if they're housing insecure. And she lives in the Nashville, Tennessee area. She has five kids. They were homeless for multiple times, I think they finally found housing, but at the time of writing this article she was the fourth time that she had been homeless. And I ask a lot of people, whenever I talk to individuals who are experiencing housing insecurity, I often ask them where they grew up, what neighborhood specifically, and places around them that they wanted to live in. She grew up in a neighborhood in Nashville, Tennessee. It's this place called Haynes Area, if you look at the census map, that's kind of the area that she was in. It's a place where researchers have looked at and it was a lot of concentrated poverty in this area and folks have a difficult time getting social mobility or economic mobility.

Demsas: I asked her about places where she would want to live, a place that she thought was reasonable, places that she felt like she could get if she was able to get a good job, and it was hard for her to dream of that, but the area that she wanted to live in this place called Franklin, she just talked about how it was something that she felt was an impossibility. That it's a place that was meant for rich white people. She's Black and she does not feel that it was a place that was open to her. I actually, after the publishing of this article, I talked to some of the city officials of Franklin, and it's really interesting because they've actually done a lot of work to try and liberalize their zoning laws, which is what this article is about. But it's very clear that there's a longstanding tradition of segregated housing has left people with the impression that there are areas that are for them and against them regardless of whether those laws actually exist.

It's very clear that there's a longstanding tradition of segregated housing has left people with the impression that there are areas that are for them and against them regardless of whether those laws actually exist.

Beckworth: So this is interesting to me because I'm actually doing this podcast from Nashville, Tennessee myself. So pre pandemic I was doing it out of DC, but I've been doing it from home as many listeners will know, and I know this area well. So I know Franklin well, it's a very affluent area, many country stars live down there, and Brentwood area, down south in Nashville, and it was fascinating to see this kind of unfold in my neighborhood so to speak. Tell us why this is so consequential? It's probably obviously, but why does it matter if Kennetha can move down to Franklin versus staying in her low poverty area? You bring up Raj Chetty's work, so kind of flesh that out for us.

Demsas: Totally. So there's been a lot of work over the decades about whether neighborhoods actually matter. If you move someone to a different neighborhood, would that actually affect their household outcomes, or is that just not really relevant, is place really not that relevant? And the research on this is very mixed. It's like still figuring it out, but Raj Chetty, Nathaniel Hendren, and Lawrence Katz who run Opportunity Insights, as I'm sure a lot of your listeners are aware, did find that moving to a wealthier neighborhood increased likelihood that kids would go to college, and also increased earnings by over 30% by the time they reached their mid 20s. And this is for if you move young children and where they would grow up.

Demsas: So the place that Kennetha grew up in was a place where she said that, the Opportunity Insights research shows, you would expect to earn around $20,000 a year for a household income. And in Franklin, where she wanted to live, a child who grows up in a low income family would go on to have a household income of $53,000 a year, which is over the median income income for the city of Nashville. This kind of research really shows the importance of allowing for mobility within places, and it's not really clear exactly what is the causal factor here. Is it just children going to better schools? Is it children engaging with families that already are in a higher social class, and being aware of and open to different things that might increase their human capital? There's a lot of things that people are still looking into, but it is very clear right now that concentrated poverty and keeping people in places where people don't earn good incomes or have good jobs can really kind of be a death knell for that kid.

Beckworth: There's a lot of moving parts there for sure and it's important to tease out causality, but at a minimum, if you're in a poor area, your local schools are going to have very few resources, just based on the support from the tax base that surrounds them. Going to Franklin you're going to have much nicer schools, better labs, more resources. But surely the families matter too, and many other things that go into that mix. But yeah, you want to give them the opportunity to move if they wanted to move, and you highlight some of the challenges. So you mention in Franklin, there's a lot of only single family home zoning down there, so single family homes, not apartments. You also mention that a lot of places down there must have two acres or more, did I read that right?

Demsas: Yeah. In some parts of Franklin it's illegal to have a property that's smaller than two acres. So that means even if a developer wanted to build even two single family homes close together, they could not do that. They would have to build a single, single-family home on two acres of land, and when you do that, then you're incentivized as a developer to build a very, very luxurious house because you're already having to spend so much money on the land and you want to make sure you're getting as much out of it as possible, so you're catering to a high income earner. And again, it's really interesting because Franklin itself is a place that's been trying to liberalize it's zoning laws, but even a liberalized zoning law in a place that's trying to liberalize it's zoning laws still has minimum lot sizes that force builders to make units larger. They don't have a lot of mixed use districts and things that would make it possible for lower income folks to move there.

Beckworth: Yeah. And just to make this really concrete, you state that the average price of a home in Franklin is $550,000 versus $335,000 in Nashville, just to kind of highlight the stark differences.

Demsas: Mm-hmm (affirmative). And officials told me that they only approved 4.9% of proposed single family home developments, but 69% of proposed apartments in 2020. So they're trying to move in the good direction, but you can still, from those numbers you cited, see there's still a vast divide.

Beckworth: Now you go over the history of zoning laws, I want to come back to that, but you provided a nice segue with your point about even Franklin is trying to be a little bit more progressive, and try to open things up. You had another area that you looked at in Connecticut, an article titled, “The Fight Over Housing Segregation is Dividing one of America's Most Liberal States.” Who gets to live in Connecticut? and this to me is really striking. Last year for example, during the Black Lives Matter protests, I saw on Twitter many times front yard signs in places like San Francisco that would have Black Lives Matter on one sign in their yard, the other sign would say, hey don't build any more in my city.

Demsas: Mm-hmm (affirmative).

Beckworth: Don't destroy my neighborhood. And the tension between those two signs couldn't be more stark. So speak to that. What's going on?

Demsas: Yeah. I mean, I think this is one of those things where, A, I think a lot of people don't know that there's a tension between those things. I don't think a lot of people are hyper aware of how zoning policy effects affordability. So there's that aspect of it, and then there's a second aspect of it where there's clear cognitive dissonance here. When you look at these folks who are Democratic voters and Republican voters in local voting, it's not a question of partisanship whether or not they're opposed to development. It's a question of whether or not they're a home owner. That is the bright line. So homeowners are often very opposed to new development in their area. They are protecting, in their minds I think they're protecting an asset because they don't want to have lower property values because as we know, as we talked about, it is the largest asset you'll ever own as a homeowner.

Demsas: So I think it is really striking to see that, as you mentioned, because it is one of the largest things you can do for racial equity is ensure social mobility, ensure economic opportunity for people. And these zoning laws are essentially walls that you're creating around places that have economic opportunity and not only are you hoarding it, you're actually also shrinking the pie at the same time for yourself because that creates stagnation, you don't see new people being able to move in, these cities are dying. We saw last year, California lost population for the first time. It's pricing out middle income folks and only higher income people are able to move there, and that does not create for a dynamic society or progressive society in any sense of the word.

One of the largest things you can do for racial equity is ensure social mobility, ensure economic opportunity for people. And these zoning laws are essentially walls that you're creating around places that have economic opportunity and not only are you hoarding it, you're actually also shrinking the pie at the same time.

Beckworth: Yeah. I want to be charitable to these people I just talked about and assume that they aren't aware of the tension but nonetheless-

Demsas: Some are.

Beckworth: Some are, some are. But some may simply not be aware and put all the pieces of the puzzle together, like oh my goodness, what I'm proposing has this effect on different groups. So some of it is not intentional, but I want to go back in history and walk us through, there was a period where it was very intentional, right? We had these red zones, zoning laws, back 1950s of 1940s. Tell us about that history and how that kind of plays into the current period.

Demsas: Pre-1917, it was not unconstitutional to have explicitly racial zoning ordinances. So, in Louisville, Kentucky there was a zoning ordinance that prohibited a white man from selling his property to a black person if the neighborhood was already majority white. So that was legal until a Supreme Court case, Buchanan v Warley, which said that you couldn't do that anymore. But what ends up happening is that people don't really care about that Supreme Court ruling. You see a lot of extrajudicial violence being used in order to ensure that black Americans and other groups that white Americans found undesirable for property values were not able to live there, and then we saw the formation of these restrictive covenants which actually meant just these kind of contracts between groups of white homeowners where they all promised not to sell to anyone that might “bring down property values” and they were very explicit about the types of people that would be inside of these covenants.

Demsas: In 1948, the Supreme Court deems this practice unconstitutional, but even before then, there's recent research showing that the profit incentives were kind of breaking apart these covenants. If you had someone who was “undesirable”, but they were offering more money, people would often break these covenants anyways and it was not really clear. In some places, sheriffs would enforce them, in other places, sheriffs wouldn't. So, it was a very strange system, but it ended up being very effective in a lot of places. After 1948, you still see a bunch of extrajudicial violence being perpetrated in order to disincentivize individuals from moving in if they were not white Americans. And then I think the biggest point in favor of why you should see these zoning laws as segregation by design is that before Buchanan – the 1917 Supreme Court decision was decided – there were only eight American cities with zoning ordinances. 20 years later there are over 1200 American cities with zoning ordinances.

I think the biggest point in favor of why you should see these zoning laws as segregation by design is that before Buchanan – the 1917 Supreme Court decision was decided – there were only eight American cities with zoning ordinances. 20 years later there are over 1200 American cities with zoning ordinances.

Demsas: And then there is also interesting new research from Alexander Sahn who is at the UC Santa Barbara, that shows that the great migration, he finds causal effect between places that saw an influx of Black residents during the great migration, and the implementation of zoning ordinances that restrict multi family housing. I think that's really interesting research, I think it's been hard to find a causal link for it, so he's someone who's found that. And so it's clear that it's not just property values for a long time that were motivating residents. It was also explicit discrimination against Black Americans and also other groups of people that were considered undesirable.

Demsas: So now you have today where you don't really hear this sort of explicit racial rhetoric anymore. I think sometimes you can if you listen to enough public meetings, like I have, or some people on NIMBY Twitter have, you'll hear things that are very clearly coded language, but most of the time I think if you're being generous, I think there are people are just being classist a lot of the time actually instead, and that these zoning rules are being used to keep out people who people think are poorer, often people don't like the idea of there being homelessness housing. We saw in New York, a bunch of Upper East Siders kind of opposed allowing homeless individuals to be housed in a hotel during COVID. And so, you see a lot of these zoning laws and also the ability for people to veto public action via these meetings or even via lawsuits, and that has had the effect of continuing economic and racial segregation regardless of whether or not you have individuals who are explicitly saying that's their goal.

I think sometimes you can if you listen to enough public meetings, like I have, or some people on NIMBY Twitter have, you'll hear things that are very clearly coded language, but most of the time I think if you're being generous, I think there are people are just being classist a lot of the time...And so, you see a lot of these zoning laws and also the ability for people to veto public action via these meetings or even via lawsuits, and that has had the effect of continuing economic and racial segregation regardless of whether or not you have individuals who are explicitly saying that's their goal.

Beckworth: Yeah. Very fascinating. And wow, I didn't realize they didn't want to put the homeless in the hotels.

Demsas: Yeah.

Beckworth: In New York this past year. Very sad commentary.

Demsas: Yeah.

Beckworth: So one thing I want you to flesh out for us is the consequences for this. This sounds awful, but it's not just a question of being right or wrong, it's a question that it has this long lasting effect. So I think part of the critique or the challenge from Black Lives Matter movements is this wealth disparity between median Black family and median white family, and it hasn't narrowed, if I recall correctly, it's been a while since I've looked through the data, but it's grown over time, and one of the defining, again, features of wealth accumulation for most Americans is their home, as we've been saying repeatedly on this show. So if you kept people out of areas where homes would go up in value and would accumulate wealth and you're going to give them a disadvantage moving forward, and wealth is what you can pass on to your children, you mentioned Chetty's study how well they turn out in many ways. But there's a number of other things that are going on there that contributed to this. So you mentioned the extrajudicial forms of discrimination. Some of your colleagues have written about the interstate highway construction, that also contributed to this as well, didn't it?

Demsas: Yeah. I mean we saw over the 20th century places that ... We saw over the course of the 20th century the federal government and local and state governments wanting to expand the highway system, or build different kinds of transit networks or different kind of public works projects, and what ends up happening is that people who are wealthy are able to lobby against that being in their neighborhood or that cutting through their property, or near areas where they think are already visually desirable or would break up the aesthetics that they prefer, and we know this from social science research that lower income folks and middle income folks are very unlikely to engage in the local political process in that way, and William Fischel's research shows that homeowners become, he coined the term home voter, that you get incentivized because you had this really valuable asset to protect that and you get really engaged in the political process locally because of that.

Demsas: Not everyone, but disproportionately the case and you can look at Katherine Einstein's research as well at Boston University where she and her co authors find that you have disproportionately wealthy homeowners are the ones who speak up at these public meetings. And so I think the effect of this is clear, the case, and you look at that with the highways and these highways end up getting put in lower income neighborhoods, you see this with other public works projects whether it's waste management or other environmentally hazardous things, often these things don't actually cause harm to the communities, sometimes they do, there's obviously a lot of research showing that the harms of living next to some of these kinds of power plants and things like that, but often it's just this might reduce property values, and reflexive opposition to change. And some of it's rational, but some of it's just irrational. Some of it is, I don't like the idea of this metro stop being near me.

Demsas: Georgetown, a wealthy neighborhood in Washington DC, does not have a metro stop, in part because wealthy homeowners in the area did not want to have one because they did not want people coming there from other parts of the city that they viewed as lower income or undesirable or dangerous for whatever reason. Because of that, it's really hard to get to Georgetown sometimes, and there's not much parking over there, so it's really irritating and it causes a lot of problems for people-

Beckworth: That's right.

Demsas: It's a big shopping area too, so I don't know, they might be losing income at these stores because people have a hard time getting over there. So it's very frustrating because this can also frustrate a lot of important public works projects like transit lines.

Beckworth: So one last thing on the history of housing and how it interacts with race and affects racial outcomes, this redlining was something that's been talked about a lot too, historically, the federal government had in place red lines on maps that would prevent certain people from getting mortgages. Tell us about that and how consequential that was.

Demsas: Yeah. I mean, it's obviously bad for the federal government to be saying that areas that are poor and often were neighborhoods that were full of immigrant communities or Black Americans should not be insured and were considered quote unquote risky, too risky. There's a lot of current debate around how influential this was at perpetuating segregation. As often the federal government was actually replicating existing patterns of segregation. It is rightly castigated as bad federal action, but we should be clear here that a lot of this was because of existing discrimination and the federal government was often replicating that. It had massively harmful effects because the federal government had chosen to still ensure and still ensure that Black Americans were able to get homes and get FHA loans, then they would probably have a lot more wealth. But I think it's important to recognize that a lot of it was replicating existing patterns that the mortgage industry was already following, and that was the core of the problem.

Beckworth: Okay, so that's the history, nice kind of big picture view which is in your article. I want to ask this question that's related to that history. I had Salim Furth, my colleague on the show, I think you're familiar with him, and Emily Hamilton, my other colleague who works on these issues, and Salim was talking about how around the '60s and '70s there's this movement towards these wealthier, dominant voices locally that can prevent all kinds of things from happening. And so maybe racism is part of it, but it's not in my backyard in general, right? You don't want people to come in, you want to maintain the look, the feel, the existing things. You mentioned in an article titled, “Why Does it Cost so Much to Build Things in America,” that there was a rise of the citizen voice. So the rise of the citizen voice empowered all these homeowners to put up barriers, and there were laws that were passed, maybe enabled them, but walk us through this rise of the citizens voice and made it harder to build.

Rise of the Citizen Voice

Demsas: Mm-hmm (affirmative). So this is a theory that comes out of work by Leah Brooks who's an economist at George Washington University, and her co-author. Essentially they're studying the highway problem, and if there's a highway cost problem and whether it's risen the cost to build a highway. And they find that states spend nearly three times as much to build a mile of highway in the 1980s as they did in the early '60s. So there's pretty substantial cost increases that she and Zach Liscow find. And her explanation for this because they are able to kind of rule out a lot of the traditional explanations, is that we see a rise in citizen voice, and that's what she calls it, so essentially NEPA, which is the National Environmental Policy Act, which passes in 1970, has led to increased veto power for citizens.

Demsas: There's no evidence that there are more Americans than people in other countries that are opposed to changes or construction in their neighborhood, but what NEPA does is it changes the legal firmament in a way wherein people can sue and delay, delay, delay transportation projects and other projects, anything that gets federal dollars essentially. And Brink Lindsey and Sam Hammond, they look into the NEPA problem and they find that an environmental impact statement, which is required for any project that receives federal funds, used to be as short as ten pages. But litigation has led to the point where the average environmental impact statement runs 1600 pages.

Brink Lindsey and Sam Hammond, they look into the NEPA problem and they find that an environmental impact statement, which is required for any project that receives federal funds, used to be as short as ten pages. But litigation has led to the point where the average environmental impact statement runs 1600 pages.

Beckworth: Wow.

Demsas: So that takes about four and a half years to complete. The big problem with America's cost problem when it comes to highways and transit is the time it takes. The amount of time and the delay means you're paying a bunch of salaries for a long time, it's a huge labor cost, of course you're taking up even hiring people to complete these kinds of projects, whether it's consulting firms or whoever, to complete these things, running these studies. It all takes a ton of time and money. And so there are a bunch of reasons why transit costs so much, but this is a big one.

Beckworth: But this is in the same spirit as some of the NIMBY-ism we see, right? You want to avoid change, avoid building, no new structures near my house, am I correct in saying that?

Demsas: Yeah. I think there's clear parallels in both of these problems, both in housing and in transportation. It is not just the fact that people don't like disruption, people don't like disruption anywhere, but United States for some reason has one of the worst costs of rapid rail transit. Research shows that we are the sixth worst in the world and that's while we're building our transit projects at only 37% tunneled, whereas the other five that are above us are 80% tunneled, and tunneling is the most expensive part of building these transit projects. Without that, we'd likely be the most expensive place to build rapid rail transit, things like the metro and subway, the Chicago L, things like that.

Demsas: So it's not about the fact that people don't like disruption, it's about the fact that we've empowered people who don't like disruption to stop the process. Most places, if you have our peer countries, they have representative governments, and there's some kind of recognition of the fact that they're going to make the decision. In America, we kind of have empowered the small D democratic processes that end up allowing people to stop things that they don't like, regardless of whether the public good is actually served. I think what's important here is that people tend to say, but we talked earlier, you brought up this idea of highways kind of raising through communities and creating problems, and you would think, "Oh, we need to stop that from happening, we need to increase small D democracy." But evidence shows that the average person does not show up to these meetings. The average person is not going to get up and hire a lawyer and sue and do their own economic impact analysis and environmental impact analysis to try to prove that you shouldn't build a highway near their home.

Demsas: These are usually very wealthy individuals and I grew up in the DC area, and the purple line is a quintessential example of this. This is something that's trying to be built in Maryland since before I moved to Maryland when I was three years old. That's over 20 years ago that this is been trying to be built. At one point there was essentially just a small group of wealthy home owners who were claiming that there was some sort of small animal that might be harmed, and after years of looking into this, there's no evidence this animal exists. They give up on this claim, and they move onto other claims.

It's not about the fact that people don't like disruption, it's about the fact that we've empowered people who don't like disruption to stop the process...In America, we kind of have empowered the small D democratic processes that end up allowing people to stop things that they don't like, regardless of whether the public good is actually served.

Demsas: So it's clearly the case that there are instances in which the NEPA process has helped protect the environment, but often it's being used to actually just defend interests that we already have decided in society should not take primacy over the public good. There are places in California, California has it's own version of this called CEQA, and it's been used to oppose housing, solar farms, transit, at one point it was trying to stop these bike lanes in San Francisco because the person wanted to protect a parking lot. So you have an ostensibly environmental regulation protecting a parking lot against bike lanes, and I think that's the sort of thing where there's a real problem in the process if we're allowing that to happen. NEPA reform I think is really hard because people don't like to be seen as opposed to the environment, but I think that it ought to be politically feasible to say we're going to exempt things like solar farms and transit which have a clear environmental benefit from this kind of environmental regulation.

Beckworth: That is so fascinating. So we have enabled both on the housing front and infrastructure front, the ability for people to resist change. Like you said, other people overseas may have the same desires, but here in the US they're just empowered to do it, and the people who are most likely to do it are the ones with means, the ones who can afford to get up and protest. So the system is kind of set up kind of skewed in that manner. So moving forward, what can we do? So you have an article that talks about some proposals for doing things differently, in fact many of your articles that we've gone over already has brought up suggestions in them, but walk us through, should we build more, who does it? Local government? State government? Does the federal government, what can President Biden do? How do we move forward on this problem?

Proposals Moving Forward

Demsas: With transit I think there's a lot we can do in terms of regulation, change, and exempting, as I just mentioned. And also there's a lot of governance issues that need to be changed. When I'm talking to a lot of experts in this space, a lot of what they talk about is just American transit authorities are not empowered to just do the problem, to fix the problem. There are smart people there who are committed to trying to build whatever project is on their plates, but they often don't have the authority to just get the appropriate permits, they're stuck in this kind of legal and regulatory morass and it's just a huge problem for them.

Demsas: One example of this is the Boston Green Line which proposed limiting construction to between 10 PM and 7 AM because people didn't want to disrupt traffic flow during daytime hours, but that takes up much more time and much more costs to stop that from happening. In Istanbul, they allowed transit construction to run 24 hours a day and in seven years they built over 12 miles of subway, the expected duration of the Green Lines was only 4.3 miles, expected length of the subway was only 4.3 miles. So three times as much was built while the Green line built nothing. So I think this is clear that there's a lot going on here in terms of governance. I think it's a really hard problem. I also think it's complicated by the fact that we don't collect enough data when it comes to transit.

Demsas: I think when we look to housing, the answer is much cleaner, equivalently politically difficult. There is unanimity amongst experts, economists, political scientists, everyone, that exclusionary zoning laws, these laws that require parking minimums for apartment buildings that drive up costs, that the setbacks that ensure that a house cannot begin within 20 feet of a sidewalk, that exists in places in Los Angeles. These drive up the cost of these homes. And so local places, it would be great if localities themselves decided to change this, and we've seen some movement in this space as this issue has become more important, especially when we're looking at places in California. But even in Minneapolis and Oregon, in Washington, there's been a lot more effort, but a large majority of people feel that you need to abstract away from the local level to get real change here. That the economic harms are diffuse across an entire state or region, but the political harms are concentrated at the local level, so you cannot expect the incentives to be aligned at the local level for officials to take action.

There is unanimity amongst experts, economists, political scientists, everyone, that exclusionary zoning laws, these laws that require parking minimums for apartment buildings that drive up costs, that the setbacks that ensure that a house cannot begin within 20 feet of a sidewalk, that exists in places in Los Angeles. These drive up the cost of these homes.

Demsas: So in California, there's been a lot of effort at least to have these state wide bills that would require change. A lot of them have been shot down by members of the legislature, but they've been getting more and more progress. Oregon has banned single family zoning state wide. Washington has several bills in the legislature as well. Connecticut as we talked about earlier, they have a small bill that passed legalizing ADUs, even though it does allow towns to vote to opt out, so-

Beckworth: What is an ADU for our listeners who don't know.

Demsas: Oh sure. Sometimes I get too wonky in the weeds here. It's an additional dwelling unit, so that just essentially means, it could be an English basement, it could be converting your garage into an apartment, it could be a mother-in-law suite that you build in your backyard, so basically these small structures, and if you think about it, it's kind of absurd that the government is telling you that you are legally prohibited from allowing someone to live in a small apartment in your backyard. If you want to have your kid, your 23 year old kid wants to move back home from college and you're like hey they're having trouble finding somewhere to live in San Francisco, they're legally prohibited from living in your backyard even though it's your land. So I think part of this stuff is just a very strange conception of property rights in which the neighborhood also has a right over your own property changes as well as their own home. So I think that's a weird part.

Demsas: But essentially I think that this needs to be abstracted away from the local levels because as we talked about earlier, the labor market implications of this, the wage implications of this are widely diffuse over the entire country. I would hope that the federal government would take a larger stab at this problem. There's been some talk from the Biden administration and from Congress that they will try to, within the infrastructure bill, pass a grant program, essentially. The idea is kind of race to the top funding structure where they will have localities basically compete for this five billion dollar pot of money. In order to get it, they have to reduce the barriers to zoning in their locality. It could work, I think it's possible. I wish they would spend more money on this problem, multiple five billion dollar pots trying different things to incentivize localities would be a much better version, but this is what they're doing right now.

Demsas: Amy Klobuchar has suggested that instead of just having this race to the top funding, some of the money should be allocated towards actually helping these kind of mid sized towns figure out how to do a rezoning. This sort of thing is so complicated and so time consuming that often these small towns don't have the capacity to figure it out on their own even though it's causing problems. I'm not really sure how much that will do because it's not really clear to me how difficult it would be to repeal some of these ordinances. But that's what they're considering at the federal level, and of course there's the opportunity for legal action. A lot of this stuff is very clearly, well some of this stuff seems very clearly violative of the fair housing act. There is harm being done to poor individuals because if they cannot move to these places, to these higher opportunity places that have these restrictive zoning laws, and as we know, disproportionately lower income Americans are minorities and those are protected under the Fair Housing Act.

I think that this needs to be abstracted away from the local levels because as we talked about earlier, the labor market implications of this, the wage implications of this are widely diffuse over the entire country. I would hope that the federal government would take a larger stab at this problem.

Demsas: There is a legal standard called the Disparate Impact Standard that says you don't have to just prove that something was explicitly racist or discriminatory against families or people with disabilities to prove that it's unconstitutional, you could also prove that it has a disparate harm on this group. It's not been used to great effect for a long time. So there hasn't been a large body of case law supporting disparate impact, because there are a lot of judges that are kind of hostile to this sort of legal analysis, but my understand is that Biden, Department of Housing and Urban Development under Secretary Fudge is really looking into doing this a lot more. They're pursuing new rules that would allow for this kind of litigation to be brought forth. There are fair housing groups that are gearing up to kind of take on these sorts of lawsuits, but we'll see how effective that will be because this is not something where you kind of think just sue towns into compliance.

Demsas: We have had a long history of trying to sue towns into compliance on equity issues and it's not been super fruitful. There needs to be some sort of required regulatory change, and I think one thing to really remember is localities have no authority that the state does not grant them. The constitution gives authority to states, and it gives authority to the federal government, localities only have authority because states offer them that. So states that you take control of the situation and realize that it's creating massive economic harms for the rest of their population, and eventually their cities will suffer as well if people cannot afford to live there, and you cannot have that kind of dynamism that allows for economic growth if people can't move there, if people who don't already have a ton of money cannot afford to buy property or afford rent. So I think that's the solution moving forward.

Beckworth: Okay. We are near the end of the show, but I want to end with this question, Jerusalem. Are you hopeful for the future on this issue? Can we look forward to seeing the supply of housing continue to grow? It seems like to me, something that's way off in the future, but help me out here. Is the glass half full or half empty?

Demsas: I think it depends where you look in the country. I think that, I have a lot of pessimism right now for places like New York, for places like Los Angeles, where there is the political economy of the area does not seem amenable to these kinds of changes. People have developed an opposition to these arguments along lines that are completely irrational. You have people who are claiming on equity reasons that they're going to down zone, they're going to make it even harder to build affordable housing in these areas, and when you have that kind of argumentation coming out of elected officials, it becomes very unlikely that you're going to see a lot of change. And I think the other thing that's making me a little bit pessimistic is that as we've seen, it becomes a migratory phenomenon. People are leaving California, they're leaving these areas, and they're moving to more affordable locations like Phoenix, and Austin, and Miami.

Demsas: At the state level, it's very unlikely that Republicans are going to take this on, and I think at the local level the problem is even though it's really affordable, these areas, it's very affordable because it's cheap to build out these single family homes out into the suburbs of Austin and Phoenix. These are not places where climate change is going to be especially kind. Phoenix has these 115 degree days sometimes, and it's really only going to get worse in these places and of course building out and keeping, really entrenching single family home infrastructure is terrible for climate change, people who are worried about that. So that's keeping me pessimistic.

Demsas: What's keeping me optimistic is this was not something that people were talking about at the national scale even five years ago. There has been a lot of work done by both YIMBY groups on thing west cost and of course elected officials and thought leaders. Matthew Yglesias' personal vendetta against zoning regulations has been to the effect of making it much more relevant to policy makers in DC, and it's something that the council of economic advisors has put out guidance that they know that this is causing all these problems, they recognize it, and they blame zoning for labor market issues, they blame zoning for lower wages, and so it's clear at this point at least that there is a large recognition of how big of a problem this is. It remains to be seen if the political barriers are too big, but at some point, if no one can live in America's job centers, someone's going to have to do something or it's bad times ahead.

Beckworth: Well on that optimistic note, our time has come to an end. Our guest today has been Jerusalem Demsas. Jerusalem, thank you so much for coming on the show.

Demsas: Thanks for having me.

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