Emily Hamilton on the Current State of the U.S. Housing Market and Solutions for Reform

Emily Hamilton is a senior research fellow and director of the Urbanity Project at the Mercatus Center at George Mason University. Emily’s research focuses on urban economics and land use policy, and she joins Macro Musings to talk about housing in the United States. Specifically, David and Emily discuss many of the issues present within the American housing market, why we should care about rampant housing shortages, and the most effective avenues we can pursue for largescale reform.

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: Emily, welcome to the show.

Emily Hamilton: Hi, David. Thanks so much for having me on.

Beckworth: It's great to have you on. You're one of my colleagues. You're a senior research fellow. It's great to have people like you working at Mercatus, making the world a better place. It's fun to be on board with you and with Salim and the Urbanity Project. I look over from the side. Housing is such an important issue. It overlaps into macroeconomics. I think, arguably, you can make the case that it's one of the key, if not the key, issue in the U.S. economy for social and economic problems, everything from economic growth, inequality, productivity. We're going to touch on all these as we go through our conversation today, but is it fair to say housing is one of the key issues in the U.S. economy?

Hamilton: Certainly. There are some of the most productive places in the country, where wages are very high, there are very high rates of productivity and innovation, but it's very difficult to build new housing in many of these locations, which puts a cap on the number of people who can move to the centers of productivity and limits people from being able to live in the location where their best job opportunities might be located. At the extreme end, we even see that the difficulty of building new housing is contributing to rising homelessness rates and really dire consequences for people who are living in very expensive housing markets on low incomes.

At the extreme end, we even see that the difficulty of building new housing is contributing to rising homelessness rates and really dire consequences for people who are living in very expensive housing markets on low incomes.

Beckworth: Yeah, so it affects a range of issues, everything from homelessness, as you mentioned, but up to how productive we are, because there might be smart people who would otherwise move to San Francisco, for example, but they can't because of housing costs. But if they were able to move, their talents would be matched with other smart people in San Francisco and new innovations would happen, so we're missing out on all of that. We're going to come back later, talk about some economists who've made some estimates of how much we're missing out on.

Beckworth: Let's step back, Emily, and maybe get a big-picture view of the U.S. housing market. Then later in the show, we'll get into work that you're doing, the Urbanity Project is doing, to fix some of these problems to make progress towards a better world. Let's step back. One of the big themes, it seems, from last year and probably going into this year is the U.S. housing market has been hot. It's been on fire. Just maybe give us an overview of some of the indicators that suggest we've had an incredibly hot housing market this past year.

An Overview of the Current U.S. Housing Market

Hamilton: Yeah, that's right. It's different across the country. The hottest markets have, in large part, been in the sunbelt and other locations that have seen a large influx of people who have decided to move because of new opportunities to work remotely, perhaps, or because people are increasingly wanting more space at home as they've been spending more time at home during the pandemic. So we've seen particularly crazy price increases in certain locations, but prices are up all across the country. The median house price across the country as a whole is now over $400,000, which is a big increase over a few years ago. And the availability of housing that's on the market for sale is way down. It just recently hit a new low of under 300,000 listings.

Beckworth: What would be normal? Pre-pandemic, how many homes would we need to be on the market to meet demand?

Hamilton: Over a million was the pre-pandemic rate.

Beckworth: Okay. Wow.

Hamilton: That was what we were seeing. But I would argue that even that was not "high enough." There are various estimates of how many units of housing the country is short of as a whole, and those range from about four million to about seven million houses, are the range of estimates that the country is short of.

Beckworth: That's staggering, three to seven million homes shortfall, so that's a lot of families. You multiply that times average households, that's a lot of people. It's not a trivial number. Then the other thing you just mentioned is also interesting. Even though we are way below... We had over a million. We're now around, what did you say, 300,000? So huge shortfall, 700,000 plus. Even that million number was actually a declining number, so we had problems before we came into the pandemic. Maybe later we can talk about how the pandemic has made things worse for housing.

Beckworth: The key takeaway is, housing stock is low relative to demand. We're not keeping up with it. Prices are up. I live here in Nashville. I have since the pandemic has started. I've seen my home value go up dramatically, and I live on the outskirts. It's pretty surprising how much our home has gone up. So huge deficit in the stock of homes. Something else I remember talking to Jerusalem Demsas on the show about when she came on, she mentioned that homes are being sold really quickly, that homes will go on the market and many people will buy them without even seeing them, so the inventory goes really quick. Is that right?

Hamilton: That's right. Yeah. Right now, about a third of listings that come onto the market are going under contract almost immediately.

Beckworth: That's amazing. So people are willing to take the risk, move right in without checking anything. Maybe I should sell my house, Emily, with all its defects.

Hamilton: But then where will you live?

Beckworth: This is a good point. This is a good point. I think I'll stay put for the time being. Okay, so we have a shortage. Are we at all making any progress on building more homes? Is there any hope there, or are we still behind on that count too?

Hamilton: Well, relative to the nadir shortly after the beginning of the pandemic, housing starts are picking up. Some of the supply chain issues and very high lumber prices that have been a challenge to home building throughout the pandemic are easing a little bit, so we are seeing things turning around somewhat. But I don't see any indications that home building is going to reach the level that it was at a few decades ago, when the country as a whole was seeing much more home building per capita relative to what we're seeing now.

Beckworth: Okay. This segues nicely into another observation that I've seen made. When I was preparing for the show, I saw this in the data. In fact, you provided me a nice chart on housing starts. Even with what we do have, which again is well below what's needed, there is a focus on single-family units, so we don't have a nice mix. You provided this chart that shows historically there was a bigger mix between single-family housing and multifamily housing. Maybe talk through that a little bit.

Hamilton: Yeah, that's right. On the whole, we've seen a big decline in, particularly, what's often referred to as missing middle housing. That's housing that has between two to four units per building, so duplexes, triplexes, fourplexes, that were an important source of housing for middle-income families in the world prior to zoning. Those have really fallen off as it's gotten more difficult to build that type of relatively small project, and the share of detached single-family houses has increased as a portion of the total housing that gets built. But then, also, looking at the amount of housing that gets built in total right now, that's at about four units per 100 people is being permitted across the country as a whole. But if we look back at the '60s, '70s, and '80s, that rate was commonly around seven units per 100 people.

On the whole, we've seen a big decline in, particularly, what's often referred to as missing middle housing. That's housing that has between two to four units per building, so duplexes, triplexes, fourplexes, that were an important source of housing for middle-income families in the world prior to zoning.

Beckworth: So we've come down quite a bit. The amount of housing per 100 people has declined a lot, and the mix has changed as well. Just to reiterate this point you made, people who are just getting into the housing market, it's tough, right? If they don't have this middle housing, low entry level housing segment, then it's really challenging if you're a young couple, if you're just a young person trying to find a home. So what do you think they are doing? If they can't find a home that's affordable because everything's really large or expensive, what are they doing? What's the substitute?

Hamilton: Perhaps renting for longer than people did in the past before moving into home ownership. We see an increasing share of young adults living with family members relative to what we saw a couple of decades ago, and pursuing arrangements like living with roommates perhaps, which might be a good or a bad thing. But it's a reflection of people not having access to as much housing as the country previously had available, particularly at the relatively low-cost end of the market.

Beckworth: Okay. Now, one of the big stories over the past year... We had hot prices, demand for housing went up, but one of the stories that ties into what happened over the last two years, I guess, since the pandemic started, is this work-from-home phenomenon where people had to work from home. As a result, the narrative is that people moved to the suburbs or moved away from busy city life, where they could have more space. If you can't go out because there's lockdowns, they used to have a big yard or a park nearby, so they moved to the suburbs. And there's been some people who've argued, you've seen some pricing effects based on migration patterns, but is that the whole story? Is there more going on? Is there something to this work-from-home phenomenon in terms of affecting housing markets?

Pandemic Migration and the Work-from-Home Phenomenon

Hamilton: Well, I think it's hard to say what the ultimate effect of increased work from home will be on housing markets in the longer run, but it's certainly true that there has been a bigger change in house prices in some of the areas that we think of as particularly desirable work-from-home locations. The suburbs have generally gotten more expensive relative to center cities, compared to what the ratio may have been previously. Some locations that are really desirable work-from-home locations, like sunbelt cities, that might be highly desirable for their weather, or vacation cities, like ski towns, have gotten really, really expensive-

Beckworth: That's interesting.

Hamilton: ... and seen just incredible price growth during the pandemic. But prices are up everywhere, or nearly everywhere. Just they're up more in some places than others.

Beckworth: Well, I wonder if this will be maybe a silver lining in this housing conversation, this housing debate, in the following sense. If work from home is now a big thing, maybe the pandemic was the shock that forced firms into realizing many of their employees don't have to be in the office or they can work from home, and therefore people move to places where the supply of housing is more elastic or they can build easier. So maybe some of the pressures, in the aggregate, are eased. Now, again, some of this evidence that we've seen says prices are going up in those sunbelt areas, those ski resort areas you just mentioned; but I wonder if, in the aggregate, prices might come down as people move to places that are more affordable. I don't know. What do you think?

Hamilton: Yeah, I think it's possible that increased work from home could be a good thing for housing affordability for the country as a whole. It could reduce the number of people who are paying an amount that's uncomfortable for them for rent or a mortgage because they previously had to live in New York City or San Francisco, but now they have the opportunity to spend less on housing or to get more for their dollar by moving to Texas or where have you.

I think it's hard to say what the ultimate effect of increased work from home will be on housing markets in the longer run, but it's certainly true that there has been a bigger change in house prices in some of the areas that we think of as particularly desirable work-from-home locations.

Beckworth: Yeah. I think this will be an interesting phenomenon to watch as we go forward and over the next decade. Probably lots of papers will be written. This will be a great natural experiment, as they say, in the literature. Did this meaningfully and significantly change productivity and just improve the overall quality of life? If we can be severed from the office and we can live in a nicer place, so be it. Now, I'll say there's a flip side to that, Emily, because since February 2020, as I said, I've been working from my home in Nashville. Listeners of the show know I was commuting to D.C. two weeks a month prior to that. And while it's been great to be at home, it also can be a little bit like cabin fever. I kind of missed the office environment. I wanted to at least get out a few days a week. That'd be nice, I think, in the ideal world.

Beckworth: I think I've seen some research where they looked at people, they surveyed folks, and they say… many of them don't want to work the whole week at home, maybe three days at home, two days in the office, or something along those lines. I'm sure the dust will settle somewhere, and we'll find out what the true outcome is. But it'll be interesting to see this development as it affects housing, in particular, going forward. Now, something else that's been a part of the conversation around housing this past year has been the corporate buyers of housing stock. I think the term people use is iBuyers. Is that right? Do you call them iBuyers?

The Rise of iBuying

Hamilton: Yeah, it's called iBuying when companies like Zillow or Redfin use the big data that they have on the housing stock and house prices to try to get good deals and identify listings that are underpriced relative to what these companies think the houses are worth or could be worth with some repairs done to them.

Beckworth: Is that a growing segment of the market?

Hamilton: Well, I believe it's down a bit from its height, but it had been growing until recently. But it peaked at about 1% of total sales, so it's never been a large portion of sales at all.

Beckworth: I know some people are worried about the corporate takeover of housing, but really it's a false alarm, is what you're saying.

Hamilton: Certainly, iBuying has not been a big factor in rising house prices, given its small share. In general, investor purchases of single-family houses are a relatively small share of all sales. They're about 20% of all sales that are houses that an individual isn't purchasing in order to make that their primary house. So that 20% could include second homes. It could include a mom and pop landlord, iBuying, or a Wall Street firm making those purchases.

Beckworth: Was it BlackRock, the Wall Street firm, that was starting to buy housing and people got scared? "Oh no. Wall Street is going to become this evil landlord, and we're going to go back to the feudal days where we were servants to our landlords." I guess my question, Emily, is this. Even if it were the case that BlackRock and these iBuyers, Zillow, Redfin, Offerpad, Opendoor, even if they do become, let's say, 10% of the market, that's not necessarily a bad thing, right? They might be actually bringing efficiency to the market. They might lead to some good changes too. We shouldn't necessarily fear a bigger footprint from these iBuyers, correct?

In general, investor purchases of single-family houses are a relatively small share of all sales. They're about 20% of all sales that are houses that an individual isn't purchasing in order to make that their primary house.

Hamilton: Yeah. Well, I think there's potential for them to introduce efficiencies in house flipping, particularly, finding houses that need some serious repairs before they would be habitable, that a typical home buyer just isn't going to want to deal with that, or might not even be able to get financing or have the knowhow to make these types of repairs in a cost-effective way. But if Redfin can come in and say, "Oh, this house needs $50,000 worth of work to make a good, livable house for someone. We can that at $30,000," then that could be an efficiency that's a win-win for those companies and home buyers, potentially.

Beckworth: Okay, let me ask you a question that's more personal in nature. When I'm selling my house, is it wise to look at Zillow and Redfin, look at their estimates of how much the market value... Because if you talk to a realtor, they're like, "Oh, that's all garbage." But what if I took the average of all these online databases? Do you think that's anything value there for someone like me, a retail person looking at prices?

Hamilton: Well, I think that it would certainly be a wise starting place. Sometimes there are concerns that people who may have lived in a location for a really long time, particularly, say, an elderly homeowner who has lived somewhere for many years and hasn't been tracking house prices closely, they might be willing to sell to whoever, an iBuyer or any sort of buyer, for a price that's much lower than what someone else might be willing to pay for their house. So I think it's certainly wise for a home seller to take a look at those numbers and get a feel for what some software company thinks their house is worth, as a starting point before deciding to make any sale.

Beckworth: Okay. All right. I will take that advice to heart. All right, so we've been talking about a housing market where there's a shortfall, up to seven million based on one estimate, maybe as low as four, but a significant shortfall. And it's not only a shortfall in absolute numbers, but the composition of the shortfall is also troubling because it's hard for entry-level homes to be found. Therefore, people who are starting out their careers, maybe they're moving from a low-income community or an underprivileged community, it's hard for them to break into nicer housing and climb that ladder. So there's this challenge. One question, of course, is why has it happened? Why has it come to this? Why do we have this shortfall in U.S. housing stock? I think I know the answer, and that is single-family zoning laws. Tell us about them, the history. How did we get to this place where they seem to be so dominant?

I think it's certainly wise for a home seller to take a look at those numbers and get a feel for what some software company thinks their house is worth, as a starting point before deciding to make any sale.

The U.S. Housing Shortfall and Problematic Zoning Laws

Hamilton: That's right. A little over 100 years ago, cities began implementing zoning rules for the first time in U.S. history. These rules include, as you mentioned, single-family-exclusive zoning, which means that on a lot in a given locality, the only thing that can be built there is a detached house for one family, as opposed to something that would allow for people to economize on land to a greater extent, whether that's a duplex or a large apartment building, that could be anything denser than a detached single-family house.

Hamilton: There are also all kinds of restrictions on what can be built beyond just that broad-use zoning designation. There are often height limits, setback requirements that limit how close a house can be to its lot lines. Minimum-lot-size requirements are a really important one, which governs how large of a yard each house has to sit on. When you have a requirement for a large piece of land for a house, and many times it's not going to make sense to build a low-cost house on that piece of land, so a minimum-lot-size requirement is generally driving up the cost, not only of the amount of land that someone has to purchase in order to buy a house, but also the cost of the house that's going to go on that land as well.

Hamilton: Roughly 100 years ago, these zoning regulations began taking off across U.S. cities, and then in the 1970s, a new trend emerged, particularly in California, and particularly in the Bay Area, that introduced things like environmental review, design review that requires new housing to meet specific aesthetic requirements, and all kinds of subjectivity in the housing approval process, which, as I said, started in California, but has now spread to many places. It's increasing the cost of building housing as well as introducing cost to the housing approval process, as well as delay and risk, that all just compound to make it much more difficult to build housing of any type relative to what used to be the case.

Beckworth: Yeah. I remember when Salim first came on the show, he brought a chart, or he had a chart in one of his papers, that showed the amount of housing stock, I believe, in Los Angeles in the 1960s relative to the population. It was much, much greater than the population. But over time, it shrunk, so that what happened is the supply of housing was just barely keeping up with population growth, whereas in the early '60s, there was this huge gap, there was this surplus stock of housing, which ties in nicely to this story about San Francisco.

Beckworth: Let's go back to their earlier part, though, to 1916. There's this AEI paper that we'll provide a link to. We'll come back to it later, actually, talking about your work. But they have this 100-year history. Am I being fair and characterizing some of the earlier motivations being more about keeping out certain types of people from housing? I was familiar with the redlining story after World War II, but it goes before then. It was interesting to read in this AEI book that you're a part of, is in 1916, in New York, I guess is when this first starts, and the original motivation was to separate garment factory workers from department stores in order to discourage largely immigrant factory workers from spending time near the stores. I was surprised, but also found that to be consistent with the redlining motivations later, which is distinct from the 1970s story. Is that right?

Hamilton: Yes, that's right. Zoning certainly emerged as a way to separate people from each other as much as a way to separate uses. In the New York City case, which had the country's first zoning ordinance that looked somewhat like what we would consider a zoning ordinance today, the Fifth Avenue Commission was an organization made up primarily of owners of fancy department stores on Fifth Avenue who wanted to keep that area very exclusive, a place that they wanted to be appealing to their very high-income shoppers. Their big concern and their big motivation for wanting zoning was that garment manufacturing firms kept moving closer and closer to their department stores because they wanted to be in a location where they could see what's going on with the trends, what types of clothing people are wanting to buy, as well as being close to their department store customers.

Hamilton: But the Fifth Avenue Commission thought that, "Well, if we could have zoning that would separate where you can have a department store from where you can have a factory, we can keep these low-income immigrant workers out of our fancy shopping district by just making it simply too far away to be convenient for them to go there." In cities across the country, particularly in southern cities, following the Supreme Court decision of Buchanan v. Warley that made zoning by race explicitly illegal, some cities began using things like minimum-lot-size requirements or single-family zoning as a tool for segregating people by race indirectly, by segregating them by house price directly.

Beckworth: So they found workarounds to the Supreme Court ruling to still separate people. But to be clear, maybe I overgeneralized when I brought this up, there is a place for some zoning, right? You don't want to have a big industrial park maybe right next to residential. You maybe want some distance. But it's been abused, is the key story here. It's been abused for other reasons. Emily, one of the things this speaks to is that some people explicitly used zoning for these motives of keeping people separate, but I think many Americans just aren't aware of it or see it in this collective action perspective, this externality that it's creating. People care about their homes. They want them to be in a nice neighborhood. They're not thinking about the bigger picture here and what it does and causes. I mentioned at the start of the show, housing is a huge, huge deal, but I suspect many Americans don't see how it is, and how their choices made in their communities is a part of that.

Zoning certainly emerged as a way to separate people from each other as much as a way to separate uses...In cities across the country, particularly in southern cities, following the Supreme Court decision of Buchanan v. Warley that made zoning by race explicitly illegal, some cities began using things like minimum-lot-size requirements or single-family zoning as a tool for segregating people by race indirectly, by segregating them by house price directly.

Beckworth: Just to give an example of this, and I brought this up with Jerusalem when we had her on, I remember seeing a picture from San Francisco in some neighborhood there the summer of 2020, Black Lives Matter protests were going on, and one sign in the yard had BLM and the other sign in the yard was “No New Buildings! Keep the Beauty of Our Neighborhoods!” The lack of discernment that these two signs... They're really at tension with each other. I suspect the people didn't realize what the message implied in terms of housing when they said that. I guess my question is this. Do you get this sense, too, that maybe many people just don't wrestle with or see the broader implications of their preferences for keeping their neighborhood a certain way or a certain style?

Hamilton: Yes, I think that's, in very large part, the case. There's a reason that the opponents of new housing construction are generally called NIMBYs, Not In My Back Yard. It's not that people oppose housing or low-cost housing in general; they just don't want it to be built in a location that's near them, where it might increase traffic on their street or make it more difficult to park, or there might be more construction noise, or any number of reasons that people have for wanting their neighborhood not to change. But when that's repeated in neighborhood after neighborhood, in region after region, it's led to the problem we have today, where there's an overall shortage of housing that's affecting many of our country's housing markets.

Beckworth: In your experience working on this issue, when you've encountered NIMBYs, Not in My Back Yard people, and let's say you make the case and assume that they understand it, so I'm sure you've had scenarios where you said, "Look, here's what this actually means for the rest of the country," when light bulbs go on like, "Oh, wow, hadn't thought about it that way," do they change their tone? Have you seen NIMBYs become, I guess what's called YIMBYs, or the Yes, In My Back Yard. Is there a big conversion, or is there still resistance that goes on?

Hamilton: Well, I'd say the proportion of YIMBYs is definitely increasing as this issue is getting more media attention, and housing affordability as a problem is something that more and more people are becoming aware of. I think as people are seeing issues that might affect them personally, even if they own their own house and live in it very comfortably, people might be seeing, for example, their kids, their adult children are struggling to afford housing in the location where they grew up, or people who they know are renters and are having a really hard time finding someplace where they're comfortable living at a price they can afford. I think there's certainly growing awareness of the problems of exclusionary zoning being a factor in housing construction in more and more places.

Beckworth: You're fighting the good fight, getting the message out, changing hearts and minds one at a time.

Hamilton: Hopefully.

Beckworth: Yes. While I'm up here in the clouds talking macroeconomic policy, you're on the ground actually making people's lives better with more affordable housing. Okay, one other question related to this, then we'll move on to the implications and what needs to be done. Our colleague Kevin Erdmann, he had a book where he argued, and a series of articles, where he argues that the Great Recession, 2007, 2009, and then the housing decline that really started in 2006, is often misinterpreted. He argued that the consensus back then was it was a housing bubble, excess building; there's froth. And he argued, well, actually it was fundamentals. That surge in housing was tied to the fact that you couldn't build in places like New York and San Francisco, so people raced to Las Vegas or towns in Florida. In one sense, it was a fundamentals story; it wasn't a bubble story. When he originally wrote that, that wasn't a very widely held view, but is it your sense that that view is now more widely accepted?

Hamilton: Yes, I think so. As we have a little bit of distance from the Great Recession and the housing bust, I think more and more people are acknowledging that there was never a time in the 2000s when too much housing was being built in the country as a whole.

I'd say the proportion of YIMBYs is definitely increasing as this issue is getting more media attention, and housing affordability as a problem is something that more and more people are becoming aware of.

Beckworth: Okay. One other question. I said that was the last one before we moved on, but one other question on this front. This is more a question of the international story. I know we're focusing on the U.S., but if you have any thoughts, I'd love to hear. What's interesting about this is this seems to be a problem among many advanced economies, not just the U.S. Housing prices are going up everywhere. You look to Europe. They've got denser cities, so they have some of what we would aim for with multifamily housing. Does this reflect maybe just a quirk of human nature? Is NIMBYism a problem over there, overseas, as well? Why do you think they are experiencing similar patterns in housing that we see in the U.S.?

Hamilton: Well, it's certainly true within the Anglosphere that we see lots of similar types of restrictions on how much housing can be built and what type of housing can be built. We see similar challenges in the UK, Canada, South Africa, to take another example, where incomes are much lower, but the type of housing that can be built is similar to what U.S. or UK, U.S. particularly, zoning rules would make feasible. Within those countries, there are very similar problems across all of them.

Beckworth: Well, that's interesting. It's something that many advanced economies are going to have to wrestle with. We're focusing here on the U.S., but something that we'll see. I just bring that up because our other colleague, Scott Sumner, he's the one who really found Kevin's writing and brought him on board to Mercatus and promoted his work. But Scott Sumner had a recent post where he goes back and looks at how, during this housing boom period, early to mid-2000s, many people, including myself, I'll say I'm guilty here, were saying housing bubble. He made a point, "Well, we don't know that yet. Maybe there's some fundamental story behind it."

Beckworth: He criticized The Economist magazine on his blog. The Economist magazine actually wrote that "Sumner was wrong," Scott was wrong, and now The Economist magazine has flipped completely and they're like, "Yes, all across the world, there's a shortage of housing." It's interesting to see this, maybe, awakening taking place that there's big structural problems in advanced economies in terms of the stock of housing. Okay, let's move on now to the next part of that, which is why we should care about this? We've already touched on it some, some of the implications, but why should we care that the housing shortage is so pronounced in the U.S.?

Why Should We Care About the U.S. Housing Shortage?

Hamilton: Well, one of the big reasons is that if there aren't enough houses to accommodate everyone who wants to live in, say, New York City or the New York City region, that means that people are going to have to make tough choices about not being able to pursue, say, their dream job, or just the city that they want to live in for whatever their own individual reasons may be, yet they can't afford housing there, or they could only afford a teeny-tiny apartment there and they have a whole family. So they have to make unpleasant choices about, "No, we're going to live where our fifth or sixth-best job opportunities are located, but where we can afford housing."

Hamilton: Then, of course, things are even more difficult for low-income people who live in high-cost regions. About half of renters in the country as a whole are rent burdened, which means they spend more than 30% of their total income on rent. That's the federal government's definition of rent burdened. And that number is much, much higher if we're talking about, say, a Los Angeles or a New York City, where median incomes are not particularly high, but housing costs are sky high. So low-income people in those locations are generally living in very cramped, unpleasant housing, and struggling to pay the cost of doing so.

About half of renters in the country as a whole are rent burdened, which means they spend more than 30% of their total income on rent...And that number is much, much higher if we're talking about, say, a Los Angeles or a New York City, where median incomes are not particularly high, but housing costs are sky high. So low-income people in those locations are generally living in very cramped, unpleasant housing, and struggling to pay the cost of doing so.

Beckworth: Emily, I want to go back to that first point you raised about productivity, being able to work in a city that fits your talents and would make you more productive, and ultimately what that means for economic growth. This is Macro Musings after all. There is a well-known economist named Enrico Moretti. He and some co-authors have written several papers, one well-known paper, where he argues that inability for talent to match onto cities where they'd be most productive had a huge cost on GDP. How much GDP have we lost, according to his work, because of these housing constraints?

Hamilton: They estimate that GDP would be about 9% larger today if the most productive cities reduced their land use restrictions down to a level of restriction that would match the median American city. That would increase U.S. GDP by about 9%. That's a staggering number. There are a range of estimates about how much land use restrictions in the U.S. are constraining economic growth and economic productivity, but all of them are staggering about the amount of economic growth and wealth that is lost to people simply not being able to live in the places where they could be most productive.

Beckworth: This goes back to the point I was trying to make earlier, that people are aren't aware of this because they don't see it. It's GDP growth that we didn't have, and so it's hard to do that counterfactual. "Man, I could be this much richer, have this much easier of a life, had these zoning restrictions been different," so doing the right counterfactual. But it does affect people in a meaningful way. You mentioned wealth. Household wealth for many Americans is driven by their homes. I was looking up some numbers before we did the show. The Urban Institute has this great report on housing finance. I'm going to throw some numbers out here. This is housing value and mortgage debt. Total housing wealth, they estimate, and this is at the end of last year, 2021, $39.2 trillion. Mortgage debt of $12.3 trillion. So equity or net worth in homes, $26.9 trillion. Quite a bit. Huge amount.

Beckworth: What's interesting, though, is if you break it down, look at home values by race, huge differences. This goes back to the redlining story, the use of zoning restrictions to keep people out of communities. It's had a huge bearing on wealth accumulation over time. Just a quick few numbers here to put this in perspective. This is from the Survey of Consumer Finances from the Federal Reserve. They have data on this. This is for 2019, I believe the last year this survey has come out. Every three years, I believe, is when it's released. So from 2019, they say a typical median white family owned about $184,000 in family wealth. Now, that could be more than housing, but for many Americans, a large part of that is housing. A typical black family, median, again, $23,000. Typical Hispanic family, $38,000. If you look at averages, the numbers are even much larger and much more disparate.

GDP would be about 9% larger today if the most productive cities reduced their land use restrictions down to a level of restriction that would match the median American city. That would increase U.S. GDP by about 9%. That's a staggering number.

Beckworth: It's consequential, right? Because if you're from a community that doesn't have a lot of housing wealth... Let's say maybe you're not even mindful of, "Oh, I'm building wealth for my family for future generations." Maybe you just want to move to a nicer community because there's better schools, more resources there. It can be hard to move into a community that has better schools, that would also have affordable housing, entry-level housing, because nice schools are going to have big homes, big lots, all these zoning restrictions you've alluded to. So it perpetuates, I guess, this gap between whites and blacks and different groups in terms of housing wealth.

Hamilton: Certainly, yes. As we discussed, these land use restrictions, in many cases, started out as a tool for segregation, and they're still having those effects today, even if that's not their explicit purpose at all, by making it more expensive for people who come from families that haven't had a history with home ownership and housing wealth to enter the home ownership market, particularly in the highest-cost parts of the country.

Beckworth: Another implication or consequence of this housing shortfall, at least I think it is, and correct me if I'm wrong, is homelessness. That's been in the news a lot lately. We've seen homelessness, for example, in San Francisco. In many big cities where it's expensive to live, you see a lot of homeless people, even in D.C. We work in Arlington, you take an Uber to get across the river to go do some meeting in D.C., and you see these encampments along the way. Is there a connection between homelessness and the high cost of living in some of these cities?

Hamilton: Yes. There's research showing that as median rents exceed 30% of median income for a region, homelessness rates begin increasing. We see that the highest poverty parts of the country are not the places where homelessness rates are particularly high; it's the most constrained housing markets in the country where homelessness rates are high and rising.

These land use restrictions, in many cases, started out as a tool for segregation, and they're still having those effects today, even if that's not their explicit purpose at all, by making it more expensive for people who come from families that haven't had a history with home ownership and housing wealth to enter the home ownership market.

Beckworth: Matt Yglesias had a recent article on his Substack newsletter that talked about homelessness in Europe. He noted that oftentimes you travel to Europe, you don't see homelessness. But he went and looked at the data, and there actually is homelessness there, just as much as they have here. You see again this similar phenomenon. You've got a shortfall of housing stock relative to demand here, over there as well. Home prices are up, and you also have homelessness up. He said the difference between Europe, though, and the U.S. is how they deal with homelessness. They spend a lot more cleaning up camps, getting them out of sight, getting them away from downtown tourist areas. But you're seeing this same pattern emerge in other places, not just in the U.S.

Beckworth: One last thing about the consequences of this, Emily. I wanted to hear your thoughts on this. Population growth in the U.S. is down. It's been going down. For me, I think it's one of the most troubling or concerning things about long-run growth in the U.S. We don't have enough immigrants, enough children being created in this country. Last year, the number just came out, 0.1% growth, which is the lowest it's ever been in terms of the data we keep for the country. I wonder to what extent do you think the inability for young couples to move into entry-level homes or move to jobs that would pay well, do you think there's any link there that some of the decline, not all, but some of the decline in fertility rates, in particular, is tied to housing?

Hamilton: Yes. There is some research from Daniel Shoag and Lauren Russell on this topic, and they find that locations with more restrictive zoning is causing a decline in fertility, and that this is particularly true of women in their 20s. That's the time period of life when we see that restrictive zoning and the high housing costs that flow from that. They're having fewer babies in their 20s. In these markets where zoning is restrictive and housing costs are high, women are having more children later in life, which makes a lot of sense. In a place where housing is very expensive, it takes people a longer time to get to a point where they feel financially comfortable enough to start having children. But as we see this shift toward women having children later in life, there are also fewer babies being born in total.

There's research showing that as median rents exceed 30% of median income for a region, homelessness rates begin increasing. We see that the highest poverty parts of the country are not the places where homelessness rates are particularly high; it's the most constrained housing markets in the country where homelessness rates are high and rising.

Beckworth: Once again, housing has its hands in many of our economic problems all around the country, and this one is consequential. Again, there's other fixes we could have, more pro-natal policies. We could have more immigration. There's other ways to get around this. But to the extent it is affecting the population growth, it's hugely consequential long term down the road. We've had this discussion before. It's not just having enough workers. It's having brains and ideas and creativity. The wellspring of growth is having more people who can be creative and do what they do best, and that's solve problems of scarcity.

Beckworth: Yeah, this is, I think, an all-encompassing problem that's tied to many of the issues we face as a country, and advanced economies in general as well. So let's talk about ways to address it. You've been very busy here again, I mentioned earlier, fighting the good fight. You're changing hearts and minds across America. You were a part of a book. I alluded to it earlier. I didn't give its name. The name of the book was *A Series of Policy Briefs on Zoning, Land Use, and a Solution to the Nation's Housing Shortage.* It's an AEI book, and you're one of the authors in it, I think chapter four. You had a chapter on accessory dwelling units as part of the light-touch density reform opportunities. Before you explain what accessory dwelling units is part of the solution, what does light-touch density reform mean?

Solutions for Housing Reform

Hamilton: We define light-touch density to include small-lot single-family houses, so houses that are sitting on a yard of 2,500 square feet or less, single-family houses that have an accessory dwelling unit. An accessory dwelling unit can be something like a backyard cottage or a garage apartment or a basement apartment, that's a small part of someone's house that they're able to either rent out to a tenant or provide for a family member, or what have you. Light-touch density also includes duplexes, triplexes, and fourplexes, as well as attached single-family houses. It's everything that's in between a standard detached single-family house on its own lot, up to a larger apartment building with five or more units. Light-touch density is where we've really seen sharp decline in terms of this type of housing share of the housing stock as a whole. It's also a type of housing that's proved to be politically palatable in some cases that are suffering from NIMBYism in general and land use restrictions causing high housing prices.

Beckworth: That's interesting. Maybe it's not surprising, but people are more willing to tolerate you building an apartment in your garage or in your backyard, as opposed to building a multifamily complex next door with many apartments. So it's a good first step is what you're saying. Walk us through what you recommend be done. You list, I think, a number of states that have tried different things along these lines. Maybe you could walk us through those as well.

Hamilton: Yeah, it's been a big deal on the West Coast, in particular, so far. California, Oregon, and Washington all have state laws that have been intended to make it easier for homeowners to build accessory dwelling units, or in Oregon's case, that have preempted single-family-exclusive zoning across much of the state, making it legal to build between two and four units on each lot that was previously zoned exclusively for a single-family house. In California, Los Angeles, in particular, has seen a big increase in accessory dwelling unit permitting and construction, with accessory dwelling units actually becoming a very large share of the total permits that the city is issuing for housing of any type. Now, I would argue that's good and bad. It's wonderful that accessory dwelling units are taking off as a housing option in Los Angeles, but it's also a reflection that Los Angeles is making it really difficult to build more typical types of housing, whether that's big apartment buildings or new neighborhoods of detached single-family houses or townhouses.

Beckworth: These are reforms being legislated at the state level? Is that right?

Hamilton: In general, yes, that's where we've seen a lot of action on accessory dwelling units, and in the case of Oregon, the requirement that localities permit two to four units in many cases. But they are working best, these state-level reforms, in places where local policymakers are on board in spirit and are attempting to make this type of construction feasible in line with the spirit of state law.

It's wonderful that accessory dwelling units are taking off as a housing option in Los Angeles, but it's also a reflection that Los Angeles is making it really difficult to build more typical types of housing, whether that's big apartment buildings or new neighborhoods of detached single-family houses or townhouses.

Beckworth: The ADUs in Los Angeles, was that a local decision that was made, or was that driven more by the state?

Hamilton: I would say it was driven by the state, but the local policymakers have made, for example, the permitting process fairly straightforward and appealing to Los Angeles homeowners, whereas other cities that have policymakers who are not as on board with the state law can continue to, for example, have delays in accessory dwelling unit permitting, or require review processes that might turn off homeowners who don't want to risk their time and money in a process that seems risky.

Beckworth: Even if the state does change the laws for zoning, how it actually gets implemented can be determined by local authorities on the ground in areas. So the battle is a multi-fronted battle. You've got to address state and local governments as well. Let's move on to another area of reform you've written about, and that's transit-oriented zoning reform. Talk us through that.

Hamilton: Yeah. 10 years or so ago, when I first started getting interested in housing policy, there was a big focus on planning for transit-oriented development, so making it legal to build large, dense multifamily housing, as well as large office buildings, in locations that are well-served by transit, whether that's metro lines or bus routes or light rail, or what have you. There was a big focus on making it legal to build lots of housing in these relatively small areas while generally maintaining the status quo in the larger portion of a locality's land that was developed as lower-density residential or office or commercial development, what have you.

Hamilton: That's changed. Today, the focus is much more on that light-touch density approach that we were talking about earlier, which is good and bad, I would say. We've talked about the legacy of racism that single-family-exclusive zoning is a part of, so it's a very positive development that residents and policymakers are focusing on trying to reverse that to some extent, by eliminating single-family zoning. But on the other hand, the process of building accessory dwelling units or replacing detached single-family houses with duplexes is a very, very slow process that will take decades to bring about substantial increases in the stock of housing. Whereas we've seen that places that have embraced transit-oriented development, Arlington, Virginia, being one example, where Mercatus is located, have seen it be possible to deliver very large numbers of housing units and large apartment buildings in a process that doesn't take nearly as long as permitting one duplex at a time.

So it's a very positive development that residents and policymakers are focusing on trying to reverse that to some extent, by eliminating single-family zoning. But on the other hand, the process of building accessory dwelling units or replacing detached single-family houses with duplexes is a very, very slow process that will take decades to bring about substantial increases in the stock of housing.

Beckworth: Yeah, I was thinking of Ballston, Virginia. As I mentioned earlier on the show, I used to commute two weeks a month up there. I'd stay in a hotel. It was business. I'd be home on the weekends. But I'd go for runs in the morning, and right near my hotel there's these typical single-unit homes, and they cost a small fortune, easily a million dollars, and they're not that big. But then you run a few blocks down near the Metro station, these high-rise apartments, condos, that new mall they've refurbished down there, so very dense living, which is exactly what you just described. Now, are you saying that that isn't as widely used now or needs to be used more? What's its status?

Hamilton: Well, I would just say that the focus has shifted from making it feasible to build large multifamily projects in a small number of places to making it feasible to build slightly more density in, for example, all of the single-family lots within a whole state, for example. I would say both are very positive reforms. Anything that makes it feasible to build more housing at lower prices is a good thing in my book, but focusing on reforming single-family zoning across a locality or a state as a whole might obscure ways to really make it possible to build more housing quickly.

Beckworth: Right. We want to take both approaches. We want to do transit-oriented zoning reform as well as reform zoning for single-family home units. Let's move to Colorado. Colorado, you note, is a place where they're taking a very different approach. They're approaching and trying to deal with this problem, but in a very different way. Tell us how.

Anything that makes it feasible to build more housing at lower prices is a good thing in my book, but focusing on reforming single-family zoning across a locality or a state as a whole might obscure ways to really make it possible to build more housing quickly.

The Colorado Approach and Federalism Within Housing Reform

Hamilton: Yeah. Legislators in Colorado have introduced a bill that would preempt growth caps across the state. In particular, the city of Boulder has used a growth cap for a few decades now that has limited the rate at which housing can be built in Boulder and is contributing to high housing costs in that region. Similar policies across other localities in the Denver region are contributing to high and rising housing prices there. This bill would also require that when localities introduce new land use regulations that reduce property owners' land values, they would be required to compensate those property owners for the lost land value. Rather, property owners would have a simple administrative process they could follow to seek compensation for their loss of land value. This would be a big change in land use law that would treat regulatory takings from zoning changes similar to takings that we see under eminent domain. If a locality were to take title to a property, they'd be required to compensate that landowner. This bill in Colorado, which is modeled on a law that's in place in Arizona, would require them to also compensate property owners when new land use regulations reduce property values.

Beckworth: What do you think of that? I can see both a good and a bad side to that. The good is it opens a door for reform. The bad side would be, well, these homeowners have been rent-seeking for all these years. Why should we reward them? Why should we pay them off? It's kind of like paying the mafia money just to do what we need to do. Where do you come down on that?

Hamilton: Yeah, that's certainly a concern that opponents of this type of reform have raised. I personally think that putting a price on downzoning, that requires local policymakers to spend taxpayer resources on reducing these development rights, is a good thing. In Arizona, where a similar law is in place, we've seen that proposals for things like historic districts or downzoning neighborhoods where multifamily housing is currently permitted, these proposals have been abandoned once local policymakers have realized, "Oh, this downzoning is going to cost us a lot of money. That's not going to be popular." We can see examples from New York City, for example, where there have been a lot of zoning changes recently. There's oftentimes been a change to a commercial corridor paired with a change to a nearby lower-density area where more development will be permitted on that commercial corridor while less development will be permitted in the nearby lower-density area. And if there were a law at the state level like this in place, those upzonings that make more development possible would still be viable, but those downzonings would become very expensive.

Beckworth: Okay. Well, in the time I have remaining, I want to speak to you about the philosophy of thinking through this issue. We both come from a classical liberal perspective, more free market leaning. In this day and age when our society is highly polarized, different parts of the country went different things, one of the solutions, and I think one I'm sympathetic to, probably you too, is increased use of federalism. Let the local states determine the laws and the norms in that particular region. If the South wants to have a certain way of the world, let them do that. If California wants to be the progressive paradise of the world, let them do that as opposed to... The other solution would be increased centralization. Make the federal government do more and more and decide more and more.

Beckworth: On housing, what we've discussed so far sounds like it's more of a federalism perspective, but you could easily tell the story, "Well, if the federal government came in and just outlaw... Supreme Court went and outlawed all these zoning laws or requirements..." What's the right way to think about this? Is it best to tackle this from a local level using a federalist perspective versus an increased centralization perspective? Because I'm sure there's some who would advocate increased centralization.

I personally think that putting a price on downzoning, that requires local policymakers to spend taxpayer resources on reducing these development rights, is a good thing.

Hamilton: Yeah. I am most optimistic about reforms at the state level, like those that we talked about in California, for example, to make accessory dwelling units easier to build. That's because localities get their authority to regulate land use from their states. State policymakers, from a federalism perspective, are on very firm ground if they want to set limits on the extent to which localities can make it difficult to build housing, from my perspective. At the federal level, I am most optimistic about the courts, as you mentioned, as being the place where we might potentially see some big changes about the constitutionality of some of the current types of land use regulations. Not to say that that's likely. I'm not a court reader. I don't know what they might do. But that's the spot at the federal level where I think we could potentially see some big changes. But there are certainly federal policymakers, and all of the recent presidential administrations have talked about local zoning as an important problem facing the country.

Beckworth: Rightly so. As we've discussed, it's tied into so much of the ills in our country currently. Maybe we can see a Supreme Court case that says this is not constitutional, but then the local state would have to go back to the drawing board and come up with a better way that is legal, like California. It's interesting that California is one of the states leading the charge on this. It'll be interesting to see if other states do follow. Well, with that, our time is up. Our guest today has been Emily Hamilton. Emily, thank you so much for joining the show.

Hamilton: Thanks so much, David.

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