Private market must be a central part of affordable-housing solution

Minnesota is experiencing an affordable housing crisis. Housing costs eat up too much of the budget for many Minnesota families, particularly those with low incomes. But there is no consensus about how to fix this problem.

Surprisingly, some "experts" refuse to see private market production of housing as a central solution to the affordability problem. They argue that relying on the market to increase supply will not lower prices ("Minneapolis 2040 Plan: An economic principle is being misused," July 23). More government subsidies for housing are the only path to affordability, in their view.

We will not mince words: These views are dead wrong, and dangerous. Market supply must be a critical part of the solution. And governments must reform policies that drive up housing costs.

Arithmetic alone shows that increasing private market supply is critical to reducing the cost of housing.

In 2006, the Metropolitan Council estimated that the Twin Cities would need to provide an additional 51,000 homes affordable to low-income households during the 2011-20 period. Government subsidies to builders have yielded only about 7,000 such affordable homes so far during that time frame. Even if governments had subsidized builders at quadruple that rate, we would still be 23,000 units short of what is needed by 2020.

The record over a long period of time suggests that state and city budgets will not fund future building subsidies of a magnitude that would produce the needed units.

What about giving housing subsidies to households instead? Sounds appealing. But housing subsidies increase the demand for housing, so unless total supply also increases, prices will just go up. Current landlords and homeowners will get richer, but low-income families will have even fewer options.

We're back to the market, then. How does building more market-rate housing increase the supply — and lower the price — of housing affordable to low-income households? Let's look to other cities for an example.

In Portland and Seattle, thousands of new market-rate apartments have lowered rents in previously existing properties. If the new market-rate apartments had not been built, new arrivals to these cities would have competed for older and cheaper units. This would have bid up prices, displaced current residents and reduced the supply of affordable homes.

Building more housing of any type affects the price of all other types of housing. For every luxury unit filled, a more modest home is left behind for another family to move up into. Build enough luxury homes, and the prices of regular homes fall, too.

There also is a longer-term effect. Housing tends to decline in value over time, as it ages and as tastes for housing change. Older housing then becomes more affordable. Indeed, the Met Council found that the greatest source of new affordable housing comes from existing market-rate homes that have become cheaper over time. This takes time, but increasing supply now will prevent a re-emergence of the affordable housing crisis in the future. And research shows that this process occurs much faster than observers think.

But we are not simply relying on markets to work. Our governments have the power to encourage the creation of new, lower-cost, market-rate housing. Governments can start by looking at policies that constrict housing supply by artificially inflating building costs.

Relaxing zoning regulations to allow greater density is one option. Eliminating building code requirements that raise costs without commensurate benefits is another. And there are many more options for policymakers. Unlike subsidies, constructing market-rate homes costs our state and local governments nothing.

To be absolutely clear: The private sector cannot solve all of our housing problems. State and local government support will remain necessary. Even massive increases in supply won't make housing affordable for families in extreme poverty. The problem for these families is poverty itself; the solution is income support for housing and other needs.

But for most of our neighbors, focusing too heavily on housing subsidies as the solution is wrong. Increasing market supply must be central to the response. And that means building many more homes in all communities throughout the Twin Cities.

Ron Feldman is first vice president and Mark Wright is senior vice president and director of research at the Federal Reserve Bank of Minneapolis.