Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Affordability: Recommendations for New Research to Guide Policy

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Housing Affordability: Recommendations for New Research to Guide Policy

Article excerpt

Many housing market analysts point to the financial burdens of high home prices and rents as justifying government intervention in housing markets. Indeed, in recent years, the cost burdens and presumed shortage of affordable housing have been recurring themes in numerous reports, news articles, policy debates, conferences, and market commentaries (see, for example, Gabriel and Painter [2017] and the Joint Center for Housing Studies [2018]). Prominently featured in these discussions are calls for new regulations, additional public resources, or the redesign of existing policies to reduce the cost of housing and increase the supply of affordable housing.

In this article, I discuss five issues that federal policy-makers will likely grapple with if they are interested in promulgating evidence-based policy to address today's housing affordability challenges. I focus on areas where economic research is necessary to reduce the uncertainty in federal policy design choices, but also where there are gaps in the research. A goal of this discussion is to motivate pragmatic future research based on the questions that I anticipate would arise in a rational policymaking process on housing affordability at the federal level. New research on housing affordability would strengthen the evidence base on effective policy interventions, help policymakers evaluate risks and uncertainties, and make salient the trade-offs between different policy objectives.

1. IDENTIFYING A RATIONALE FOR GOVERNMENT INTERVENTION

Rising home prices and rents, and their associated cost burdens, oversimplify the rationale for intervening in housing markets to improve affordability. After all, an undesirable price that is "too high" is rarely a sine qua non for government intervention in other markets. So why should policymakers intervene to address housing affordability? For one, a large literature analyzes the myriad housing market failures, including those stemming from externalities and asymmetric information. For example, recent research points to the role of high housing costs in holding back the agglomeration benefits of highly skilled workers locating near each other (Hsieh and Moretti 2017). And the mortgage market is a classic example of credit rationing in the presence of asymmetric information (Stiglitz and Weiss 1981).

In addition to efficiency-related reasons, policymakers may seek to use housing policy to redistribute income and wealth. Indeed, policies that address ability-to-pay concerns include publicly provided low-rent housing, subsidies for private construction of housing for low-income households, and programs that promote geographic, and thus economic, mobility (Quigley 2000; Chetty et al. 2014). In the United States, certain aspects of the social safety net, such as health insurance and education, are tied to where one lives, so the challenges of housing affordability interact with how the social safety net affects household well-being. More fundamentally, shelter is a necessary ingredient for human survival, so at a time when catastrophic weather events are likely to increase in frequency, indiscriminately threaten the existing housing stock, and haphazardly destroy wealth, policymakers may wish to provide social insurance against these shocks.

Unfortunately for policy, limited research and evidence exists on the relative importance of various explanations for why affordability presents such a challenge. For example, a vast literature points to the role of regulations in pushing up housing costs, but little research disentangles this explanation from the contribution of economic fundamentals or financial market frictions (see Quigley and Rosenthal [2005] for a summary). Moreover, because regulations are hard to quantify and take many forms, it is difficult to know more systematically the areas where regulations have greater bite. As another example, consider the research that argues that stagnating incomes have strained affordability (Gabriel and Painter 2017). …

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