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

The Impact of Building Restrictions on Housing Affordability

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

The Impact of Building Restrictions on Housing Affordability

Article excerpt

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A chorus of voices appears to proclaim unanimously that America is in the midst of an affordable housing crisis. Housing and Urban Development Secretary Andrew Cuomo asserted the existence of such a crisis in his introduction to a March 2000 report that documents a continuing and growing housing affordability crisis throughout the nation. Indeed, Secretary Cuomo regularly justified aggressive requests for funding by pointing to this crisis. Advocacy groups for the poor such as the Housing Assistance Council pepper their documents with assertions that "the federal government should commit to a comprehensive strategy for combating the housing affordability crisis in rural America." Trade associations such as the National Association of Home Builders decree that "America is facing a silent housing affordability crisis." The National Association of Realtors agrees: "there is a continuing, growing crisis in housing affordability and homeownership that is gripping our nation."

Does America actually face a housing affordability crisis? Are home prices high throughout the United States, or are there just a few places where housing prices become extreme? In those places that are expensive, why are home prices so high? Is subsidized construction a sensible approach to solving this problem-relative to other, deeper reforms? This paper examines whether America actually does face an affordable housing crisis, and why housing is expensive in high-price areas.

In general, housing advocates have confused the role of housing prices with the role of poverty. Both housing costs and poverty matter for the well-being of American citizens, but only one of these factors is a housing issue per se. Certainly, the country should pursue sensible antipoverty policies, but if housing is not unusually expensive, these policies should not be put forward as a response to a housing crisis.1 To us, a housing affordability crisis means that housing is expensive relative to its fundamental costs of production-not that people are poor. Therefore, we will focus entirely on housing prices, not on the distribution of income.

A second key concept in thinking about a housing affordability crisis is the relevant benchmark for housing costs. Affordability advocates often argue for the ability to pay (for example, some percentage of income) as a relevant benchmark, but this again confuses poverty with housing prices. We believe that a more sensible benchmark is the physical construction costs of housing. If we believe that there is a housing crisis, then presumably the correct housing response would be to build more housing. Yet the social cost of that new housing can never be lower than the cost of construction. For there to be a "social" gain from new construction, housing must be priced appreciably above the cost of new construction.

This argument is not meant to deny that the existence of poor people who cannot afford housing is a major social problem. However, if housing does not cost appreciably more than new construction, then it is hard to understand why policies oriented toward housing supply would be the right response to this problem. Hence, we focus on the gap between housing costs and construction costs.

To look at the housing affordability issue, we use the R.S. Means Company's data on construction costs in various U.S. metropolitan areas (hereafter, the Means data). These data give us information (based on the surveying of construction companies) on the costs of building homes with various characteristics. As a basic number, the Means data suggest that construction costs for the lowest of the four quality types they track (termed an economy home) are about $60 per square foot. Construction costs for the next highest quality type (termed an average home) are about $75 per square foot. Ultimately, we compare this information with data on housing prices. …

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