U.S. Housing Policy, Politics, and Economics: Bias and Outcomes – Part 1

• Real estate investors need a basic understanding regarding the fundamentals of policy and economics, that continuously drive the demand and supply of housing;
• For the past 88 years, approximately twenty-eight of thirty-five housing policies have been primarily focused on supply;
• In comparison to other industrialized and developing countries, the United States currently has less direct government assistance for housing;
• In total, Democrats have passed more supply-side housing policy and have expressed a bias regarding supply-side legislation. 

In order for investors to build and manage institutional grade single-family or apartment portfolios, there must be a basic understanding regarding the fundamentals of policy and economics, that continuously drive the demand and supply of housing. When the aggregate factors that control the housing market are identified, then single-family and apartment market supply and demand fundamentals are able to be analyzed for metro and submarket performance. These tools can be used within the selection process, portfolio optimization and target allocation. In addition, these allocations can also be determined by introducing indices for benchmarking and property derivative positions. 

For the past 88 years, approximately twenty-eight of thirty-five housing policies have been primarily focused on supply. Between all political parties, Democrats are twice as likely to pass supply-side housing policies, however with the Republican party controlling the executive and congressional branches of government (2017-2018), it is less likely that major supply-side housing policies will be passed. Within the last decade there has been a slight shift towards more demand-side legislation or no legislation at all, resulting in policy gaps. In response to having fewer supply-side policies there is an increase in rising costs and falling affordability for housing consumers. Today we are seeing an increase of 67% since this year and 360% from a year ago in lumber alone. With these record breaking prices, lumber has added approximately $36,000 to the price of an average single-family home. If nothing changes there will most likely be a continuation of the housing crisis that is ultimately reflected in higher prices and lower affordability. 

Supply-Side Legislation Bias

Within industrial countries where housing quality is high, such as the United States, affordability is a major issue. On the other hand, developing countries are experiencing long-term issues regarding low quality and high relative cost being impacted by increasing rates of population and infrastructure incapable of accommodating their residential growth.

In comparison to other industrialized and developing countries, the United States currently has less direct government assistance for housing. With the approval of the Housing Act of 1949, the United states had legally pledged to provide decent housing for all Americans. As a result, the private sector holds the most responsibility for producing and delivering housing and services.

The most efficient way to analyze housing within the United States is through legislation produced by Congress. Congress and the President of the United States are capable of influencing markets through supply-side or demand-side legislation. 

Supply-side legislation revolves around policies that promote the supply of housing, whereas demand-side focuses on promoting housing demand.  Throughout the history of housing policies within the United States, it has been proven that there has been supply-side legislation bias and a lack in demand-side policies. The rare occasions that demand-side policies are passed are typically throughout times of recession within the market. Many believe that the stability within the housing market since the 1950’s are in response to the supply-side legislation bias resulting in more homeowners in America, however that is not the case. 

Throughout the past 88 years of housing policy within the United States, policies have been dominated by the Democratic party, whether that’s by a Democratic President, Senate or House. Recently, larger policy gaps have been identified within the overall housing policy, which makes many people believe that this could be the cause of the current housing crisis. In response to less housing policies and more policy gap periods, a repeated housing crisis may arise and be reflected in rising prices and historically low affordability. 

If the executive and congressional branches of the federal government were controlled by the Republican party, there is a lower probability of major supply-side housing policy. If the House were to be controlled by the Democratic Party (2018) but the Republicans were to maintain the Presidency and Senate, there is still a low probability of supply-side legislation bias. Although most demand-side policies occur throughout recessions, the party that holds power is the determinant of policies that will be put through.

In total, Democrats have passed more supply-side housing policy and have expressed a bias regarding supply-side legislation. In the past, a Republican President and Democratic Congress have expressed a 67% success ratio, whereas, under a Democratic President and Republican Congress displayed a success ratio of 25%. Throughout history, it has been made apparent that Democrats demonstrate a bias towards supply-side housing policies and have shown a better success ratio under a President of the contradicting party. 

Within the previous decade there has been an increase in demand-side legislation or no legislation at all, however the supply-side policy bias still exists. In response to less supply-side policies, the supply shocks to the housing market have declined, benefiting housing developers and brokers but leads to rising costs and falling inventory and affordability for housing consumers. In order to guarantee the maximum benefits for United States households, the supply-side legislation must be slowed or reversed.

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