This week, Nick and Goldy explore why the market alone can’t solve the U.S. housing crisis with Sandeep Vaheesan and Brian Callaci from the Open Markets Institute. The guests discuss their recent article in the Harvard Business Review, which explains how profit-driven private markets fail to address housing affordability, particularly for lower-income individuals. Their discussion underscores the drawbacks of deregulation and the need for strong antitrust enforcement, second-generation rent controls, enhanced tenant protections, and a public option for housing to ensure stability and affordability. Vaheesan and Callaci also stress the significance of understanding the interconnected issues of supply, demand, and the socioeconomic factors driving the crisis, arguing that without proactive governmental intervention the housing market cannot effectively meet the needs of those seeking affordable housing.
Sandeep Vaheesan is the legal director at the Open Markets Institute. He leads the institute’s legal advocacy and research on a range of anti-monopoly topics, including antitrust law’s role in structuring labor markets and promoting fair competition. Before working at the Open Markets Institute, he served as regulations counsel at the Consumer Financial Protection Bureau, where he helped develop rules on payday and title lending and debt collection practices.
Brian Callaci is the chief economist at the Open Markets Institute. He researches and writes about market structure, antitrust law, and their relationship to worker and employer power. In addition to peer-reviewed academic research, he publishes articles in news outlets such as The Atlantic, Harvard Business Review, and The New Republic. Before working at the Open Markets Institute, he worked at the Strategic Organizing Center and Workers United/SEIU.
Social Media:
Sandeep Vaheesan on Twitter: @sandeepvaheesan
Brian Callaci on Twitter: @brian_callaci
Open Markets Institute on BlueSky: @openmarkets.bsky.social
Open Markets Institute on Twitter: @openmarkets
Further reading:
The Market Alone Can’t Fix the U.S. Housing Crisis
Zoning change: Upzonings, downzonings, and their impacts on residential construction,
housing costs, and neighborhood demographics
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Joe Biden:
It’s time to build our economy from the bottom up and from the middle out, not the top down.
Nick Hanauer:
Middle out economics is the answer.
Joe Biden:
Because Wall Street didn’t build this country. Great middle class built this country.
Nick Hanauer:
The more the middle class thrives, the better the economy is for everyone, even rich people like me.
Intro:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
This episode, Nick, is the third in our three-part series on America’s housing crisis. And it gets to a point I’ve been trying to make for years, and I think the title of the article that our guest wrote, it gets straight to it, it’s that The Market Alone Can’t Fix the U.S. Housing Crisis. As a devout capitalist, Nick, what do you think about that, they’re dissing the market this way?
Nick Hanauer:
I definitely agree. I definitely agree. Housing’s hard.
Goldy:
Right.
Nick Hanauer:
Such an obvious stupid thing to say, but it’s different than making widgets. You can scale a lot of things with demand fast. People can enter markets quicker, but I mean, when 100,000 people move into a place, even if all of the policy is right, building 100,000 extra units of housing, it’s just hard. It’s not going to be quick.
Goldy:
As we’ve learned here in Seattle, because Seattle actually has been building housing at an incredible pace.
Nick Hanauer:
Yes.
Goldy:
I mean, I’m not talking about the metro area. Just Seattle proper has been building 10,000 units a year and can’t keep up with demand.
Nick Hanauer:
In every corner there’s a five story apartment building going up, right?
Goldy:
Yeah.
Nick Hanauer:
Everywhere. Everywhere.
Goldy:
It’s block after block of five over once.
Nick Hanauer:
But you still can’t get ahead of the problem,
Goldy:
Right, it takes time, it’s expensive, and of course… And this is the thing, we are not anti-market, right?
Nick Hanauer:
Yeah.
Goldy:
We’re not a couple of socialists here. Me more so than you know, I might be a little more socialist-y than you are, but we’re not socialists. We believe in markets, but as you said, not all markets are alike. The market for commodities is different from the market for labor or the market for housing.
Nick Hanauer:
Yes.
Goldy:
And as you said, you can build more widgets. You can’t build more land.
Nick Hanauer:
Yeah, no.
Goldy:
You can a little bit maybe. You could fill in-
Nick Hanauer:
But it’s very difficult. It’s very difficult. And of course it’s complicated. If there’s a supply demand imbalance for chocolate bars, that’s a relatively easy thing to scale up and you’re not going to antagonize a lot of people by making more chocolate bars available to people.
Goldy:
Also, Nick, if you can’t scale up fast enough to serve that rise in demand, people can buy things other than chocolate bars.
Nick Hanauer:
That’s right.
Goldy:
There’s other candies. They could buy jelly beans.
Nick Hanauer:
They can.
Goldy:
They could do gummy bears.
Nick Hanauer:
Yes.
Goldy:
They could maybe have chocolate ice cream, if you’ve got, or make some brownies or something like that.
Nick Hanauer:
Yes.
Goldy:
And this is another thing that’s different about the housing market. It’s not just that you can’t build more land. There’s a lot of friction on the side of the buyer. It’s really painful and expensive to move, and landlords take advantage of that. If there aren’t chocolate bars, I’ll buy some other dessert. But if you raise my rent?
Nick Hanauer:
Yeah, you’re screwed.
Goldy:
Yeah-
Nick Hanauer:
Very narrow set of options available to you.
Goldy:
And so I’m much more likely to pay that rent increase than go through all the costs and expense of moving. Not just the cost of moving, but moving your kids from one school to another-
Nick Hanauer:
All the things.
Goldy:
… moving out of the neighborhood where you have all your friends and support and maybe family. And so that creates this huge power imbalance in the housing industry that isn’t there in the market for chocolate bars or fresh fruit or TV sets, whatever.
Nick Hanauer:
No, absolutely. It’s complicated. And today we have two people with us who understand it’s complicated. Sandeep Vaheesan, who’s the Legal Director at Open Markets Institute. He leads their Legal Avisen research on a range of anti-monopoly topics, including the housing market. And Brian Callaci is the Chief Economist at Open Markets. And these guys have just written this really cool article on the housing market for the Harvard Business Review, The Market Alone Can’t Fix the U.S. Housing Crisis, in which they detail sort of the challenges and some of the possible solutions. So why don’t we chat with those guys?
Sandeep Vaheesan:
Hi, I’m Sandeep Vaheesan. I’m the Legal Director at the Open Markets Institute where I lead our Legal Research and Advocacy program. Brian and I recently wrote an essay in the Harvard Business Review on how to fix America’s housing crisis.
Brian Callaci:
And I’m Brian Callaci, I’m the Chief Economist at the Open Markets Institute.
Nick Hanauer:
We read your excellent article in the Harvard Business Review about how private markets alone can’t fix the U.S. housing crisis, but why don’t you take our listeners through the basic beats of the argument? Why can’t we just let the market sort it all out?
Sandeep Vaheesan:
Sure. So our piece was probably motivated by this growing chorus of voices saying that America has a housing crisis, correct? Housing is increasingly unaffordable, and what we need to do to fix it is lift regulatory barriers to housing construction. And these barriers include things like zoning laws and building codes. And we certainly see value in pursuing some of these reforms, but also believe that these reforms that might be necessary, but are by no means sufficient. And the reason is landlords and real estate developers are not charitable institutions, they’re not social institutions. They are for-profit institutions. And so they build and let housing based on profit considerations. They’ll build when they believe it’s profitable and they’ll hold off when they believe profits are waiting to be made. So we use the nationwide cartel of landlords organized by RealPage to remind everyone of this basic fact, that profits are the name of the game in private real estate development.
And so we argue that there’s nothing inherently wrong with the profit motive. We don’t say that, but rather we say that we need well-structured markets to ensure that the profit motive is consistent with broader social goals. In this case, the goal of providing everyone affordable, decent housing. And further, we argue that private profit minded developers are not going to supply housing for everyone, especially people at the low end of the income distribution who don’t have much in terms of wages and salaries are not likely to be an attractive market for these developers to serve. So we believe there’s an important role for a public housing authority, either at the federal, state, or local level to serve in a sense, as a provider of last resort, which we’ve done in partial measure for almost a century. But then also provide competitive discipline against private landlords. In a sense, provide housing not only for poor people, but also for working in middle class people as a way of reining in the pricing power of landlords and ensuring that overall housing standards are high. So that’s a summary of the piece.
Goldy:
So it was great to read it because I’ve been having this argument here in Seattle with the urbanist YIMBYist crowd for more than a decade who insist that if we just free up the market to do its thing, it’ll solve this crisis. And my argument has always been that I think if you free up the market, it will do an excellent job of reducing the price of luxury housing, but it’s not going to… Well, it has. They build over supply at the high end of the market and it does bring it down a bit, but it doesn’t address the middle and the bottom end of the market because that’s not where the profits are.
I think the thing to do first, and it’s really important because the title of your piece is The Market Alone Can’t Fix the U.S. Housing Crisis, we’re not saying that the market doesn’t play an important role in the solution, and we’re not saying that land use reform isn’t an important part of the solution. It just can’t fix it on its own. Well, if one of you could just lay out specifically in detail what the urbanist YIMBYist argument is and the economic argument behind it, so we can then move on to just refute it outright.
Brian Callaci:
Basically, and I think it’s important to characterize your opposition’s argument fairly, as they would articulate it. So I think that what basically the market urbanist or YIMBY position is that the fundamental constraint, the fundamental driver of high rents is a restriction in supply. There’s not enough housing being built, and that’s why rents and housing prices are high. And then the second step is the primary bottleneck to increasing supply is particularly local, but government regulations that inhibit the ability of developers to build more housing. And their argument is that it really doesn’t matter whether you’re targeting different parts of the income distribution. If you build the luxury housing, what happens, sort of like how hermit crabs change their shells is, so you build more housing for the rich, they move into the nicest housing, and then they leave behind their sort of crappier housing, and the poor in the working class and middle class sort of all move into that abandoned housing that the rich no longer want. The idea is that it reduces rents across the board.
Goldy:
And the restrictions we’re talking about are here in Seattle where I don’t know what the actual number is. 60, 70, 80% of the residential land is zoned single family detached. So houses with yards, which makes building density impossible. But also permitting and other oversight on construction that makes it more expensive and time-consuming to build housing. And so what they want to do is largely lift these restrictions and let the invisible hand do its magic.
Brian Callaci:
Yes. If I could add quickly, I think one important point here is that this whole land use regulations, there’s a lot of them and they have different effects. There’s different types of land use regulation. There was an interesting paper by an economist [inaudible 00:11:51] and some co-authors recently just showing that there’s actually different dimensions of zoning. And so in city centers like Manhattan, what you get is sort of complex. There’s a lot of complexity, which makes sense because if you build a tower, you’re going to inflict all kinds of costs on your neighbors. Not that you shouldn’t be able to build it, but there has to be whether someone all of a sudden is in the dark all the time or those kinds of restrictions. What we see in the suburbs is more of the exclusionary stuff. So the more distance you get from the city centers, you get those sort of… I live in the New York area. You get sort of rich suburbanized in places like Scarsdale who are trying to prevent the creation of density. But those are sort of different things and they might be better assessed with different policies.
Nick Hanauer:
One of the things I was really struck by, guys, was that study that came out of the Urban Institute that showed that the dramatic decrease in zoning didn’t have any sort of material impact on the amount of housing. I think what was it? The average upzoning would result in a 0.8% increase in housing supply after three to nine years. So did it help a little bit? Maybe, but it’s certainly not the panacea that it’s advocates make it out to be.
Sandeep Vaheesan:
Yeah, that’s right. That’s the meta study by Yonah Freemark and his co-authors, and they looked at a range of upzoning, some small, some more significant, and found on average there’s a fairly modest impact on the housing supply. And I think the study really underscores one basic fact that’s often missed in these discussions. Upzoning, for example, gives developers the option of constructing multifamily housing, but there’s no mandate. So just because a property is upzoned doesn’t mean you’re suddenly going to see a new construction. If anything, we often see increased land speculation. People expect land to be more profitable, so upzoning, the most immediate effect is there’s a lot more churn in the property market. Current property owners often get a nice windfall, but you don’t necessarily get an immediate increase in housing supply. And if anything, the evidence shows that you may go years or even decades without new construction. And so when people say, “Build more housing,” what they often mean is give developers the option of building more housing, an option they may or may not exercise.
Brian Callaci:
And there really hasn’t been much research showing a relationship between housing regulations and rents. We do see some sort of intermediate studies like an increase in supply. It does have an moderating effect, but as you said, the magnitudes are pretty small. So you can publish an economic study finding a statistically significant effect, but we really care about the size of the effect. And it’s clear that increasing, the paper by Lee showing that 10% increase in the housing stock, rents only decrease by 1%. And increasing the housing stock by 10% is quite a bit. So yeah, it helps at the margin. If you can do it, why not? But the idea that this is the panacea I think is where we sort of see some problems.
And I’ll just say real quick, another idea of having the public sector as the provider of housing of last resort is that a lot of the things that people consider inefficient about the construction industry, whether it’s work rules or the relatively small size of construction firms, some of that you can’t surmount because you’re building a housing on site. It’s not a factory, so you’re subject to weather, all kinds of issues can crop up.
But second, a lot of that, it’s such a boom and bust industry that whether it’s construction companies or certain building trades unions, they really see the most important thing is stabilizing demand. So when there’s a boom, they’re a little bit reluctant to unleash a wave of new apprentices onto the industry because once the bust happens, there’s no work for those guys.
Goldy:
That’s a fascinating idea that you raised, that the public sector could play a role in sort of a counter cyclical role in maintaining stability in the construction industry so that you know when the private sector is building less, that’s an opportunity for the public sector to build more and keep people employed.
Sandeep Vaheesan:
Precisely. The public sector can bring more of a social long-term orientation and try to mitigate some of these boom and bust cycles, which are especially severe in property development. We saw the huge boom in the early 2000s driven by subprime mortgage lending that resulted in massive bust, the global financial crisis of 2008. And if you look at home building figures, annual housing starts, they haven’t recovered from the crisis. So if anything, we now need a public developer to build for secular reasons. Forget cycles. You appear to be in a permanent slump, and I don’t think upzoning and relaxation of building codes is going to solve that now 15-year-old problem.
Nick Hanauer:
Why do you think that exists?
Sandeep Vaheesan:
I think there are a number of reasons. So after 2008, Congress passed the Dodd-Frank Act, tightened up mortgage underwriting standards. So it’s harder to get a mortgage today than it was in 2007, and with good reason. Many people got tricked into taking out mortgages that had teaser rates they ultimately couldn’t pay back, and they ended up losing their homes. Congress said, “We’re going to require lenders to do fairly rigorous underwriting before they extend mortgage credit.” That protects people from predatory loans, but the flip side is there’s less money flowing into housing now. And in a sense, the boom years we’re sustained by all this predatory irresponsible lending.
Goldy:
So a lot of people, when we think about housing, I’m sure a lot of our audience, they are homeowners. Let’s talk about the rental market a bit and about the role that RealPage played in driving up rents. And it’s really amazing. I’d read a bit about RealPage. I had no idea how prevalent it was and how effective it was at raising rents on millions of Americans, if you could get into that a little bit.
Brian Callaci:
I ignored it for months. Oh, yeah, so there’s this algorithms going on. How big can the effects be? And when you look at the evidence, and particularly in the Department of Justice complaint and the other official complaints, it is pretty astonishing how widespread this price fixing conspiracy was. And for us, I think that sort of demonstrates is that private actors left to their own devices are always going to do things like try to maximize profits. Not by building the most housing, but by restricting the supply and raising prices, which is what the RealPage algorithm sort of encouraged and even mandated. They had a lot of restrictions that made it very difficult, if not impossible, for landlords to sort of buck the “recommended” rents. That’s I think just illustrative of just allowing the market to do its thing is not going to be enough. You at least need something like antitrust enforcement. We would argue you need to go further with things like rent control, tenant protections, and other measures.
But the other thing I would say about the RealPage issue is that a lot of especially smaller landlords, they’re not really maximizing profits. There’s an economist called Herbert Simon who contrasted maximizers with what he called satisficing. So a lot of landlords were just, “Yeah, what’s a fair rent? I’m just trying to make up, pay my mortgage and make a little bit extra.” They’re not thinking about, how can I squeeze as much out of this property as possible? And that keeps rents lower for renters. But once you have a RealPage sort of educating, playing this role of telling landlords, “Well, actually you could be charging a lot more,” that effect, even if they bust the cartel, may be permanent.
So that’s something we have to sort of keep an eye on, is this sort of rather than maximizing what they call heads in beds and just if you have an empty building, of course you would rent it out for as low as you can. What landlords are starting to do is realize, you know what? We have some market power here, just like in labor markets where every employer has the ability to reduce wages, what we call monopsony power. Same thing in housing. Landlords have a lot of power, that may have been latent in the past, to raise rents that now they are aware of, and they may continue to pursue those policies in the future.
Nick Hanauer:
Okay. So guys, what should we do? What are the three or four things that we should collectively do to get this crisis addressed?
Sandeep Vaheesan:
Yeah, so we talked about a few solutions in the piece. I think the first is vigorous antitrust enforcement. If landlords collude directly or through a third party like RealPage, they should face real legal consequences. Unfortunately, we’re seeing that. The DOJ joined by eight states filed a lawsuit against RealPage in August. And then prior to that, Arizona and the District of Columbia filed suits of their own. So our public enforcers are taking the RealPage scandal seriously. But as Brian said, we need a lot more. We need strong rent control laws to constrain landlord power in all its forms, whether it’s a nationwide cartel or a small landlords simply trying to take advantage of someone who’s lived in their building for a long time. And by rent control, we don’t mean permanently freezing rents at a specified level, but rather caps on annual rent increases. So caps tied to, for example, the consumer price index and year-over-year changes in that.
And complementing that are what we call just cause or good cause protections which bar landlords from evicting tenants at will. They can only evict people if they fail to pay rent or damage the property. They can’t simply say, “Hey, I think I can get more money from someone else. You have 30 days to leave.” That’s an important complement to rent control measures. And last but not least, we’ve already talked a little bit about this, is the need for public housing development. We already have some of that, especially significant in New York City, but it’s something we need to replicate in cities across the country. Ideally this would be done by the federal government, which has fiscal capacity that state and local governments don’t have. And second, responding to the YIMBY’s point about zoning, the federal government has the authority to preempt local land use regulations. So ideally a federal public housing authority that is energetic and building a lot, but short of that, state and local public housing authorities are important as well.
Goldy:
And you’re not just talking about public housing for low income housing for the most vulnerable. We’re talking about what the term at large is social housing, we like to call a public option for housing, where you are serving the middle of the market as well. And that can be done with little or no subsidy, just favorable interest rates.
Sandeep Vaheesan:
That’s right. Yeah, we’re thinking of a vigorous public option that serves the low end and middle segment of the market. We’re seeing a little bit of that in Montgomery County, Maryland outside of Washington, D.C. where the county’s building apartment’s catering to middle-income households, taking advantage of lower interest rates, their nonprofit status. Not necessarily receiving extensive subsidies, but taking advantage of their status as a public operator and providing important competitive discipline against private landlords in the county and raising habitability standards. In the quest for universal affordable housing, we don’t want to go back to the early 20th century where we had private developers building large tenements, often with appalling conditions. We want high decent standards for everyone, and a public housing option can get us there.
Nick Hanauer:
Yeah. Where did we go wrong before? What happened with public housing in the old days that made it so bad?
Brian Callaci:
Well, one of the things that happened there, so there was an ambition during the period of experimentation during the New Deal. There was an idea called Modern Housing, which was promoted by both the labor movement and some housing policy advocates, notably a woman named Katherine Bauer. And I think one of the things that’s so striking about that is I live in Westchester County, I take the Metro North train into Manhattan for work, and you pass the Harlem River houses when you take that train, that was a New Deal era public housing project. And the idea, the ambition at that time was to build excellent housing for working people, targeting both the middle and the lower end of the market. And what we ended up getting, for a variety of reasons, was subsidies to insurance through the FHA to facilitate single-family housing, basically facilitate suburbanization and private that.
And so the public housing that was built from the 1950s on was designed to be a little bit crappy. It was designed to be as sort of if you’re poor, you shouldn’t be incentivized to look to the public. This is the housing really of the most poor. You end up with concentrations of poverty, and so people blame a lot of the social problems that arise from poverty on public housing. And it’s actually the other way around. I think that’s a big part of it, the ambition of building nice things, even for working people, as opposed to let’s just liberalize the market when they build those skinny towers in Manhattan. Well, that’ll free up some lower grade housing for the hoi polloi.
We can let working class people have nice things too, and we can build it for them. And that was an ambition. I’ll just say a funny anecdote is the labor movement of the Labor Housing Conference in the New Deal called The Ultimate Federal Housing Authority, which did some good in terms of subsidizing single-family housing, they called that pejoratively F Housing Altogether. So they called the FHA because they wanted a more robust, nice public housing for ordinary people.
Sandeep Vaheesan:
I’ll just add one point. So public housing in the United States was designed in a way that it wouldn’t private landlords and private real estate developers. So as Brian mentioned, it was set up and developed, especially in the 50s and the 60s, as housing of last resort. So for people who couldn’t afford housing on the private market, they would have this fallback option. And second, developers didn’t want to actually augment the housing stock. So there was a condition saying that for every new unit of public housing, one existing unit of housing would have to be removed, which is partly why we saw the destructive slum clearance in the 50s and the 60s.
Nick Hanauer:
Are you shitting me? That’s unbelievable.
Sandeep Vaheesan:
I wish I was. But yeah, that was one of the conditions of this program.
Nick Hanauer:
Oh my god.
Sandeep Vaheesan:
And instead of, honestly-
Nick Hanauer:
Unbelievable.
Sandeep Vaheesan:
… history, people say, “Oh, public housing was a disaster. Think about Pruett-Igoe in Saint Louis, think about Cabrini-Green in Chicago. They just concentrated poverty. We should never do that again.” But the reality was public housing was in a sense, designed to fail. And that doesn’t mean it has to be designed to fail this time around.
Goldy:
Let’s not forget how incredibly racist both the policy, and more importantly, the implementation was in the 50s and 60s.
Sandeep Vaheesan:
Oh, absolutely. And the popular view is poor people of color got all this government support while white middle class people pulled themselves up by their bootstraps. They got plenty of subsidies. They were just mostly invisible or rendered invisible.
Goldy:
Right. And not just the subsidized interest rates, but also just all the infrastructure that was built, all the highways and so forth that made these suburbs possible. Up until the 60s there were restrictions on who could live there, so it wasn’t even like a working class Black families could move into some of these neighborhoods. In some cases there were [inaudible 00:28:57]-
Sandeep Vaheesan:
Exactly.
Goldy:
… that said they couldn’t. So it’s a long history of racism in America has helped contribute to this housing crisis. So you mentioned Montgomery County, Maryland. We’re heading that way in King County here in Washington state, in the Seattle area as well. It looks like we’re going to be experimenting with, again, I hate the term social housing because I think it doesn’t tell you what it is. It makes it sound like a commune and it’s a big turn-off to people, whereas it’s just we’re going to own it outside of the market. We’re going to build it and own it outside of the market. And it’s very encouraging to see it’s not just here, it’s elsewhere. There’s a lot of attention being paid to this as an option. And I got to tell you, 15 years ago when I first started looking at this, people just rolled their eyes at this as a possibility.
Brian Callaci:
Got to think bigger.
Sandeep Vaheesan:
And I think we have to reclaim public housing. I share your discomfort with social housing. It’s sort of hippie-dippie and also just vague, let’s be honest, about what we’re doing.
Goldy:
Yeah. Well, I think the other thing that people miss in terms of the housing crisis is it’s not just an affordability crisis. As you mentioned, you want quality housing up and down the income scale, but stability is the real issue. You can have affordable housing with no stability if you’re constantly being forced to move around from one affordable low-income housing unit to another. I just don’t see how it’s possible to give renters the same sort of stability that you get from a thirty-year fixed-rate mortgage without public ownership.
Nick Hanauer:
Yeah, it seems impossible. So guys, we have a benevolent dictator question. If you guys were in charge of housing policy, political constraints aside, what are the three top things you would do?
Brian Callaci:
All right, I’ll start. I would say we need rent controls. Second-generation rent controls, not rigid, just a cap, but that are flexible enough to adapt to increased costs and maintenance and things of that nature. We also need tenant protections. I think it’s a lot like the labor market where there’s a lot more power on one side. So you need to rebalance that by giving tenants, for example, good cause eviction. You can’t be evicted unless the landlord is forced to show some kind of cause, not just because they don’t like you anymore. And then finally, I like the phrase public option for housing. So there’s just no way to do this. And even some of the folks on the YIMBY side who are forthright about confronting this recognize that maybe increasing supply in the market rate housing can help loosen up the middle of the market. But you just simply need public investment to create enough housing for all. And you don’t deregulate your way to that. You need public investment to do that.
Goldy:
Anything to add there, Sandeep?
Sandeep Vaheesan:
I think Brian covered it well. I’ll make a point that’s come up a few times. So when we talk about restrictions on construction, we shouldn’t look at just public zoning. There’s also a parallel set of private restrictive covenants that dictate what gets built where. In some cases, who can live where. We have a very ugly history of racially restrictive covenants in this country that said if you’re a Black person or an Asian person or a Jewish person, you can’t live in certain neighborhoods. Thankfully, those were invalidated by the Supreme Court and later by Congress, but we still have other private restrictive covenants. Houston famously doesn’t have zoning laws, but instead they have private zoning laws made by developers. And the YIMBY discourse is so focused on the public side of things that they seem oblivious to the web of restrictions that developers have established across the country. And so when we’re formulating housing policy, we need to be aware of this parallel private system as well.
Goldy:
Are you talking about restrictions within homeowners associations or is there…
Sandeep Vaheesan:
Yes, that’s usually how they work. So the developer, when building a subdivision, will establish restrictions saying, “Only single-family homes will be built here. They must have a two-car garage.” And what usually happens is the HOA is created to enforce these restrictions over time.
Goldy:
It hadn’t even occurred to me to look at that as a source of land use restriction.
Sandeep Vaheesan:
I think Houston is such an interesting case study because in the sense they have followed the YIMBY playbook and we don’t have… Houston is not a dense city by any means. It’s actually quite the opposite. And the reason is we have these private restrictions on development that have encouraged sprawl and low-density construction.
Goldy:
In a funny way, this is an example of the market at work. Because the interesting thing is there’s, if you look at the 50 largest cities in the U.S., vastly different in terms of median income and median housing prices. And yet, overwhelmingly it’s very close to half of all renters pay over 30% of their income in rent, regardless of housing prices, regardless of median incomes. And that is the market telling you, “We can extract 30% of your income in rent and through whatever means possible.” And they managed to do it regardless of zoning and median prices and median income. So the market’s good at that, extracting profits.
Brian Callaci:
Yeah, in a sense, land is the ultimate monopoly. There is no other. That parcel of land is unique. Its characteristics don’t transfer somewhere else. That is something that zoning doesn’t really relax. It’s just a fundamentally monopolistic nature of the asset of land, which is the biggest component of housing costs, not materials, not labor. It’s the land.
Nick Hanauer:
So one final question, guys. Why do you do this work?
Sandeep Vaheesan:
We are relatively late arrivals to housing, so most of our work has been focused on building fair labor markets, building fair energy markets. And I only got into housing about a year ago, frankly later than I should have. But I think RealPage gave us an entry point. It’s an antitrust problem. We have something semi-intelligent to add to the debate because the housing space is saturated. A lot of people are talking about housing, offering solutions, some good, some not so good. And RealPage gave us a hook. We can address the problems plaguing this important market. Everyone needs shelter. And I think the two of us quickly realized RealPage is really the tip of the iceberg. There’s a lot more to study here. We really need a full suite of solutions. Anti-trust enforcement is one part of that, but one relatively small part of that. And we hope to do more work here. The housing crisis isn’t going away anytime soon. And based on our experience as an anti-trust economist and anti-trust lawyer, I think we have something useful to add.
Brian Callaci:
And I would just add, I think one thing that I just saw that the housing debate was missing was any attention at all to the demand side. It’s not just that there’s not enough housing, it’s that people don’t have enough money to afford it. The underlying structure of demand determines the underlying or the observed difference in rents. And one of the things I think was missing from the debate was the fact that there’s been surging demand, particularly by the very wealthy pouring back into cities since maybe the mid-1990s. So there’s a lot more money pouring into cities, and that’s driving up rent. And why are all these people all of a sudden, after abandoning cities during the urban crisis in the 70s and 80s, coming back? And I think one of the things I just thought the YIMBYs were missing is they sort of naturalize the forces concentrating wealth and economic opportunity in a couple of mega cities on the coast, and yet they treat any of the forces limiting housing supply in the cities, those are just totally artificial once we get rid of those.
Land is in fact scarce in Manhattan. It’s difficult, whether you deregulate zoning or not, to build enough housing there. And so the government support for the tech sector, concentrating wealth on the West Coast, NAFTA and Chinese entry to the WTO, trade policy, you could call that neoliberalism, created surging demand for housing in these cities where it is difficult for both regulations, but also more importantly, just the lack of space. Housing supply in elastic cities. That sort of regional inequality dimension I think has sort of been downplayed. So when you drain the middle of the country of the educated and wealthy, where you put all the economic opportunities in a couple of cities on the coast, that’s just…
The market urbanists will say, “We need to build housing where people want to live,” but it’s not really a choice. If you’re from Flint, Michigan, Pueblo, Colorado, if you want to have economic opportunity, you kind of have to move to the coast. It’s not exactly voluntary. So one thing I would say is I think a positive aspect of the Biden administration’s industrial policy was the idea of creating economic opportunities throughout the country. Not just saying, “Hey, what you need to do if you want to survive is move to New York City.” Deregulation of transportation, finance and that kind of thing sort of created the housing crisis. There wasn’t a sudden upsurge in zoning around 2000. There was a sudden concentration of wealth on the coast.
Nick Hanauer:
Yeah. Interesting. Well, guys, thank you so much for being with us, and thank you for your work.
Sandeep Vaheesan:
Thanks so much. This was a lot of fun.
Brian Callaci:
Thank you.
Nick Hanauer:
So, thoughts, Goldy?
Goldy:
Yeah. What we have here, Nick, as usual, is a selective reading of Adam Smith. At the heart of the housing crisis Adam Smith will tell you, people will quote him, they’ll say invisible hand, like free up the market. If we just free the market to address this problem, well… And don’t worry about the fact that developers and landlords are in it to make a profit because it’s not the butcher and the baker and the brewer and all that are serving their own self-interest, but in doing so, they serve yours by making more bread and beer and meat. And that’s the same thing in the housing market. By pursuing their own self-interest, they will build more housing and reduce the price for everybody. And that’s Adam Smith.
But Adam Smith also tells you that you get these people together in a room and there isn’t a minute that they’re not turning to how to collude to raise prices and reduce wages. And oh my God, the RealPage scandal, and it is a scandal, is eye-opening. That software, the dominance of that software with landlords combined with, since 2008, since real estate bubble collapse in the recession of 2008, the move of private equity into the housing market. You put those two things together and it explains a lot of the housing price increases over the past few years.
Nick Hanauer:
Yeah, absolutely. Absolutely. The other thing this conversation continued to teach me was how big an idea this public option for housing is that we’ve been talking about and working on. I think at the end of the day, if you really want to get a scaled solution, you have to use mobilize big dollars, use the government’s capacity to borrow, build a ton of housing using that money in prime locations, and just keep it out of the market. And if you do that, over time, you can build your way out of this-
Goldy:
Right.
Nick Hanauer:
Short of that, I don’t think there’s likely any sort of scalable solution.
Goldy:
Right. Again, we don’t disagree with the urbanist YIMBYist crowd. We need to address, we need to have land use reform and regulatory reform. All that is absolutely necessary.
Nick Hanauer:
It’s just not sufficient.
Goldy:
Right, necessary, but not sufficient. But if we want to address this crisis at scale, again, I don’t see any way to do it without a public option. If you want to read more from Brian and Sandeep, we provide a link in the show notes to their Harvard Business Review article, The Market Alone Can’t Fix the U.S. Housing Crisis.
Outro:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate, and review us wherever you get your podcasts. Find us on other platforms like Twitter, Facebook, Instagram, and Threads at Pitchfork Economics. Nick’s on Twitter and Facebook as well at Nick Hanauer. For more content from us, you can subscribe to our weekly newsletter The Pitch over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, pitchforkeconomics.com. As always, from our team at Civic Ventures, thanks for listening. See you next week.