Market forces, regulation have worked against more affordable housing

Fourth in an occasional series on the future of housing.

Economist Mark Wright of the Minneapolis Federal Reserve Bank didn't much like hearing the old economics term "merit good" as part of an argument to expand production of lower-cost housing.

It has fallen out of fashion, he said, on the grounds that talking merit goods made economists sound like they were just making value judgments.

Thinking of housing as a merit good isn't a terrible idea, by the way. The merit part comes from the good things safe and affordable housing does for the families around them, like promoting greater neighborhood stability, beyond the benefit to family members who live there. And the market doesn't seem to provide enough of it.

But for Wright, the research director of the Minneapolis Fed, it's up to elected government officials to decide what's of merit and worth supporting. The job of economists is to advise on the best ways to get it, and that's what he and his colleagues are working on with affordable housing.

It might be a little surprising to learn that the Minneapolis Fed even cares about affordable housing, but it sure does.

One reason is that Congress has asked the Fed to help promote full employment in the labor market. Expensive housing discourages people from moving to a region with better job opportunities and can make it harder for employers to add staff.

If the question is how to make more affordable housing units available, Wright's answer is not that complicated. We need to build a lot more housing and make sure that the units get built for a far lower cost than they do now.

Wright and his colleagues at the Minneapolis Fed have research initiatives underway on housing, including a new paper about this problem of having each unit cost way too much.

Wright shared a draft of their paper, and it had a striking tone for economic research. There was even a hint of anger at misguided government policy that has gotten in the way of the market providing more and far cheaper units of housing.

Wright and his colleague, James A. Schmitz Jr., frame the problem as our clinging to an expensive and old technology — workers on a building site putting up a wood-frame house one 2-by-4 at a time.

People hear the term manufactured housing and think mobile homes in a trailer park, but a factory-built can also be just a house that was either partly or completely built in a manufacturing plant.

It turned out to be more challenging than the entrepreneurs first thought to make manufactured housing work as a business.

What did work, though, was a kind of factory-built housing product studied by Wright and Schmitz. These mobile homes surged in popularity during the 1960s, production peaking at about 600,000 units a year in the early 1970s before sinking like a stone.

What almost killed the industry, Wright and Schmitz suggest, was simply changes in federal housing policy.

Policymakers seemed interested in fostering homeownership, but they tilted the playing field away from manufactured housing. A program in 1968 was designed to make home mortgages far more affordable, but buyers of manufactured houses weren't eligible to get any of this cheap financing.

Other problems for the industry grew out of a mid-1970s set of rules for manufactured housing. One was the requirement that the manufactured house had to have a permanent chassis.

The permanent chassis rule created the odd situation of people sitting in their basement recreation rooms and looking up at the exposed bottom of a trailer, which by rule could not be detached from their house.

As the Minneapolis Fed researchers noted, one problem with this rule is that the house was forever deemed a trailer. That meant a prospective owner could bump into local housing restrictions that might group these kinds of trailers all in one spot or might not allow them at all. And the only way to finance them was more like a new car rather than with a home mortgage.

Another problem was obviously the additional cost, as the homeowner had to pay for a trailer chassis that was useful exactly once.

Government regulations down to the local level turned out to be a problem that the factory-built housing producers ran into repeatedly. As Wright put it, "If you have to build a different product for every locality, you can't really do it very cheaply."

In our conversation, Wright did not suggest that rolling back regulations on manufactured housing to get that industry booming again is the only solution to the problem of not having enough moderately priced places to live, but they are clearly onto something.