In “Private market must be a big part of the solution,” (Oct. 18) Federal Reserve Bank executives Ron Feldman and Mark Wright argue that building more market-rate housing will create more affordable housing through simple supply and demand.
If you have a market for bananas and you increase the number of bananas for sale, the cost per banana will go down. And people will buy more bananas and fewer of oranges. Conversely if you have fewer bananas for sale, the price will go up and people will buy fewer bananas and more oranges.
But this ignores fundamental truths about the housing market. Housing is not like bananas. People only live in one home. They do not avoid buying or renting a home if the price is too high, nor do they buy or rent a second home when prices go down. Economists call this inelastic demand.
The real question is whether there is supply to meet demand. Proponents of the Minneapolis 2040 Plan talk about Seattle. Seattle is the fastest growing major metropolitan area, growing 18.7 percent this decade. But it added only a quarter of the housing needed to meet this population growth. Supply and demand are very much out of whack.
But we are not Seattle. The Twin Cities population grew only 7.4 percent in the same period and we added 5.4 percent in new housing. (Metropolitan Council — Metro Stats — August 2018). We have a slight imbalance, which is evidenced by the small inventory of homes on the market. But the market is responding. The number of units under construction increased over 50 percent from 2016 to 2017 and remained high in 2018 (Keystone Report).
Adding new housing in the Twin Cities will not result in declines in price like it will in Seattle. This is consistent with history — simply adding new housing has not resulted in lower prices. The only way this would happen here is if developers build housing that there is no market for and no rational developer would do that.
A second problem that Feldman and Wright ignore is that there is no incentive for developers to build lower-priced housing. Because people must have a place to live, people pay whatever they must to have a roof over their head. Developers build what makes them the most profit, not what makes it easiest for people to afford housing. Luxury housing makes a larger profit than lower-cost housing, so this is what is being developed. We see this in the new 41-story luxury condo building that was just approved.
A third problem is that the cost to build new housing is higher than what is affordable to low-income people. No new affordable housing is being built without subsidies and will not be built simply because it is not profitable. Housing for the poor has become a merit good, something that the marketplace underproduces. The only way we are going to produce more affordable housing is through government intervention.
Last, in Minneapolis, there is the problem of opportunity cost. To get new housing, we have to tear down old housing. The most cost-effective housing to tear down is lower-value housing — exactly the affordable housing we need.
Merely adding new housing of any kind, anywhere, will not magically make housing cheaper. The new apartment building the Lakes on Lake Maka Ska that is currently posting units for $9,750 — that’s per month — will do nothing to create affordable housing.
The marketplace does not have an incentive to produce more affordable housing. The cost to construct affordable housing is too high for the market to produce and we have to tear down affordable housing to produce new housing. We need more government intervention to protect existing affordable housing and produce new affordable housing — not less. Deregulation of housing production will just exacerbate this problem, not help it.
Carol Becker lives in Minneapolis.