Last spring, Olympia for All, a grassroots housing justice coalition, held meetings with our state legislators to discuss the housing crisis renters face every day and the solutions the legislature is working on.
We were informed that in the last two legislative sessions “more bills have been passed to ease the supply problem than ever in the legislature’s history.” Legislators and the housing industry are framing this housing crisis as a supply/demand problem with a simple Econ 101 solution: build more housing.
Olympia for All is asking legislators and our community as a whole to take a step back and question this solution.
Despite legislative action to increase the supply of housing, according to a recent St. Louis Federal Reserve Economic Data report, housing start permits in Washington state are now at the lowest level they have been in over 10 years! That’s right, while conventional wisdom says more supply is our solution, we are actually building less housing than we have in over 10 years.
Olympia for All would say that it’s difficult to swallow the supply/demand Kool Aid if you really understand Econ 101. The reason we aren’t building housing is because interest rates are high. Higher interest rates mean higher costs for developers to build housing today. Those developers know that they will not be able to recoup their costs and make a profit unless they ask for even higher rent than we have already. But they know renters are already tapped out and aren’t able to pay even higher rents. So, the building we need is simply not happening.
This gets to the very heart of why the supply/demand Kool Aid is so hard to swallow. The cost of housing is all about the price builders need to charge to make a profit. Economies of scale are extremely marginal in the building industry. The cost of building is primarily the materials, labor, and land costs associated with construction. It doesn’t really matter whether you’re building two apartment complexes in Olympia or four. The price per unit is going to be pretty much the same.
OK, but let’s continue drinking the Kool Aid and look at this further. Everyone agrees that we need housing prices to drop significantly to make housing affordable for homeowners and renters. So, let’s say we reach our goal: Supply finally exceeds demand and housing prices plummet. What will this scenario look like for our building industry?
The answer: Something akin to 2008, with lots of builders filing bankruptcy and lots of workers filing for unemployment because plummeting prices will mean builders are severely underwater as the price they can get falls far short of the actual cost of building that housing. Is this really our goal?
And how about those plummeting prices for existing homeowners? How are homeowners going to feel about the largest asset they possess — an asset that may be key to their retirement plans — plummeting in value?
The cost of housing for renters and homeowners is directly tied to the cost of building for builders and developers. That’s why a supply/demand solution is something we really should be thinking long and hard about. The consequences of actually achieving the oversupply everyone is aiming for will be widespread and devastating.
The pure market demand/supply solutions being sought by the legislature are clearly not working. The pure market solution has in fact brought us to the housing crisis too many of us are living today. As Albert Einstein once said: “We cannot solve our problems with the same thinking we used when we created them.”
We must forge a new path by significantly increasing public investment in affordable housing. This crisis is real. We must move toward real solutions now.
Dave Toler is the campaign chair for Olympia for All, a community coalition of the 14 local organizations.