The law of supply and demand originated in marketplaces centuries ago, long before the principle was formally examined by Adam Smith in The Wealth of Nations published in 1776. Yet, in modern day America, there is a faction of affordable housing advocates that don’t believe this economic principle applies to housing.
Faculty directors of the NYU Furman Center: Professor Vicki Been, the Boxer Family Professor of Law at NYU School of Law; Professor Ingrid Gould Ellen, the Paulette Goddard Professor of Urban Policy and Planning at NYU Wagner; and Professor Katherine O’Regan, a Professor of Public Policy and Planning at NYU Wagner, identify this unusual phenomenon happening across American towns and cities, calling this contingent of progressive housing advocates, “supply skeptics.”
Interestingly, supply skeptics do not dispute the law of supply and demand when applied to goods and services like coffee and clothing; they just do not believe that an increase in housing supply will result in more affordable housing prices. In fact, they argue it will increase the cost of housing. It is this sticking point that led Professors Been, Ellen and O’Regan to release their first paper in 2018 called, Supply Skepticism: Housing and Affordability.
What makes this topic so interesting is that opposing the development of new housing stands in the way of one of the biggest solutions for America’s housing and affordability crisis — more homes. More so, it puts the supply skeptics into the same camp as NIMBY (Not In My Back Yard) advocates who outright oppose the development of new housing– affordable or not.
In this article, we provide a current overview of America’s housing crisis, examine two common arguments against new construction made by supply skeptics, review the evidence, and then look at how these assumptions are fueling the housing crisis and impacting communities.
Does America’s Housing Crisis Really Boil Down to Not Having Enough Supply?
Harvard’s The State of the Nation’s Housing 2024 report, released by the Joint Center for Housing Studies (JCHS) of Harvard University, paints a grim picture of America’s housing crisis, noting both homeowners and renters are struggling with affordability. The housing shortage is at a crisis point, and household growth doesn’t look to be slowing down in the near future.
22.4 million American renters and 19.7 million American homeowners are cost burdened. Here in Bellingham, 56% of renters and 24% of homeowners are cost burdened. Cost burdened is defined as those who spend more than 30% of their income on housing and utilities. High housing costs have a wide-spread economic impact on the nation’s economy, not only limiting discretionary spending but reducing income needed to pay for necessities and save for the future.
In a 2024 hearing titled “A Blueprint for Prosperity: Expanding Housing Affordability,” Senator Sheldon Whitehouse, the current Chairman of the U.S. Senate Budget Committee, states, “Unaffordable housing decreases job retention and lowers productivity. It can force businesses to relocate, taking job opportunities with them. A lack of available housing reduces local tax revenue, reducing local resources for education, public safety, and infrastructure. Nationwide, the shortage of affordable housing opportunities costs the American economy an estimated $2 trillion each year. High housing costs reduce disposable income and economic mobility, stifling economic opportunities.”
The increase in the cost of housing is directly related to the shortage of housing supply. In January of 2021, the U.S. was at the lowest level of available homes since 1999 (when home inventory tracking began) (Rosen Consulting). The reduction in new housing supply is not a symptom of COVID (though the pandemic did create labor and supply chain issues), it is the result of decades of underbuilding. According to Rosen Consulting Group’s report, Housing is Critical Infrastructure: Social and Economic Benefits of Building More Housing, between 1968 and 2000, the U.S. housing stock grew by an average of 1.7% per year and then dropped to an average of 1% before further declining to an average of 0.7% in the last decade.
Monthly Supply of New Houses in the United States between 1968 - 2024. FRED Economic Data, St. Louis Fed
In addition, America is experiencing the “lock-in effect,” which is a result of homeowners staying in place because high interest rates make it too expensive to move. This effect restricts the supply of existing home sales, exacerbating housing costs. Typically, existing homes make up 90% of all home sales, but 2023 saw the lowest level of existing home sales in 30 years.
The graph shows the availability of existing home sales through early 2024 (JCHS, 2024 p.10).
To make matters worse, America is experiencing “robust” household growth as millennials and generation Z move out of their parents’ homes and into their own. As of April of 2024, experts estimate America needs between 4 and 7 million new homes to meet the demand as 1.9 million new households formed in 2022 and 1.7 million new households formed in 2023, according to data pulled by JCHS from the U.S. Census Bureau Housing Vacancy Surveys.
The gravity of America’s housing crisis is well documented, yet there is a politically successful contingent of people who work to block new developments under the assumption that new construction is for wealthy households and signals to landlords to increase their rents.
The Misinformed Citizen
In a survey asking whether an increase in housing supply would reduce housing prices and rent costs, only 30 - 40% of urban and suburban survey respondents believed that additional supply would lower housing costs (Been et al., 2024 p.14).
Another recent 2023 survey conducted in Washington state by Oregon Polling Company, DHM Research, resulted in similar findings. The Seattle Times reports, “DHM Research asked 500 Washington voters which of two statements was closer to their opinion: “Building more units of housing in my community will help stabilize the price of housing where I live” or “The price of housing will continue to rise where I live regardless of how many units are built there.” 65% of survey respondents chose the latter response, believing that housing prices will continue to rise even with an increase in supply.
Opinions based on hearsay and/or personal experience are fueling the already emotionally-charged topic of housing affordability — which is a symptom of wealth inequality. The dissemination of misinformation is highly problematic as it further polarizes community members pushing us farther away from reaching consensus on the actions required to solve America’s complex housing crisis.
Two Common Misconceptions Regarding an Increase in Housing Supply
The Construction of New Rental Apartment Buildings Raises Existing Rents
One of the concerns supply skeptics share is that new construction increases the cost of all rentals in the surrounding area. Newer housing construction is more expensive because of the increased costs of land, building supplies and labor in addition to an increase in regulations. Therefore we can assume that the rents for new apartments will be higher – at least at first. The State of the Nation’s Housing 2024 report, released by the Joint Center for Housing Studies (JCHS) of Harvard University, notes the median asking rent of units entering the market at the end of 2023 was $1,710.00 which was up $20.00 from 2019’s median asking rent of $1,690.00. However, does the supply of new construction increase the price of rentals in the surrounding area?
Been, et al. address this concern in their first paper and again in Supply Skepticism Revisited released in March of 2024. In their second report they introduce more recent data including a 2023 paper published by Andreas Mense’s that found, “a ‘1 percent increase in yearly new housing supply causes the average rent level [in the local municipality] to fall by 0.2 percent.’ Further, he finds that new market-rate housing reduces the housing cost burden for all renters in the municipality, not just those renting at the high end of the market,” (Been, et al. 2024 p.17).
So, though new homes and apartments tend to be more expensive to rent, the increase in supply does not cause landlords of existing buildings in the surrounding area to raise their rents.
Another concern from supply skeptics is that the addition of new luxury apartments and the amenities that come with them attract wealthier people to an area, creating a higher demand to live in that area. They say this demand will offset any reduction in price as a result of an increase in housing supply. To this claim, Been, et al. highlight research from a number of studies in areas around the U.S., and the world, that again find when new apartments and the amenities that follow (restaurants, boutiques, etc.) come into an existing neighborhood, the new supply of housing results in a decrease in surrounding rents and/or slows the rate at which existing rents will increase.
Specifically, Xiodi Li, a researcher who conducted a study in New York City, found that the development of a new high rise caused existing rental units within a 500 ft radius to decrease their rents by 1.6% one year after the new high rise was built. Li’s research also showed that new amenities, attracted by the high rise, had no effect on surrounding rental prices (Been, et al., 2024 p. 20).
If it’s not new construction that is causing a price increase, what is behind the rise in rental prices? The answer to this question will vary by location, though a broad look at the market shows the demand for rentals dipped in 2020 as a result of pandemic lifestyle shifts and then sharply rose in 2021 far outpacing the supply of available rental units, motivating landlords to increase their rents (JCHS 2022, p. 32).
As a result of the strong demand for rental units, 2021 saw the highest number of multi-family construction projects since the mid-1980s (despite the higher costs of building supplies, labor and land). “The rapid pace of multifamily production continued into early 2022, with starts totaling 124,000 units in the first quarter. This was the highest first-quarter reading in any year since 1986. Some 113,000 of the multifamily units started in early 2022 (91 percent) were intended as rentals, also among the highest shares recorded since the 1980s (JCHS 2022, p. 35).”
As these multifamily construction projects finish and come onto the market, the increase in supply will reduce the cost of rents in those areas. An article first released by Fortune in July 2024, notes the surge in multifamily rental completion has increased vacancy rates and is causing landlords to make concessions to fill apartments, which is ideal for renters. However, these higher vacancy rates are not expected to last long because the increase in interest rates (coupled with higher costs of land, labor and building supplies) pushed financing out of reach, slowing new multifamily rental construction. Therefore, as supply dwindles, rental prices will rise again.
New Market-Rate Construction Negatively Impacts Housing Costs for Lower Income Brackets?
Another argument made by supply skeptics is that an increase in new market-rate construction has no impact on the price of existing homes and therefore will not benefit those in lower-income brackets. In fact, they have a zero-sum perspective, believing that new construction not only negatively impacts those in lower income brackets, but it also replaces the opportunity for affordable housing. As noted above, factors like regulations and the increased cost of land, labor, and materials naturally make new home construction more expensive, so buyer demographics typically fall into middle to upper-class income brackets. Yet research shows that these buyers aren’t the only ones to benefit from new home construction.
When new housing comes on the market, it creates a domino effect that is referred to as “filtering.” According to the National Low Income Housing Coalition, “Broadly defined, filtering is the process by which housing comes to serve different residents and uses over time. In some contexts, housing can filter downwards as it ages and can become more affordable to lower-income households. In other contexts, housing can become more expensive as it filters upwards to higher income households. In still other contexts, housing units might be converted for different uses or demolished. Downward filtering is thought to be the most significant source of low-cost housing in the private market.”
Been, et al. point to a range of recent research that shows that when a new supply of market-rate construction enters the market, it not only lowers the costs of home prices but also lowers the cost of rents, while triggering a chain of mobility that benefits people across income tiers. For example, a middle-to-upper class family of four purchases a new market-rate home and now their current home is available for a family that is outgrowing the starter home they purchased. Once that starter home is on the market, a household who has been renting can finally buy and when they do it creates vacancy in the rental market for a new household and so on. This ripple effect from new construction impacts people across income brackets; “low-income individuals also benefit from new expensive housing through a moving chain process, even when the new units are allocated to individuals higher up in the income distribution (Been, et al, 2024, p.31).”
Researchers note that while filtering benefits a range of income levels, it has little to no benefit for those in very low-income brackets. “Some households have incomes too low to afford even the lowest rent a landlord can charge and still profit after paying for expenses. Some form of housing subsidies will be required to fill the needs of those households. But as increases in housing supply moderate increases in rents, the gap the government will have to fill between what the household can afford and market should decrease (Been, et al., 2024, p.34).”
An Increase in Supply, Decreases Costs — Even for Housing
Data from a broad range of research consistently shows that when there is an increase in housing supply, housing becomes more affordable. There’s a nationwide housing crisis because of a housing shortage, and while an increase in supply is not the only solution when it comes to housing for very low-income citizens, it is one of the primary solutions that will make housing more broadly affordable for a wide range of people. So, what is standing in the way of more housing supply? Low-growth advocates and the land use regulation policies they support.
Been, et al. generally define supply skeptics as progressive housing advocates who think an increase in supply will increase the cost of housing, but then there are NIMBYs. NIMBYs are also housing advocates — they advocate for limited to no new housing and little to no new growth or change in their communities.
From zoning and land use regulations to building codes, policies that limit and slow growth are made at local levels. These policies have traditionally been won by white, older, more educated and affluent residents that have more time and influence to organize, lobby and participate in local politics to prevent growth. Environmental protectionist policies have largely been used as a reason to limit growth. It’s important to note that a healthy environment is a critical component for healthy communities. However, advocates have used environmental protection as a cover in their quest to limit growth which has had severe social and economic consequences for communities.
The City of Boulder Colorado came together in the 1970s to prevent a “human tsunami” of growth and keep Boulder a “sleepy college town.” They limited the number of housing permits to 1.52% of the population and created 33,000 acres of protected greenways, but by 2023 the median home price was over 1 million dollars. Not only did restricting growth in the name of the environment result in a major affordability issue, but it forced people to sprawl. The Sierra Club defines urban sprawl as “the expansion of low-density, automobile-dependent development beyond the edge of service and employment areas.” Residents of Boulder needing affordable places to live were forced to move outside of the city, increasing their reliance on vehicles for back-and-forth commutes to the city for work and recreation resulting in an increase in carbon emissions and pollution from vehicle runoff. The effort to limit growth and preserve the localized environment within the city harmed Boulder County’s greater environment and resulted in negative social and economic impacts for the community.
In the beginning of 2024, the City of Boulder voted to repeal the residential growth cap, which coincidentally coincided with the passing of a state law that now prevents anti-growth laws.
In Washington state cities can’t stop growth — by law, they have a responsibility to support it. Yet, Bellingham’s history shares similar parallels to Boulder. Like Boulder, Bellingham is the economic and cultural center and county seat. In past comprehensive planning periods, residents and organizations such as Futurewise Whatcom (see Appendix B) have advocated for lower future population projections out of the desire to protect the environment from sprawl and preserve the existing lifestyle. However, lowering population estimates shifts priorities away from investing in the necessary infrastructure needed to support future growth, which impedes the development of housing. Today, Bellingham and Whatcom County are in the midst of a severe housing affordability crisis that has real consequences for middle and low-income residents. As of July 2024, the median sale price of a home was $700,000.00, which is a 20% increase from July of 2023, but the average annual salary was only $50,431.00. The point-in-time count for unhoused individuals at the end of 2023 was 1,059, 23% higher than at the end of 2022. Data just released August 23, 2024 by Whatcom County Health and Community Services shows 47% of those experiencing homelessness report housing affordability is the primary cause followed by 37% who report job loss and unemployment is the cause of their homelessness. It’s worth mentioning, large employers look to establish their businesses in locations that have a healthy supply of affordable family housing for their workforce.
When it comes to limiting growth for environmental conservation and protection, a recent report by Leland Consulting Group found that approximately 19% of Whatcom County’s growth happened outside of its Urban Growth Areas in unincorporated areas of the county, causing sprawl. This represents a failure in our well-intended policies to prevent sprawl.
As Daniel Herrieges, Editor-in-Chief at Strong Towns, asserts, “We can lay out a vision of the city we want through whatever political processes are available to us. But we simply don't always get to script the city we want, at the size we want, with development in only the locations we want it. Not without severe side effects.” High rates of homelessness, a housing affordability crisis, and growing wealth inequality are all examples of severe side effects caused by limiting growth.
From coffee to cars to housing, the relationship between supply and demand determines the market price and the quantity of goods and services in a market. It’s a principle that fuels our global economy and the “invisible hand” behind housing and rental prices in America.
Social and economic stability is inextricably tied to housing through wealth. Homeownership is central to the upward social and economic mobility pattern that is woven through the American Dream. With homeownership being the primary vehicle to wealth in America, those who cannot afford to enter the property ladder will be left out, exacerbating America’s wealth gap and further straining social services. According to the Urban Institute, “Between 2019 and 2022, homeowners’ median financial wealth increased from $60,000 to $85,000, while the overall median financial wealth for renters remained almost the same (around $960).”
The research shows an increase in housing moderates home and rental prices, making housing more affordable to a broad range of groups across income brackets. The path towards America’s housing crisis recovery requires local communities across the country take a hard look at land use policies and regulations and treat housing as the critical infrastructure it is in an effort to incentivize and stimulate the development of new homes. Here in Bellingham, elected officials and City staff have a responsibility to improve the methodologies for identifying available buildable land, annex new land into the City of Bellingham, invest in public infrastructure projects, and remove the permitting barriers that are standing in the way of the development of safe and healthy housing for our community — the health and stability of our economy depends on it.
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Housing for Bellingham is a community resource that works to explain the fundamental processes and terminology associated with housing related decisions in an effort to inform the public. When we understand land use planning processes, we can make more informed decisions about housing and land use policies in our community.
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