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The Private Housing Market: Friend or Foe?

August 30, 2016

In Evicted, Harvard Sociologist Matthew Desmond paints a damning portrait of one segment of the private housing market. As Desmond vividly illustrates, the high cost of housing combined with low and unreliable incomes can lead to a destabilizing cycle of missed rent payments and evictions for poor households. Given the importance of residential stability for child development and the ability of older adults, people with disabilities and others to live independent, fulfilling lives, the eviction cycle is deeply troubling.

In this post, I explore a range of policy options for addressing this challenge, including policies to reduce the immediate threat of evictions and policies to increase incomes and expand government housing subsidies. I focus particularly on policies that allow the private market to more effectively respond to increases in housing demand with a corresponding increase in the supply of private unsubsidized housing. The irony of relying heavily on the private rental market to address the problems that Desmond identifies with private landlords is not lost on me. But there is great danger in assuming the private rental market is inherently evil. An adequate supply of privately owned housing is essential for creating affordable housing in strong housing markets.

Reducing Evictions

The first set of policies to consider are those that help to prevent evictions. To reduce the incidence of evictions, we should adopt stronger legal protections to ensure renters can only be evicted for good cause, have an adequate time period in which to cure defaults and have access to free or low-cost legal representation. We should also consider increasing code enforcement efforts to improve housing quality and expanding funding for eviction prevention programs that help renters weather short-term crises like job loss or medical debts.

Boosting Renters’ Ability to Pay

Of course, if people were better able to afford their housing costs in the first place, they’d be less likely to miss a payment. On this front, there are two logical sets of policies to consider: (i) policies to increase the number of households that receive housing subsidies to help them afford their monthly rents and (ii) policies to create jobs and boost wages so that households have more income.

By reducing a tenant’s share of rent to more affordable levels, housing subsidies not only help to prevent evictions, but give beneficiaries more income to spend on nutritious food, health care and other necessities. In many markets, increases in wages will similarly increase tenants’ ability to afford their rents. But there are reasons to be concerned that these solutions may not fully resolve the problem.

Currently, the federal government spends more than $35 billion per year on housing subsidies, yet helps only about one-quarter to one-third of the households in need. To be sure, increasing housing assistance is not an all or nothing proposition and meaningful progress could be made without doubling or tripling overall expenditures. But given the current political climate, a dramatic escalation of government funding for housing subsidies does not seem likely.

Among other proposed policies to boost earnings are efforts to increase infrastructure spending, increase college attendance, boost the minimum wage (which would also reset salary scales above that level), and prepare individuals for higher-paying jobs through “career pathways.” Policies that succeed in boosting earnings will likely have different effects in different housing markets. In weak housing markets, where there are large numbers of vacant or abandoned homes, the increased ability of residents to pay for housing may contribute to an upgrading of these units and improvements in both housing quality and stability. But in strong housing markets – the ones that get the most attention for high housing costs, such as Boston, New York, San Francisco, Seattle and Washington, D.C. – increasing the amount of rent that residents can afford to pay without increasing the supply of housing accessible to them will likely lead to increases in rents that eat up much if not all of the residents’ increased disposable income. This is the basic law of supply and demand at work.

Expanding the Overall Supply of Housing

For this reason, it’s important to focus simultaneously on a third set of policies that allow the private market to respond to increases in housing demand with corresponding increases in housing supply. These policies include allowing greater residential density in appropriate locations and reducing the length and complexity of the entitlement and permitting processes. While necessary adjuncts to policies that boost wages and expand housing subsidies, policies to expand the overall supply of housing are also useful as stand-alone policies and can be pursued immediately, even as these other policy debates play out.

Increases in the overall supply of housing are likely to come, at least at first, through the production of housing that is not affordable to low- and moderate-income households. This is because the economics of housing construction make it infeasible in many locations to develop new housing for low-income households without substantial government subsidies. Over time, however, housing that initially rents or sells at higher levels filters down in cost, becoming more affordable.

According to the Joint Center for Housing Studies at Harvard University, between 2003 and 2013, the filtering of older housing increased the stock of housing renting for $400 per month or less by 11 percent, more than twice the increase in that stock created through new construction. As confirmed and quantified by Syracuse University Professor Stuart Rosenthal, filtering occurs in all regions of the country, though the degree of filtering in the rental housing market is somewhat lower in New England and the Pacific region than in other parts of the U.S., perhaps because of regulatory constraints that make it difficult to expand housing supply. When supply is heavily constrained, there are strong incentives to renovate older housing, leading many units to filter up in price rather than down.

Inclusionary zoning is another mechanism through which the production of market-rate units can improve affordability. In markets with inclusionary zoning policies, a share of new housing units will be immediately affordable to households with moderate incomes; by layering existing or new rental subsidies onto these units, they can be made affordable to low-income households.

In the end, the private housing market can be our friend as well as our foe.  Even as we tighten regulation for existing housing to prevent evictions and improve housing quality, we must adopt more flexible regulatory policies for new construction to allow the market to expand the overall supply of housing to improve affordability.

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