Making Housing Affordable Again: Part 2

The Housing Affordability Crisis is a Creation of Government

Part 1: The Free Market is Not Causing the Affordability Crisis may be read here.

If the forces of supply and demand are not causing Texas’ housing affordability crisis, that leaves us with the government as the culprit. Below, Part 2 examines some of the government activities that lead to higher housing costs.

Inflation and Federal Reserve Manipulation of Interest rates

In only 25 years, the United States has already experienced two “housing bubbles” in the 21st century. One would hope our politicians had learned a lesson after the first one, but that was not the case. The lesson our elected officials missed is that when the government prints more money in order to fund its runaway spending, the prices Americans pay increase. And, often, the prices that go up the most are housing prices.

One mechanism the Federal Reserve uses to create new money is to lower interest rates. Figure 2 shows that housing prices dramatically increased when the Federal Reserve artificially lowered interest rates in the first years of the 21st century. We also see that when the Fed later raised interest rates over concerns about inflation, housing prices plummeted.

For those who quickly received the new money created by the Federal Reserve, such as Wall Street bankers, government contractors, and large investors, the higher housing prices were not a problem. But for most Americans—and Texans—whose income growth did not keep up with rising prices, housing became much less affordable.

The same phenomenon is taking place today. From 2017 to 2020, inflation averaged 1.9% annually. In the last quarter of that period, Texas A&M’s THAI stood at 1.76. However, the Federal Reserve began lowering interest rates in mid-2019. As a result, inflation began to rise but was held in check by the COVID-19 government shutdowns in 2020. Once the economy restarted, though, inflation skyrocketed, hitting 7% in 2021 and 6.5% in 2022. As we have seen in Figure 1, housing prices also increased from 21% to 30% in Texas’ four largest metro areas. It was during this period the THAI rapidly declined, plummeting to 1.04 by the fourth quarter of 2022.

Property Taxes and the Cost of Government

Many people are talking about making housing affordable today, but many less people are focused on making government affordable. The truth is, though, as the cost of government increases—especially when it is funded by property taxes, the affordability of housing has rapidly decreased.

From 2020 to 2022 as housing prices increased and housing affordability decreased, Texas property taxes increased an average of 7.2% annually. Going back 10 years, property taxes have increased by 67%. Local government spending continues to drive property tax growth.

For instance, for property taxes on the average homeowner due on January 31, 2025, the city of Houston is increasing taxes by 5.34%, Dallas County by 12.47%, and Harris County by 15%. Overall property tax revenue in Harris County is increasing almost $245 million, or 10.67%.

The tax burden on Texans has also greatly increased as Texas state government spending funded by sales taxes, severance taxes, gasoline taxes, etc., continues to grow. Texas state government spending is up 61% over the last 10 years. Federal income taxes also take a large chunk of Texans earnings. These higher taxes, combined with higher interest rates as the Federal Reserve again responded to inflation concerns in 2022, have made it much more difficult today for average Texans to afford a new home.

Local Zoning, Building Codes, and Permitting Costs

Government is the first hurdle and gatekeeper for housing. Land use restrictions—such as zoning and historic designations, development fees, consultant costs, and other local restrictions can add substantially to the cost of housing. These costs vary significantly over local jurisdictions. Texas cities and counties can make it easier and more affordable for developers to build lots and homes—or make it more restrictive and more expensive.

Zoning has its roots both in racism and commercial protectionism. After a black Baltimore attorney purchased a house in an affluent all-white neighborhood in 1910, the city adopted a zoning ordinance that made it illegal for people of one skin color to move into a neighborhood in which residents were predominantly of another skin color. A few years later, the high fashion clothing stores on New York’s Fifth Avenue were being crowded by garment manufacturers. The owners of the shops were afraid this would ruin the area’s exclusive shopping experience. They were able to convince the city to adopt its first zoning code that year that restricted the garment manufacturers and other unwanted neighbors.

Houston has accounted for some of the highest growth in new households nationally for much of the last 50 years. This has accompanied a tremendous growth in employment, with jobs almost doubling from $1.9 million in 1990 to 3.6 million this year. Yet despite this growth, Houston remains one of the lowest priced, most affordable large metropolitan areas to live in the Western world. For instance, “the same amount of money buys almost seven times as much space in Houston as it does in San Francisco and more than four times as much as in New York” (Joel Kotkin).

One reason for this is Houston’s low cost of local regulations on housing. Houston is the only major city in the world that does not have zoning restrictions. Thus, unlike other cities, there is no government restriction on where housing can be built and no restriction on what type of housing can be built. Many cities have lot size restrictions that create less dense but more sprawling developments. These increase costs because more of the infrastructure is required to develop larger areas of land. In addition, this chews up more rural land for less housing units.

Additionally, Houston’s per unit development fees associated with building new housing are substantially lower than the rest of the state. Fees in Dallas, Fort Worth, and San Antonio average between $10,000 and $16,000, while Houston averages less than $5,000. Development fees in Austin, which has the highest housing costs in the state, average over $40,000 per unit.

Housing Subsidies

One solution often offered for making housing more affordable is government subsidies. Kamala Harris made this part of her campaign, proposing a $25,000 down payment assistance to 4 million first time homebuyers. Unfortunately, subsidies almost always make housing less affordable.

The American Enterprise Institute examined Harris’ proposal. The projected that the subsidies would increase the cost of housing paid by expected homebuyers under the program by $177 billion, more than the $100 billion in subsidies these buyers would receive. Not only would the subsidized buyers face higher costs as they used their subsidies to bid up prices, but so would everyone else.

The same thing happens when closing costs and interest rates are subsidized through Fannie Mae, Freddie Mac, and the Federal Housing Authority. And not just for low-cost housing. In 2021, the “Federal Housing Finance Authority (FHFA) has just increased the size of mortgage loans Fannie and Freddie can buy (the “conforming loan limit”) to $970,080 in “high-cost areas.” With a 20% down payment, that means loans for the purchase of houses with a price up to $1,212,600.”

Another problem with the subsidies is they often not only increase prices but increase the cost of building new housing. The Wall Street Journal reported that 4,500 new apartment units built for low-income people using subsidies from the city of Los Angeles cost an average of $600,000 each, while a 49-unit apartment built with private financing Angeles cost about $291,000 a unit. The difference? Regulations that accompanied the subsidies greatly increased the costs.

Finally, federal housing subsidies also distort the housing market and increase costs by directing money to corporate investors who purchase homes and convert them into “affordable rental housing for low-income households.” This is done by the Housing Tax Credit Program funded by Congress by administered in Texas though the Texas Department of Housing and Community Affairs. Using these subsidies, “corporations backed by left-leaning private equity groups such as Blackstone, Starwood Capital Group and others have been feasting on real estate in recent years, buying up single-family homes, turning them into rental properties and keeping them off the market.” While the private sector is involved, it is the federal subsidies and the federal government’s push for discrimination in housing that is causing the problem.

Legal and Illegal immigration

Texas has a long history of legal and illegal immigrants settling in the state. Whatever the positive and negative effects this has brought over the years, one effect it certainly had on Texas is increasing the demand for housing.

In recent years, the “number of foreign-born residents in Texas grew from 4.37 [million] in 2013 to 5.46 [million]” in 2023 (USA FACTS). This means that close to 18% of the Texas population is foreign born. In the Houston metro area, foreign born residents make up about 23% of the population, Dallas-Fort Worth about 19%, Austin 15%, and San Antonio 12%. Houston has twice the percentage of foreign-born residents as does San Antonio, which may be the primary factor in San Antonio replacing Houston as the metro area with the lowest median priced home.

Environmental Restrictions

Restrictions on economic activities imposed by environmental laws and actions can add significant costs to society. One area with these costs accrue is housing. Economist Katherine Kiel explains:

Environmental laws can impact the supply of land, a key input in the production of housing. Laws can also change the prices of other inputs into the construction of housing (for example, lumber) and can affect the supply of housing in that way. Laws can impact the supply of housing if they increase the amount of time necessary to build housing units or if they increase the possibility of litigation faced by housing developers.

Austin is a local example of how environmental restrictions add to housing costs; in this case, by taking land out of the housing market. Around 1990, the federal government—despite a lack of evidence—declared the black-capped vireo and golden-cheeked warbler as endangered species. Almost overnight, tens of thousands of acres were taken off the market for new development, including for new housing. Part of this is the Balcones Canyonlands Preserve, more than 33,000 acres west of Austin that have been removed from private use for perpetuity; it can never be used for human habitation despite the growing need for housing around Austin. Similarly, the city of Austin manages over 34,000 acres of water quality protection lands in Travis and Hays counties in the Edwards Aquifer catchment area. This property, too, is no longer available for housing.

A more widespread restriction on the availability of land for new housing is the U.S. Environmental Protection Agency’s rule on Waters of the United States (WOTUS). Traditionally, the EPA has said that wet patches of ground may be considered waters of the United States and thus subject to EPA jurisdiction. The EPA and the U.S. Corp of Engineers has used this to either prohibit or greatly increase the cost of new housing in Texas and elsewhere.

Last year, the U.S. Supreme Court in its Sackett decision determined that the EPA’s rule was far too broad, and that only wetlands that are part of a larger body of water are subject to the EPA’s jurisdiction. While that is a great improvement, there are concerns that the EPA is doing its best to confuse the issue. As explained by the Mississippi Manufacturer’s Association, “On its face, the new test should provide more clarity, fewer jurisdictional wetlands, and therefore fewer permits. Unfortunately, there is concern that the Corps’ and EPA’s application of the new test leaves many just as confused as they were before Sackett and could further allow the Corps and EPA to slowly expand WOTUS beyond the scope of the Court’s decision in Sackett.” Ongoing litigation by Texas and other states is seeking to improve the situation.

The EPA has also played a role in the high price of concrete that is increasing housing costs. The EPA recently imposed new restrictions on emissions from concrete plants under its “Good Neighbor” rule. Other restrictions are designed to control dust and effluents. The restrictions can include emission controls, production limitations, setbacks, enclosures of plants, all of which have led to an increase in the cost of concrete. The EPA also launched an investigation into concrete permitting in Texas in 2022 because of concerns about environmental racism.

Part 3: Solutions will be released tomorrow.