High housing costs and low inventory are creating generations of perpetual renters. The culprit: government policy. The answer: an opportunity agenda for residential housing.
A big part of the American Dream is being able to own your own home. That dream is fading fast for younger Americans due to government policy. The result: Millennials and Gen Zers are facing a future where they are renters for life.
Over the last decade the average age of renters has soared from 29 to 33 as young people are forced out of real estate markets.
Here are some of the ways that government makes it more difficult for young people to own homes:
Zoning and construction regulation limit the amount of land available for development and drive up the costs of building. Zoning benefits existing homeowners by limiting development and thereby creating scarcity rents.
Consider how zoning limits development in the Northeast. Though Massachusetts is one of the most densely populated states, it also has among the largest average lot size. The average single family home n in Massachusetts is on a lot of just under half an acre–19,166 square feet. That’s double the average 9,540 square feet in Texas and a third more than in Wyoming, the most sparsely populated of the lower 48.
Connecticut is even worse than Massachusetts. The average home in Connecticut is on a lot of three quarters of an acre (30,928 sq ft).
The result is that there is a shortage of affordable homes within commuting distance of jobs in large metropolitan areas. Zoning requirements that entail large lot sizes not only limits home ownership opportunities, it limits job opportunities for young Americans.
Federal Reserve policy has also made it more difficult for young people to buy into the housing market.
The Federal Reserve’s low interest rates policies of the last fifteen years caused home prices to soar. That was the plan. Negative real (after inflation) rates on safe assets like savings accounts, CDs and bonds forced money into risk assets like residential real estate.
Access to free money from the Fed caused buyers to bid up home prices to stratospheric levels. That benefitted existing homeowners who are mostly older. They could sell or take out reverse mortgages on their properties and have a party.
High prices drained the wealth of younger home buyers such as Millennials and Gen Zers looking to start families. In essence, the Fed’s quantitative easing policies amounted to a huge wealth transfer via the housing market from Millennials and Gen Z to the baby Boomers.
The third part of the pincer movement against younger home buyers came in the form of tax policy. The past decade has seen the rise of institutional home buyers—large financial institutions like BlackRock that are amassing large portfolios of residential housing. This takes homes out of the single-family owner-occupied market and turns them into rentals.
They can do this because they have three big advantages over individual home buyers. First, institutions can deduct from taxable income the interest cost of all of the debt they use to buy these homes. Individuals are limited in the amount of mortgage interest that is deductible from their taxable income.
Second, institutions have access to huge amounts of low interest rate debt courtesy of the Federal Reserve and can get funding directly from the GSEs. Individuals have to go through banks or other middlemen to obtain a mortgage.
Third, large institutions are always the first in line for government bailouts should the housing market tank. The lack of downside risk makes institutions a far better risk for suppliers of capital than individual homeowners.
Getting young people into homes of their own is going to require a change in government policies. A start is recognizing how governments have failed young people. Though federal, state and local governments talk a good game when it comes to housing, their policies have made the situation worse.
We are now at the point at which despite being one of the least densely populated of the advanced countries in the world, Americans has one of the lowest rates of home ownership. That’s government failure on a truly massive scale.