Like so many millennials these days, Charles Bryant has been having a rough go of things in recent years. The 39-year-old New York native had a good job as a hotel manager in Delaware, but things changed quickly when the pandemic hit.
“I was one of those guys that had a five-year, 10-year plan,” Bryant recently told Fortune. “I wanted to be at a certain place.” Unfortunately, those plans dissolved when he had to take a pay cut and eventually made the hard decision to leave his hotel job. “The pandemic halted all the positive momentum I had built professionally in the 10 years prior,” he said.
After searching for new opportunities, Bryant finally found a job as an operations manager for a major retailer, a position that has helped him through these trying times. But while he may have avoided the worst, his life is still far from where he wants it to be. He has $42,000 in student debt and lives with his parents, an arrangement of necessity given the skyrocketing price of homes.
In a lot of ways, Bryant’s story reflects some growing trends. Many young people have had to change course in recent years; many are saddled with student debt, and many are living with their parents. Indeed, roughly 58 percent of 18-24 year-olds were living with their parents in 2021, as well as roughly 17 percent of 25-34 year-olds.
The reason for the trend is not hard to pin down. “A staggering 70 percent of Americans between the ages of 23 and 40 who want to buy a home say they can't afford to,” writes Peter Rex in a recent Newsweek column, “and those who can are doing so at a later age than their parents.” In all, only 43 percent of millennials are currently home-owners. And with house prices up nearly 120 percent since 1965 (adjusting for inflation), that number will likely remain low for quite some time.
Getting to the Root of the Problem
So why are housing prices so high? It’s a question that everyone is asking, but few seem to have a good answer for.
Some blame greed, but that argument really doesn’t hold water. People haven’t suddenly become more greedy than they were a few decades ago. Another explanation is that money printing from the Federal Reserve is causing inflation, and that is certainly part of the problem. The Fed’s purchases of Mortgage-Backed Securities in particular may be inflating housing prices above what they would otherwise be. But with housing prices ballooning so quickly, inflation likely doesn’t account for the lion’s share of the price-hikes.
What does account for it is good-old supply and demand. Simply put, the primary reason housing prices are soaring is because the supply is being limited while the demand is growing.
With respect to supply, there are basically two ways to expand: up and out. On the one hand, cities can build taller, higher-density residences. On the other hand, they can build on new land at the outskirts of the city.
The problem is that both of these options are seriously unpopular. With respect to building up, many people are fiercely opposed to high-density developments in their local communities, and as a result, most municipalities have strict zoning laws that prevent or at least limit these kinds of initiatives.
If you suggest building out, however, you quickly encounter the wrath of environmentalists who are on a mission to mitigate urban sprawl, and the environmentalists have passed many land-use regulations, too. The Greenbelt in Ontario, for instance, is a 2,000,000 acre swath of land surrounding Toronto that is permanently protected from development because of environmental considerations.
Red tape is another huge barrier to housing development. Permits, building codes, and all sorts of other regulations make it far more expensive to build new homes than it needs to be, and those expenses make it that much harder to increase the supply of homes on the market.
The demand for housing is, of course, largely determined by population. Generally speaking, the more people there are in a country, the more demand there will be for housing. Population changes are in turn determined by two factors, the natural growth rate (accounting for births and deaths) and net migration (accounting for immigration and emigration).
In the US, which currently has a population of about 334 million, the natural growth rate and net migration rate are both positive, so they both contribute to the increasing demand for housing. Historically, the US population has grown by about 0.9 percent per year on average. It’s not a particularly high rate, but it’s enough to put some constant pressure on the demand side of the equation.
It’s All About Trade-Offs
So, now that we’ve identified the problems, the solution should be obvious, right? Unfortunately, that’s not quite how economics works.
The point of going through the factors affecting supply and demand wasn’t to identify potential solutions, but potential trade-offs. As we’ve seen, there are many ways that housing prices could be brought down, but if you look closely, every single one of them requires that we sacrifice something.
We could relax zoning restrictions, for instance, but then people would have to sacrifice the character of their neighborhoods. We could stick it to the environmentalists and embrace urban sprawl, but then we would have to sacrifice the environment and the benefits that come with preserving it. We could relax permits and regulations, but we would sacrifice oversight and assurances of safety.
Similar trade-offs exist on the demand side. Though few would be in favor of government interference with the natural growth rate, many people are open to changing immigration policy, and it’s not hard to figure out that fewer immigrants means less demand. The trade-off, however, is that you lose the economic and cultural benefits that come with free movement, which can be fairly significant.
Grappling with these trade-offs helps us put the housing price problem into perspective. It’s easy to want more affordable housing, but the question is, what are you willing to give up to get it. The character of your community? Environmentalism? Oversight? Immigration? You have to pick something. If you don’t, prices will just keep going up.
Having said that, it’s important to note that recognizing these trade-offs is not the same thing as making a moral judgment about these policies. For instance, the fact that lower immigration would lead to lower housing demand does not mean that lowering immigration is what we should do. The point is just to recognize that there’s a tension between all of these things, and that something always has to give. Now, there’s room to choose what it is that we sacrifice, but there’s no such thing as a free lunch. You can’t have your cake and eat it too. As Thomas Sowell said, “there are no solutions, there are only trade-offs.”
The First Lesson of Politics
Having established the inevitable trade-offs that exist in a world of scarcity, the question then becomes why haven’t we figured out a better trade-off yet. Surely the status-quo isn’t our best option, is it?
The answer has to do with the nature of the political system. “The first lesson of economics is scarcity,” said Sowell. “There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
The fact of the matter is, politicians hate acknowledging trade-offs, and as a result, they spend little time considering them. They want to talk about what they will give people, not about what they will take from them. “We will lower the price of housing” is a winning platform. “We will lower the price of housing by increasing the density of your communities and allowing urban sprawl” is more accurate and balanced, which is precisely why it’s political suicide. Remember, the first lesson of politics is to ignore the trade-offs.
But “facts do not cease to exist because they are ignored,” Aldous Huxley reminds us. “You can avoid reality,” Ayn Rand says, “but you can’t avoid the consequences of avoiding reality.”
In other words, trade-offs still exist, whether we want to acknowledge them or not.
Thus, real solutions, or shall we say improvements, need to begin by acknowledging the trade-offs. The essence of any political position is not only what you want to get, but what you’re willing to give up to get it. That is the discussion we need to be having if we want to make any progress on this issue.
Personally, I’m not a fan of restricting immigration, and I also have a soft spot for the environment. That’s fine, but if I still want lower housing prices, it means I’ll need to accept either fewer regulations or increased density, or some combination thereof. Fortunately, I happen to think most housing regulations and zoning laws are unnecessary and immoral anyways, so I’m happy to champion getting rid of them as a step toward housing affordability.
Now, you might choose a different trade-off, and values like property rights will hopefully play a role in that decision, but the point is just that something always has to give. Of course, you could refuse to make any sacrifices related to supply and demand, but then by default the thing that gives is the price.
So what’s the real reason young people can’t afford a home? Simply put, it’s because most people are not willing to give up any of the values they hold that are restricting supply and increasing demand.
As long as that remains true, prices will continue to soar.