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If We Want to Lower Inflation We Need to Build More Affordable Housing

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Earlier this month the ambitiously named Inflation Reduction Act was passed (barely) by the Senate. This legislation includes a number of measures that its sponsors claim will slow down the historically high inflation that is being felt by the American people. But according to the nonpartisan Congressional Budget Office, the legislation will have a “negligible” impact on inflation. And the University of Pennsylvania’s Penn Wharton Budget Model concluded that “the impact on inflation is statistically indistinguishable from zero.”

While the bill is loaded with funding for the IRS, incentives for the clean energy industry, and subsidies for the Affordable Care Act, what is noticeably missing is anything around affordable housing. This is a bit shocking since rising housing costs make up the largest part of household spending and have created a housing crisis in almost every American city.

We talk about inflation like it is a tangible object but in reality it couldn’t get any more subjective. Every person spends their money differently so everyone feels inflation in different ways. The most standard definition of inflation, the one used by policy makers when passing legislation, is the consumer price index. This “basket of goods” weighs the effect of the price of each different consumer purchase. The official CPI puts a weight of 23 percent for “owners’ equivalent rent of primary residence.” That means that the government thinks that the average person spends about 23 percent of their income on rent or homeownership. This number is in sharp contrast with recent analysis from the Pew Research Center that shows that in 2020, 46 percent of American renters spent 30 percent or more of their income on housing. On top of that you have to also factor in the 23 percent who spent at least half of their income this way.

So, if people spend so much of their income on a place to live, why do we focus so much on the increase in the price of things like gas and food? A good answer might be that those prices are much easier to control. The price of mortgages and rent isn’t easily influenced by a quick tax reduction or consumer rebate. Much of what influences the price of housing is not set at the federal level. Building homes can be incentivized but the price of materials and the labor needed to turn them into buildings is hard, if not impossible, to control. Governmental bodies at the state or federal level can say they want more affordable homes built but getting projects approved and permitted on the local level can still be a huge hurtle.

For now it seems like there will not be significant help from the government to help solve housing affordability. What the government can’t fix, market forces often can. I think this is the case when it comes to homes. Subsidized affordable housing is an important part of the puzzle, but a large one is building more “market rate” housing. This type of construction is overlooked by many developers who find better margins and more prestige in building luxury dwellings. That needs to change. 

I have written about housing affordability for a while now and the more I research the topic the more complicated it becomes. There are many challenges when it comes to building affordable housing. What are the most affordable techniques for building? What is the best layout of affordable units? How can developers and landlords take advantage of incentives for affordable housing? What can be done to overcome local opposition? How can a traditional property company add an affordable arm to their operations and create a competitive advantage? How can technology help streamline these processes? I’ll be asking these difficult questions and more when I moderate an affordable housing panel at the Blueprint real estate technology conference next month in Las Vegas. There are plenty of innovators finding new ways to build affordable housing and a number of pioneering property companies leading the way. I intend to learn from both of them.

An increasing amount of capital is being earmarked for “ESG” investments. I don’t think there is anything more sustainable right now than creating a more affordable society. Homelessness, which in some estimates costs between $30,000 and $50,000 per person per year, is not sustainable. Neither is making workers commute hours just to get to their jobs. We are all feeling the strain of inflation, albeit some more than others, but we need to keep our eyes on the real culprit. While it might sting to pay more at the gas pump or grocery store, nothing affects our pocketbooks, our society, and our environment more than the skyrocketing price of shelter.

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