What the heck happened to supply and demand economics?

Question

What happened to the basic understanding of supply and demand?  I didn’t grow up in a financially savvy household, but even as a kid I remember having a distinct awareness and understanding of supply and demand and its impact on prices.  There is so much discussion and legislation going on in our country about the need to implement rent control through major metros, and even state wide, in addition to how our government needs strip away landlord rights such as basic screening and ability to evict tenants out of their own personal property.  This is INSANE.  We are already seeing property owners in places like Seattle and New York moving out of the market or going through the process taking rentals off the market reducing overall supply.

Looking at new housing (commercial and residential) build data nationally over the past 20 years reveals a significant decline following the 2008 market crash that has really lasted to this day.  Current new build numbers aren’t even where they were in the late 90’s and that drop in building is clearly starting to show up as an issue as our population growth didn’t stop during that time.  I know markets are complex and different, and there are many factors involved in the housing issues in San Francisco, Los Angeles etc.  But the public just doesn’t seem to understand that we need to encourage investors and developers to build, not place crazy restrictions and limitations on those who are trying to provide housing.  There are so many complicated stats, figures, etc. out there but the basic principles of supply and demand hold true and I just can’t believe I’m seeing such a breakdown in the public’s ability to recognize this.  Better zoning laws, less restrictions and red tape, and continued tax incentives for builders and investors is needed to address the housing crisis, not increased government.  If I’m missing something or way off base, I’d love to hear your input because I’m just trying to wrap my head around why this doesn’t seem to register with much of our country…or at least incite more people to question it.

Jaysen Medhurst · Answer

The basics of supply and demand still exist, @Scott Passman. That's why housing costs have risen so much faster than wages. Demand is outstripping supply. Governments are reacting to this the best way they can with restriction, rent regulation, etc.

Why? Because they don't have many other options.

• In places where people want to live (NYC is a great example) there is a lack of build-able land (supply and demand again), so new construction is very expensive and developers must target the high end of the market in order to turn a profit.
• Those well developed places already have a number of existing impediments to new development, which further complicates and swells costs. Existing infrastructure is expensive to retrofit and upgrade; existing communities resist new development, and a number of competing constituencies must be considered.

I agree that not allowing landlords to screen potential tenants or evict those who don't pay is insane. We'll see if those things stand up in court. My bet is that they don't.

I've spent a bit of time in local government and specifically on Land-Use issues. This in a very HCOL area where median home prices are approaching $2MM. So, "affordability" is an issue to say the least. Here's what we hear from the public:

• Housing is so expensive! Why can't we do something about this?
• I don't want that new 20-unit building in my neighborhood! What about the traffic? You're going to let them tear down that 100-year old house?!? My first girlfriend lived there! We can't tear it down! "You're decimating our community!" (actual quotation).

This is the nature of a democracy. Lots of competing interests and constituencies. As a wise man once said, "The worst form of government except all the others."

Russell Brazil · Answer

All the things you are complaining about are actually what cause us in the major coastal metro areas to grow rich. The constraint on supply from all the red tape, coupled with high demand, is what pushes prices so high. Rent control? Yeah some investors look at this as a bad thing....but if you own a non-rent controlled unit in a rent controlled area.....your rent is going to sky rocket.

Llewelyn A. · Answer

@Scott Passman

Hi Scott,

I have been doing some digging in regards to why there is so much homeless, or so it seems.Here is one Study:https://www.innovations.harvard.edu/sites/default/files/hpd_0203_wright.pdfIt's an interesting Read.It points out that there is a history of declining affordable housing areas that used to be there, called "Skid Row."In "Skid Row", there were usually several kinds of apts for the homeless or very low wage persons including "SROs (Single Room Occupancy)" and Flop Houses.Back then, you could have lived in one of these "SROs" by working in some menial task that didn't require any skills such as loading and unloading trucks, etc.

They didn't care if you were mentally ill or physically disabled or need medical attention. You could still work as an independent and get some work for your flop house bed.

Today, a lot of the jobs that the non-skilled workers are doing  have been already automated or equipment that one person can use is doing the work of many workers (think Forklift here).

In the future, this will accelerate. For instance, we have people who drive for a living. BUT... in 10 years, we may see a complete disruption in this kind of work as cars and trucks become self-autonomous.

HOWEVER, today, this is a totally different story.Here in NYC, 42nd Street, Manhattan used to be a Skid Row with lots of Video Porn shops, maybe even low income housing, etc.Same with a lot of other neighborhoods everywhere in NYC, especially in Bed-Stuy.What was even worse was that there was a Purge in Mental Institutions back in the 60s or earlier, I believe. They basically let all the mental patients out with plans to have created these kinds of affordable housing in a large amount of locations throughout the Nation, but that latter part never happened. So the Mentally Ill were just left to fend for themselves.Take away most of the "Skid Rows" and the Mental Institutions.... well... you get what we have today.I have been thinking about it for a while, but Supply and Demand is working here, except that the supply of Affordable housing in respect to "Skid Row" type areas have virtually disappeared.So you have a lot of people who need this kind of affordable housing, but not much of that kind of housing is to be found.In fact, you have an increase in demand because of the recent drug epidemic involving Oxy, Meth, Fentinol and Synthetic Marajuana.I don't lean left but more towards Center, but I am trying to become more informed.I think there is merit in studies like these that describe the issue by looking at the history of homelessness.It's almost as if we have to have apts and homes that match the population segmentation as the POPULATION changes.In other words, are we just ignoring very low income people just because they cannot afford anything but a "Skid Row" type area?And if so, maybe there needs to be an incentive for Government to create these Skid Rows.Funny, but I think that is exactly what Vancouver has done with their East Hastings Street area.If you have ever been there, and if it's your first time, you will be SHOCKED at how much this is a Skid Row while Vancouver is a very EXPENSIVE City.They maybe have it the right way.... ensure there is a Skid Row area for the completely destitute who needs it.I am only suggesting that all major Cities, or even minor Cities, should ensure there is a "Skid Row" which can grow with the population that needs it.The other way around this is to ensure that the destitute can be lifted out of poverty. I think a Political Candidate, Andrew Yang, has proposed doing that with something he calls the Freedom Dividend, which is an unconditional $1k per person per month divident to all Citizens.Maybe it's time to think out side the box of thinking for a solution. Supply and Demand really isn't working for the Mentally ill or Poverty stricken. They may have a demand for housing, but because they have no money, they don't have buying power.BTW, this posting is just my thinking out loud. I haven't formulated a concrete opinion yet. Just spending time doing research.

Matthew Ryan · Answer

@Scott Passman - You're striking the right chords (minus tax incentives for development); Unfortunately, I believe those days are over. IMO, reform in zoning laws should be sufficient. My suggestions would be to align yourself with organizations that are helping fight the legislative push towards more destructive housing policies. I can't speak to those in the RE industry specifically (hopefully someone else can), but I can point you to the YIMBY organization, which, I believe, is now national. @Jaysen Medhurst summarized it well with various deep rabbit holes you can go down, all different based on the local and state policies enacted. We have produced a perfect storm here in CA, which a state Senator once told me "will take years" to reverse. I do, however, believe we're at an inflection point politically. It's vital as an industry for us to organize and talk about what the solutions are versus what the problems are or else while we're debating the latter, the politicians are making decisions on our behalf typically tilted towards the complaints of their constituents. Which, mind you, is what they're hired to do. It's not going to be an easy job, but the industry must remain capable of actually solving these issues. I once heard a former Republican South Carolina Congressman make a compelling case for carbon taxation in a way that is truly "free market." It was one of the most simple and yet persuasive arguments I've heard in my ten years of following the emergence of clean energy technology, energy efficiency, and the fight for environmental issues while balancing regulation. I only bring this up to remind you that at the time of his speaking engagement he was a  "former" South Carolina Congressman ;)

Troy Gandee · Answer

@Matthew Ryan I believe you're talking about Bob Inglis. I think he was a rep for 2 terms. He started out very conservative. When he flipped and started discussing climate change and carbon taxation with a hope for carbon neutrality in the future, he got pummeled like immediately. SC is decades behind on environmental equality and climate change. However, that's also a big reason why we've had a huge wave of manufacturers come here over the last 10-20 years. Not only are the environmental issues cheaper for them, but we're also a right-to-work state, so it's rare for those major employers to have any type of a union. Boeing employees finally voted in favor of a union just a year or two ago. It's a double-edged sword, though. The strong economy is obviously fantastic, but the damage to our wetlands and the flooding acceleration due to development has been tremendous. Not to mention the negative impact the impoverished communities are experiencing. The level of mercury in most of our waterways is pretty staggering. Those are the waterways that the poorer folks literally still eat from.

Aaron K. · Answer

For the most part I'd agree with you, however in places like LA and San Francisco, there just isn't room to build, sure there will be a vacant lot here or there, or someone will tear down a shopping center, but other than that the geography is the limiting factor in building new housing not the government, that is why you have urban sprawl from Santa Clarita to Temecula.

The good news is that any landlord who genuinely wants to solve the housing problem and has a head on their shoulders wins either way.  If you truly believe rent control doesn't work and raises rents long term, good for you because you'll make more money, if that is not the case housing will become more affordable overall.  The eviction protections are less ideal and probably have more exceptions for owner occupants etc. but that is something to work towards.

What the heck happened to supply and demand economics?

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