Democrats love to talk about helping low-income families buy a home, but most progressive schemes (including lower interest rates from the Fed) boost demand for existing housing. Demand-side policies merely push up prices. But if you look at the zoning restrictions in blue states, they are among the most formidable. 

Now the Fed is preparing to cut short-term interest rates, which will boost housing costs further. As we noted in a blog post this week on our bank index, can the FOMC be credible on inflation if home prices rise double-digits next year? Politically? No way. 

"Half of respondents in [Organization for Economic Co-operation and Development] nations are dissatisfied with the availability of affordable housing," the Financial Times reports on a Gallup survey, "a sharp rise since central banks raised interest rates to deal with the worst bout of inflation in a generation." But VP Kamala Harris  is largely focusing on encouraging demand, instead of supply.

"On August 16, presidential candidate Kamala Harris unveiled a series of housing proposals that recycle the same failed strategies that have plagued federal housing policy for decades," write Ed Pinto and Tobias Peter of American Enterprise Institute.

"Among the key components are subsidies for the construction of three million new housing units over four years, as well as a total of $100 billion over four years in down payment assistance to first-time homebuyers. Experience tells us her plan would be worse than doing nothing," they said.

In terms of the macro economy, monetary policy has never actually tightened credit enough to force home prices down. In the 1980s, Fed Chairman Volcker crushed housing and construction sectors before declaring victory over inflation. But in 2008 and 2020, the political weight of crisis made policy makers reluctant to truly fight higher prices with sustained deflation. 

Even though the Fed goosed home prices with a sharp decrease in interest rates from 2019 to 2022, for example, bank reserves are essentially where we started pre-COVID. Indeed, the Fed tightening cycle this time around has not even stopped the appreciation of existing homes and land. 

"It's been a funny cycle to say the least," writes Simon White of Bloomberg. "Chastened by the repo-market flare-up in 2019 that put an end to its last attempt to shrink its balance sheet, the Fed's current tightening cycle has proceeded along different lines. In fact, from the market's perspective there has arguably been no tightening as reserves – a primary determinant of market liquidity – are unchanged since QT began in June 2022."

Alexei Alexandrov and Laurie Goodman wrote in a paper for Urban Institute earlier this year ("Place the Blame Where it Belongs") that it is wrong to blame government policies to enhance access to credit, local zoning restrictions or institutional investors for the housing shortage. Instead, they advocate policies to make more supply available and "provide adequate subsidies such that lower-income households can afford a place to live and more renting households can afford to become homebuyers."  Sounds like Kamala Harris.

"As long as the supply shortage persists, subsidies that broadly increase the number of households (e.g., various government transfers during the pandemic), as opposed to shifting the renter-homeowner composition," Alexandrov and Goodman rightly note, "will drive up home prices and rents even further and will ultimately be a subsidy to homeowners (both consumers and investors)."

Unfortunately, there is no way to make cities like New York "affordable." Aside from the cost, the politics in blue states like New York tends to attack developers and landlords. New projects are very costly because of the dozens of politicians requiring consideration. Blue states favor subsidies without new supply because it appeals to desperate consumers and is also good politics in the tradition of Tammany Hall. 

Increased density in the form of dismal public housing blocks is the plan in New York, while red states are focused on protecting single-family homes. The trouble with such policies in New York, where this writer has lived and worked for 40 years, is that the cost of building and maintaining multifamily housing is exorbitant and is not going to come down. 

The cost to acquire land and build multifamily in New York City is over $4,000 per square foot, while new residential home construction in the suburbs of New York City can easily reach $400 psf without the land cost. Progressive laws limiting all aspects of housing and making contested loan foreclosures near impossible make New York one of the least attractive housing markets in the country. 

Local politicians in New York have enacted laws to control rent and limit the ability of landlords to recoup expenses for maintaining apartment buildings. These policies are self-defeating, however, because progressive politicians have not yet devised a way to actually control inflation. Price controls do not make inflation go away but they can make commercial and multifamily real estate in large cities uninvestable. 

Efforts by New York State to encourage the construction of low-income housing in NYC have been stymied by the land cost issue, but financing is also a problem. Banks have been shedding construction loans, BankRegData reports, in part because many institutions (and regulators) see weakness today in commercial real estate and expect to see an eventual residential home price correction. 

AEI recently examined as a solution, light-touch density, which the institute defines as housing including detached single-family houses with accessory dwelling units, small-lot single-family houses, attached single-family houses, and

duplexes, triplexes, and fourplexes. 

"We show that the widespread adoption of zoning and other land use restrictions across the country has corresponded with a declining share of LTD as a portion of the total housing stock," say study authors Pinto, Peter and Emily Hamilton. 

"It is time to change the status quo and allow dense single-family development along with two-, three-, and four unit dwellings to supplement the housing stock in current one-family residential areas through conversion, replacement, or expansion of existing structures," they argue. 

LTD has a great appeal because it is funded by the private sector and does not allow for a lot of absurd grandstanding by politicians of both parties and commercial real estate developers. It also focuses on areas of existing cities where increased density can be achieved at a relatively modest cost.

But the key question that few seem to ask about housing costs and affordability is whether any degree of liberalization of housing policies would really make expensive cities, such as New York, Miami, or San Francisco, affordable for people of average means. Soaring land prices and construction costs seem to already have precluded that outcome.

But of course, the best way to help the affordability of housing is for home prices to fall.  "Using the rule of 'the eights,' history suggests that 2028 will be the year of the correction — at least until COVID-19 arrived on the scene," observes Stan Middleman in "Seeing Around Corners," my upcoming biography of the founder of Freedom Mortgage. "Things change, sometimes without any warning."