The root cause of America’s housing affordability crisis, as told by one housing policy analyst

It’s an interesting time to be in the world of housing, to say the least, but what one might see as a national housing crisis, Armlovich sees as a metropolitan crisis. To better understand this distinction, Fortune reached out to Armlovich. To put it simply, it’s always been possible to buy cheap land and find a home far away from friends, family, work, restaurants, hospitals, et cetera, in his view. But that’s sort of changing, and while it’ll likely always be true to some degree, some middle markets seem to be becoming less of a refuge from unaffordability in the era of remote and hybrid work. 

Below are key elements of Fortune’s conversation with Alex Armlovich. Portions of the Q&A have been edited and condensed for clarity and brevity. 

Fortune: You’ve previously said that the housing crisis is specifically a metropolitan crisis,  can you tell me a little about that and your thoughts behind that distinction?

Armlovich: So when you’re thinking about housing, housing prices, and housing affordability, on one hand, there’s the ancient problem of poverty: if you have low or no market income, then you always, of course, struggle to afford reasonable shelter, even if that shelter is fairly cheap. On the other hand, when you might have earned a substantial market income and still not be able to afford housing near good jobs, a crisis, where housing costs and prices are high, objectively speaking, not just as a percentage of income. 

If you were to take a two by two in your mind of good weather and good jobs and cold weather and lower wage jobs, there’s affordable and abundant housing where there’s not good weather and not great jobs, and there’s not very affordable housing where there’s some mix of good weather and and high wage jobs. That’s basically a hard and fast rule but a quick way to kind of understand the nature of the problem. 

You can get a manufactured home, like a factory built home that can be shipped for about $70,000, not including land costs. And if you go really far from jobs, other people, and all of your friends and your family, and you go live in the woods, you can have a house starting at $70,000 where land prices are really, really low—but they’re low because they’re far from everything.

Q: Why is that an issue? 

On the one level, there’s a basic, you might call it a lowercase “l” libertarian intuition that the government shouldn’t order people where to live. Just because you’re born in the Bay Area, doesn’t mean you should be forced to migrate somewhere else, or if you’re born in the five boroughs of New York City, that you’re forced to migrate somewhere else. But beyond that, we’ve basically turned our highest wage labor markets into gated cities. People have begun to move where housing costs are low instead of where wages are high. So basically, until 1980, people tended to move to where wages were highest, and wages were slowly equilibrating between regions, and since 1980, people have begun moving towards where housing costs are low instead of where wages are high.

U.S. incomes over the course of the 20th century have grown probably 30% slower than they would have if more people were allowed to live in Silicon Valley, New York, etc. So basically, we’re all poorer, in addition to, again, if you want to live somewhere, it’s odd that we have rules that say, you’re not allowed to live here; you’re not allowed to build a home here.

Q: Can you explain your view on America’s housing crisis and how we’ve gotten to this point?

It’s a supply shortage, especially near high wage jobs and high amenity locations. In terms of how we’ve gotten to this point, in the 19th century, we did actually have something of an urban housing crisis. People were living together with 100-square-feet per person in the Lower East Side of Manhattan—extreme overcrowding, extremely low living conditions. There were no elevators and no streetcars. People had to live within walking distance of everything. You couldn’t build out because you had no streetcars and couldn’t build up because you had no elevators. We actually ended up building our way out of that crisis over the course of the 20th century, to the point that by the 1970s, not only was there no urban housing crisis, it was long forgotten. We grew our way out by adding new land, making it accessible through highway systems, so we basically created the suburbs. 

Between the 1960s and 70s, people’s sentiment towards growth changed, and they were like, we’ve built too much and too fast, so they started banning multifamily buildings everywhere. But we went so far that we basically stopped building altogether, well not quite altogether there’s some regional variation—so basically on the coasts, we stopped allowing substantial new housing and sprawl [single-family housing development] was contained by physical constraints. In New York, we built all the way out to the edge of where you can drive from within an hour’s commute, and likewise, in Los Angeles, they built all the way to the mountains. You just can’t sprawl any farther, and so, since we’re not allowing infill growth, we don’t build enough units to keep up with job growth, and then the houses that do exist go to the highest bidder.

The Sun Belt, after the invention of air conditioning became livable, so it exploded. They allow a lot of single family homes on the periphery, and they still have room to sprawl (although there are some exceptions). Those areas have been growing through sprawl and have been the safety valve of where wages are not as high as Boston or San Francisco, but housing is cheap and you’re allowed to build a house. 

Q: How has this all been exacerbated by home prices that skyrocketed during the pandemic, and in some markets are still increasing, along with mortgage rates that have more than doubled? 

Remote work was a shock that suddenly loosened that tie to the traditional high wage cities. Eventually, the sprawl machine will fire up—the question is, when are they going to be able to build fast enough? Otherwise it’s starting to nationalize a little bit. Where 10 years ago, you would have said there are three housing markets in America, now that easy three-way divide has gotten more complicated because in some of those fast growing, low cost cities, demand grew faster than their ability to produce during the pandemic. And so now, they’re almost kind of in between. We’re looking at these new Sun Belt boomtowns that are going to have to start thinking about some of the same zoning questions that you think about for multifamily on the coasts. So, remote work, not only has it not solved the problem, it’s almost nationalized it. We’re more in this together, and we all need to jointly build our way out.

Q: Why is zoning fundamental to this conversation? 

We use zoning as a shorthand often for a whole toolkit of land use regulations, you might call it land use regulation generally. The government says in precise detail, the number and types of units, the amount of floor area, how large the side yards and rear yards need to be. Everything about a home is dictated in great detail by a zoning ordinance plus the associated land use regulations. So basically the government says on every single piece of land under municipal control, how many homes can be built there and what characteristics that can have that will make them more or less affordable. So all of those things basically mean that there’s total local control over the housing supply. In Manhattan, you can build a new high rise condo and the land for your condo is the roof or the floor below. So no matter how high prices go and how much profit you could earn from adding one more floor, the rules won’t let you do it. 

Before zoning existed, the Vanderbilt family had a mansion district on Fifth Avenue, and they all got together and said, let’s promise not to sell our mansions for apartment development—all they had were gentlemen’s agreements and deed restrictions. And eventually, one by one a couple of people in the area ended up selling and an apartment building went up. Voluntary association was the way to keep it in place, so zoning offered a tool to make it so that no matter how high prices go and how much demand there is to live there, no more housing will ever be built. So you basically have this tool to ensure the integrity of the spatial income sorting that you want to achieve.

Q: What’s the effect of the nation’s housing crisis?

The problem is that there is too little supply near good jobs in high wage cities. As their economies grow but the housing supplies don’t, there’s a bidding war over the limited supply of homes, with the lowest bidders falling out of the market altogether (either leaving the region or becoming homeless). For example, New York added 1.2 million jobs, but only 400,000 homes in the last decade. We saw a similar pattern in new and used car prices during the pandemic. Chip shortages capped the number of new cars each automaker could build, limiting new supply and boosting new car prices. But, perhaps counterintuitively, used car prices rose even faster, as people who would have bought new and sold their used car, instead held onto their cars. It was just like supply-limited gentrification in housing, but for used cars instead of used homes.

This supply shortage is a side effect of local government efforts to ensure income segregation—local governments cap housing supplies intending to keep our “undesirables” and low-income households who don’t pay as much in property taxes as they consume in local services. But as every local government does this, in turn, the local supply restrictions add up to a regional shortage or even statewide housing shortage. That’s why state action to put guardrails on local control of housing supply has become necessary, because no one local government acting alone has the right incentives to open up their housing supply.

Q: Any last thoughts along these lines that you want to share? 

Ten years ago, we thought this was only going to be a problem for maybe seven large cities, and now the problem is spreading and spreading. A city like Atlanta that thought of itself as so business friendly, so growth friendly, is suddenly finding that the government says it’s not allowed to build houses. That’s going to be a reckoning that we all are going to have to face as the housing crisis has only spread since remote work. We thought remote work would save us from it, but if anything, it just seems to be even more widely shared.