There's no easy way out of the structural housing shortage

WASHINGTON — Politics, like medicine, is a discipline that requires the practitioner to identify the most urgent needs and address those first — a practice known as triage. If a patient comes into the Emergency Room impaled with a crowbar and also has prostate cancer, a doctor will likely decide that, while the cancer is serious, they will need to deal with the crowbar in order to give the patient a chance to heal his prostate. 

One important difference, however, is that politicians are not bound by a solemn oath to first do no harm. The problems that are urgently addressed by politicians on behalf of "The American People" tend to also be the very problems that distinguish those politicians from their opponents — in other words, the main problem is getting elected or re-elected. The result is that truly urgent crowbars in the abdomens of The American People are left in place while the orderly dresses their hangnails and other boo-boos.

The malignant crowbar to which I am alluding is the structural shortage of quality housing in the United States — it's getting harder and more expensive for people to find places to live, which is making it harder and more expensive to start a career, start a family and build wealth the way past generations have. Studies have shown that Millennials are more likely to delay the traditional milestones of "growing up" than previous generations, which has led to a generation of nervous would-be grandparents wondering who they're going to spoil if Jessica and Michael don't get their act together soon.

The downstream generational macroeconomic effects of expensive housing are easily understood, and for my part I'd like to dispel the aspersion that the problem is with the kids themselves. One very good reason to address the housing shortage is because people of all ages and walks of life would like to be able to find a quality place to live that meets their needs and budget, and for many it just doesn't exist. 

The good news is that those in a position to do something about the housing shortage are going to get the memo sooner or later, especially as more and more voters start identifying housing as a chief political concern. There is also little reason to expect that the market will sort this out on its own; the National Association of Home Builders said in January that new construction has continued to slow and may only pick up again next year. Rising interest rates may lower home values, but those lower prices are more than offset by higher borrowing costs. What seems to be warranted is a dramatic increase in housing supply to counteract a decade-long decline in the number of homes per person. 

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The bad news is that even if there were political demand for the government to wave a magic wand and create the untold millions of housing units the people want, that solution would bring with it still other problems. Housing, like all widgets, is valued based on supply and demand — supply not only for the widgets themselves but for substitute widgets. So if five or six million housing units come onto the market as quickly as we might want them to, the net effect might be that the housing units that were already there might be worth less today than they were worth when their occupants bought them. 

We have some recent experience with what happens when housing values experience a sudden, secular decline — some proportion of mortgage holders walk away from their mortgages, and lenders are stuck with losses. That the housing market has largely rebounded since 2008 seems to be, at least partially, courtesy of an overall decline in new construction, so it's worth asking whether the housing shortage is a feature or a bug.

Fortunately, there is no magic wand, and there are many obstacles in the way of creating such a massive supply of homes quickly enough to set off the kind of systemic cascade I just described. But sooner or later some combination of funding, supervisory incentive, innovation and market demand will crack the code, and it's not too soon for regulators and politicians to plan for the day when those stars align.