Skip to main content

Increase Local Control to Better Align Supply and Demand

With some notable exceptions, most federal housing policies increase the demand for housing by either supplementing purchasing power (vouchers, down-payment assistance, etc) or expanding a household’s ability to borrow (GSEs, FHA, monetary policy, etc). The extent to which such efforts actually increase real housing consumption depends upon housing supply. In a perfectly competitive market, supply would increase to fully match the expansion in demand. The result would be little change in housing prices, but rather an increase in housing consumption. In a world where supply is constrained, demand side policies also drive up prices with much smaller impacts on consumption. In the extreme where supply is fixed, demand side policies only drive up prices with no improvement in consumption.

I would argue that local land use policies have brought us towards this extreme, where the desired impact of federal housing policies, improved consumption, are largely off-set by local policies that restrict supply. This outcome is facilitated by the widely held political belief that local governments should control local decisions, like land use, while the federal government should address poverty. Until we combine both demand and supply policies with the same entity (which should ultimately be left up to voluntary social interaction), we will continue to see federal and local policies working at cross-purposes.

A commonly recited objection to local and state governments bearing more of the fiscal burden for housing policies is that such entities lack the resources of the federal government. Certainly on a one to one basis, such as Katrina-related assistance to New Orleans, that is correct. As it relates to nationally directed policies, it is false. Taken in the aggregate, the states have exactly the same tax base (population) as the federal government. The states and local governments have the same ability to tax as the federal government. The only reasons to have a federal role are to either facilitate geographic redistribution or to impose policies upon populations who would not otherwise vote for those policies at the local/state level.

To better align local incentives, so that choices regarding housing supply properly consider their impact on affordability, the responsibility for funding and implementing housing policy should be devolved to local governments. The one exception is the conduct of monetary policy. Given the Federal Reserve’s role in inflating the housing bubble, it would be best if we simply abandoned the use of monetary policy as a housing “stimulus” since the result as large been one of destructive boom and bust.

Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.


Welcome to the BPC Housing Commission expert forum! This forum is intended to foster interactive and substantive discussion about pressing housing issues. Each month contributors from different parts of the housing sector will be invited to respond to a discussion topic. Guest posts will feature prominently on BPC’s website, as well as be shared regularly with Housing Commissioners to help inform their work.

Have a pressing question you’d like us to consider? Please leave it in the comments section. We encourage you and our expert bloggers to add comments, contributing to the national dialogue on solutions for the future of the housing sector.

Expert bloggers are not members of the BPC Housing Commission. Any views expressed on this forum do not necessarily represent the views of the Housing Commission, its Co-Chairs, or the Bipartisan Policy Center.

2012-11-20 00:00:00
What should be the interaction (if any) between state and local policies that impact housing availability and affordability?

Share
Read Next