Economic Facts and Fallacies

by Thomas Sowell

In short, the riots represented a social breakdown that occurred before the movement of businesses out of inner city ghettoes.

Moreover, in Indianapolis, where the employers did not move as far away as in some other cities, there was the same inner city social pathology of a rapidly increasing welfare culture, with accompanying increases in crime and violence, as that found in Chicago and other cities where these phenomena were attributed to transportation costs.

Put differently, inner city ghettoes had lower rates of crime and violence, as well as lower unemployment rates, and most black children grew up in two-parent households, in an earlier era ...

The reasons for the changes for the worse in inner city neighborhoods from the 1960s on must be sought elsewhere because the movement of businesses out of these neighborhoods came after these social breakdowns. G...

Meanwhile, it has become a common sight in many American cities to see immigrants from Latin America gathered at particular places where employers drive by and hire them, taking them to whatever factory, construction site, private home, or other place of employment has a demand for them. In other words, these workers provide no transportation of their own but still get employed. Usually, these are unskilled laborers with low incomes an...

In earlier times, when black workers were poorer than today and most lived in rural areas where public transportation was seldom available, black labor force participation rates were at least as high as the labor force participation rates of whites from the late ...

The change to today’s situation, in which blacks have lower labor force participation rates than whites, cannot be explained by changing costs of transportation to work, in either time or money, for employers can and do arrange for vans to pick up workers, not only in the case of casual labor hired off the street for a day or for the duration of a given project, but also workers hired as on-going employees for businesses located some distance away from the source of the labor ...

What is crucial is that employers have a demand for such labor at a price at which such labor is available.

The biggest economic fallacy about housing is that “affordable housing” requires government intervention in the housing market, perhaps with subsidies, rent control, or other devices to allow people with moderate or low incomes to be able to have a decent place to live, without paying ruinous prices for homes or apartments.

Ruinous prices for housing are certainly a fact of life in some places, leaving people of moderate or low incomes with inadequate amounts of money for other things. The question is whether government programs offer a way out of such situations for most people.

If we go back to the beginning of the twentieth century, before government intervention became pervasive in housing markets, we find people paying a smaller percentage of their expenditures for housing than at the end of that century.

Back then, the rule of thumb was that housing costs—whether rents or mortgage payments—should not take more than one-fourth of a person’s income. In 1901, housing costs took 23 percent of the average American family’s spending. By 2003, it took 33 percent of a far larger amount of spending.

Most people know that the San Francisco Bay Area has one of the most expensive housing markets in the nation. However, not everyone realizes that, as recently as 1970, Bay Area housing was as affordable as housing in many other parts of the country. Data from the 1970 census shows that a median-income Bay Area family could dedicate a quarter of their income to housing and pay off their mortgage on a median-priced home in just 13 years. By 1980, a family had to spend 40 percent of their income to pay off a home mortgage in 30 years; today, it requires 50 percent.34

Three-quarters of the land in the county is legally blocked from development.35 With such a severe restriction on supply, high land prices were virtually guaranteed—and therefore also high prices for the housing built on that land.

By and large, however, the decade of the 1970s marked the beginning of severe government restrictions on the building of houses and apartments. That same decade marked the meteoric rise of housing prices in those places where the restrictions were particularly severe, such as coastal California. While many cities and counties in California, Oregon, Hawaii, and Vermont created restrictive housing laws and policies during the 1970s, many other places did not or did so at different times.

In most cases, the decade in which housing markets became unaffordable closely followed the approval of state growth-management laws or restrictive local plans.

The same high correlation between government intervention and sharply rising housing costs can be found in other countries as well, where housing restrictions are particularly severe, under a variety of politically attractive names such as “open space” laws or “smart-growth” policies. An international study of 26 urban areas with “severely unaffordable” housing found 23 of those 26 to have strong “smart-growth” policies.37 The results belie the phrase.

Restrictions on the building of homes and apartment buildings take many forms. “Smart-growth” laws restrict the expansion of home-building in suburban areas. There are also “open space” laws which simply forbid the building of anything on land set aside in various areas—40 percent of the land in Montgomery County, Maryland, for example, more than two-thirds of the land in San Mateo County, California and, as already noted, three-quarters of the land in Monterey County, California. Although a typical middle class single-family home is usually built on a quarter-acre lot, minimum lot-size laws forbid the building of homes on less than an acre of land in some places or several acres of land in others. Such laws alone are enough to cause housing prices to skyrocket beyond the reach of millions of people. Then there are zoning laws, environmental laws, historic preservation laws, and others, including arbitrary limits on the number of building permits issued and/or requirements that builders conform to whatever arbitrary preferences and preconditions members of planning commissions choose to impose before issuing permits.

Contrasts in housing prices are sharp between places that have numerous or severe restrictions and places that do not. Houston, Texas, for example, does not even have zoning laws, much less the array of ...

A nationwide real estate firm estimated that a typical middle-class home on a quarter-acre lot that costs $152,000 in Houston would cost more than $300,000 in Portland, Oregon, $900,000 in Long Beach, Calif...

At the beginning of the twenty-first century, home prices in Tampa and Tallahassee, Florida, were not very different from prices in Houston but, after restrictive home building laws passed in the late twentieth century began to take effect, “housing prices in most Florida markets have at leas...

Rising incomes and growing population obviously affect the demand for housing. Supply is affected to the extent that the land area is so built up that little land remains to build on in a given area. The innumerable legal restrictions and bans on building also affect the supply of land available for housing, as does the ease of delaying construction with environmental, aesthetic or other objections raised by officials, non-governmental organizations, or individual citizens.

Even when these objections are found to be groundless or are otherwise over-ruled, delay in itself can cost millions of dollars when vast sums of borrowed money are financing a project and interest has to be paid on that money, regardless of whether the building is proceeding on schedule or is stalled by claims that take time to investigate or adjudicate.

But neither supply nor demand by itself can explain prices,

“The population of Las Vegas almost tripled between 1980 and 2000, but the real median housing price did not change.”42 However, the average price of houses in Palo Alto, California, nearly quadrupled in one decade without any increase in population at all.

43 The difference is that severe building restrictions began in Palo Alto during that decade—the 1970s—but not in Las Vegas, where builders could simply construct new homes as the demand for housing increased. But not one new home was built in Palo...

“tens of thousands of new units were built in Manhattan during the 1950s, while prices remained flat.”44 In later years, especially after severe building restrictions began in the 1970s, that all changed: “In spite of skyrocketing prices, the housing stock has grown by less than 10 percent since 1980” in Manhattan, according to an article in an economic journal 25 years later.

Height restrictions are among the many building restrictions which can be imposed, either directly or by allowing complaints by neighbors to initiate costly construction delays while these complaints are adjudicated before various authorities. Those who make such complaints pay little or no costs, even when their complaints turn out to be completely unfounded and cost millions of dollars in construction delays to builders—and ultimately to those who buy or rent the housing that is being built.

Since the cost of housing includes both construction costs and the cost of the land on which the housing is built, the taller an apartment building on a given plot of land the lower the land cost per apartment. In places where the cost of the land exceeds the cost of constructing housing, height restrictions can mean that much higher rents or condominium prices must be charged.

If economic considerations would lead to the building of a 20-story apartment building but local laws restrict the height of buildings to 10 stories, then twice as much land will be required to house the same number of people.

Moreover, if a growing community cannot expand upward, then it must expand outward, leading to longer commutes to work, more highway congestion and, almost inevitably, more highway fa...

Meanwhile, in Houston during the late 1970s, “average incomes surged well ahead of the rest of the US,” but nevertheless Houston remained “one of the fifteen least-expensive housing markets of the 319 US regions examined by Coldwell Banker.” As already noted, Houston does not even have zoning laws, much less the large array of housing restrictions found elsewhere.

Dallas has consistently maintained family incomes about 10 percent above the US average, while its housing prices are generally lower than the US average.

As already noted, in Palo Alto, California, where home prices nearly quadrupled during the decade of the 1970s, there was not a single new home built during that decade, so this was simply a question of the same existing homes selling for far more than before, and obviously had nothing to do with construction costs, since there was no new construction.

An economic study of 21 housing markets around the country found that, in 12 of these markets, the cost of housing exceeded the combined costs of construction and the land by no more than 10 percent. It was precisely in other communities with extremely high housing prices that these prices exceeded construction and land costs by more than 10 percent—as high as 33 percent to 50 percent in Los Angeles, San Francisco, Oakland, and San Jose. In midtown Manhattan, the prices charged for condominiums have been double their construction and land costs.50 A New York Times story provided a glimpse of the market for condominiums in Manhattan:

Katalin Shavely, a 30-year-old bedding designer in Manhattan, devotes her weekends to scanning the classifieds and attending open houses, searching for just the right one-bedroom apartment for less than $750,000. She can’t find it.

Where builders are allowed to construct homes and apartments without severe government restrictions, even growing populations and rising incomes do not cause housing prices to shoot up, because the supply of newly constructed housing keeps up with the growing demand, as in Houston.

High profit margins in communities with high housing prices cannot be explained by monopoly in the private market but by government-imposed restrictions on home building.

Ironically, having created artificially high housing prices, government then often supplies token amounts of “affordable housing” to selected individuals or groups.

well-publicized programs perpetuate the belief that government intervention is the key to creating “affordable housing,” when in fact such intervention has often been a key factor in making housing unaffordable.

What is called “planning” in political rhetoric is the government’s suppression of other people’s plans by superimposing on them a collective plan, created by third parties, armed with the power of government and exempted from paying the costs that these collective plans impose on others.

What held in check the ability of government officials to micro-manage housing markets were property rights recognized by state constitutions restricting state and local governments and by the Constitution of the United States restricting what the federal government could do. However, court decisions over the years eroded property rights, which were increasingly regarded as simply private privileges of people who happened to be fortunate enough to own substantial property—these private privileges then being seen as expendable for the greater “public

The landmark court decision in the Petaluma case54 in 1975 opened the flood gates to a vast expansion of housing restrictions in communities where “planning” was in vogue.

One of the ironic consequences of regarding property rights as simply benefits enjoyed by more fortunate people—rather than as fundamental checks on government power—was that affluent and wealthy communities could now restrict the ability of mod...

the normal course of events, a growing demand for housing leads not only to new housing being built on unoccupied land but also to old communities being transformed as existing housing is torn down to make way for new homes and apartment buildings. Sometimes the housing torn down is replaced by larger or more upscale housing—“gentrification”—but often what happens is that luxurious homes or mansions on large lots or estates are bought up by developers and then torn down to be replaced by more numerou...

In short, the erosion of property rights has allowed affluent and wealthy communities to keep out people of moderate or low incomes and prevent the building of housing for ordinary people that would change the character of existing upscale communities.

The high housing prices created by these restrictions do not have to be paid by home-owners already living in these communities, who either own their own homes outright or whose mortgages date from earlier times before the sharp rise in housing prices that these restrictions create.

Far from losing anything by housing restrictions, existing home-owners see the value of their property shoot up—and it is existing residents who vote on local housing restrictions that raise housing prices for newcomers.

Although the affluent and the rich, by definition, have more income and wealth per person than the average member of society, often the total purchasing power of a far larger number of people is enough to bid away luxury homes and estates, replacing them with middle-class or even working class homes and apartment buildings, changing the composition of a whole community.

Where an existing community consists of people in upscale homes on large estates, and there is a growing demand for housing in their area, some of the existing residents may find the offers made by developers to buy up their property too tempting to