Susan Pendergrass (00:00)
always a pleasure to talk to Dr. Edward Glazer of Harvard. And you have a new paper out that looks at how housing has changed.

I want to talk about that. was just saying before we started recording that I had Brian Kaplan on and we have talked about how it's a supply problem, not a demand problem, but explain to me why, first of all, what's going on now with housing in United States and why places like Los Angeles continue to just not have enough housing so that people are living on the streets?

Ed Glaeser (00:32)
Okay, so big question. of course, homelessness is partially about housing supply. It's also about sort of mental illness. It's about fentanyl. It's about other things as well. But there's no question that the rent is too darn high as the party bearing that name says, and that housing prices in America have gotten to be astonishingly high, not just in coastal enclaves like

Susan Pendergrass (00:33)
Big question.

Ed Glaeser (00:56)
Los Angeles, but also in places like Atlanta, like Phoenix, that used to be bastions of affordability for ordinary Americans, largely because they built enough. Those places are increasingly also turning into places where a great house in a great neighborhood just seems out of reach for middle-class Americans. Now, you can build further out, and they still are, but they're building much less in the sort of moderate density,

Susan Pendergrass (01:14)
But why? Can't they just keep building?

Ed Glaeser (01:22)
medium price areas that used to build a ton of housing in the 70s and 80s, they're just not doing that anymore. And I want to just, you know, sort of let's get the sort of economics of supply and demand across to audience, right? So some of your audience may have taken economics 101, in which case they may remember those graphs that show a supply curve and a demand curve. But basically all you really need to remember about that is that when prices are high and

the quantity of something is also high, then it's likely to be a demand problem, right? Because you're, know, clearly people want a lot of this and firms are doing their best to provide more of that stuff. And so, you know, that's, that's about demand. If the price of something is way up and the quantity of it is way down, that's a supply problem. Okay. Because if we're all about demand, then the quantity should be up as well. And that's how we fundamentally know that this is a supply problem, not a demand problem.

Then when you look at Atlanta and Phoenix and Dallas, you really see this change where they used to be places that the new production was just amazing and it's just not anymore. And a way to think about this at the American level, if we built at the same rate between 2000 and 2020 that we built between 1980 and 2000, we'd have 15 million more homes in this country. And if we had 15 million more homes in this country, housing would be a lot more affordable.

Susan Pendergrass (02:46)
Yes, so then why aren't construction firms building the houses? assume the profit margins are similar. Why not or more? What's stopping them?

Ed Glaeser (02:56)
So I have to take you back 20 years to my first work on this that looked at this. But we certainly think that land use regulation is the great cause of how we've managed to produce scarcity in a land of natural abundance. And I'll tell you how we think we know this. So we know this both across metropolitan areas, where some metropolitan areas are more heavily zoned than others.

And there's something called the Wharton Residential Land Use Index that measures this across places. And the places where the zoning is heavier have higher prices and less production of new housing. We also know within metropolitan areas, we know that towns that, let's say, have larger minimum lot sizes, they get less building. Now, how could it be otherwise? How could if you have a two acre minimum lot size, how is it that that could possibly not reduce construction? But of course, it's nice to see if that's true.

But I'll give you the sort of, you know, the most economic-y way that we know this, which is, you know, and I like it, of course, because it makes use of those economics 101, that economics 101 logic that I'm so enamored of. There's a basic economics 101 logic, which is if markets are relatively unfettered, then the price that consumers pay should equal the marginal cost of production to firms. That's really economics 101. Now, that assumes there's not a monopoly, but let me tell you, in

in housing, like there's no monopoly on anything. There's not like there's market power. There are thousands of developers throughout America. In think there are, you another paper of ours argues that there too many developers in America relative to having a small number of bigger and more efficient developers. But there's competition in this. And so you would really expect prices to equal marginal cost. Now, the problem with saying price equal marginal cost in much of America is much of America also involves land. And so that makes things slightly more complicated. But there is a place in which measuring marginal cost doesn't involve land.

And that's in New York City, because the extra unit to provide an extra condominium unit, you just need to add extra story to the building. And so you don't need to figure out how much land is worth it all. You just add an extra story. And more than 20 years ago, when Joe Jerko and I wrote our paper with Raven Sachs on this, which was published in the Journal of Law and Economics, right, we found that at that point in time, construction costs were half of what had cost to buy a condominium. And we had a whole bunch of different ways of trying to measure construction costs. And from that,

deduced that, there must be some barrier, we're going to call it the zoning tax, and this is the big way of doing this. Now, we also have a supplementary technology, which is less perfect for these things in terms of suburban areas. And there we asked, the way we valued land was we said, how much more is a property worth if it has two acres associated with it than if it has one acre associated with it? We valued an acre that way. And when you do that, you looked then only in coastal America, we found big gaps.

between how much it cost to build a house and how much it cost to buy a house. And again, we attribute this to sort of land use, land use controls to local zoning. And our interpretation is what's happened in the pricier parts of Atlanta and Phoenix, whether or not it's Buckhead or Scottsdale, is they basically figured out how to go Los Angeles on their builders and they just made things really difficult to build. I will say one other point about cost, is that...

The technology that I talked about was taking the building cost as given. We actually don't think the building costs are independent of zoning. And we have another new paper that looks at building costs over 130 years. And it basically shows kind of flat building costs between 1900 and 1940. Building costs went way down between 1940 and 1970, which was the sort of heyday of the sort of

Susan Pendergrass (06:14)
Okay.

Ed Glaeser (06:28)
master builders like William Levitt who figured out how to bring the genius of mass production into construction and they figured out how to drive down costs for ordinary Americans because that's what competition does. And then of course after 1970 like costs went way up. Building costs not just buying costs the building costs went up and we think the explanation is what happened is that local land use rules

meant that you weren't building 3,000-unit projects anymore. You were building 30-unit projects. You were building three-unit projects. And as the projects got smaller, the builders got smaller. In most industries, the majority of employees work in establishments with more than 500 workers. They work in factories. They work in big retail operations. In construction, the majority of employees in residential construction work in establishments with fewer than 10 employees. You know what an eight-person firm doesn't have? It doesn't have a research and development department.

Susan Pendergrass (07:15)
Right.

Ed Glaeser (07:17)
It's a small

firm, it doesn't invest in new technologies. And that's really what we've seen that since 1970, you used to have patenting in construction move along with patenting in manufacturing. That's just no longer true. Patenting in construction is way down. Patenting in manufacturing is through the roof. And so the sort of magic of innovation, which powers much of American industry, that's really lost if everything's going to be a mom and pop operation that's going to just build one house at a time because of local land use rules.

Susan Pendergrass (07:44)
Well, so folks have said, I've heard that it's supply chain problems and high school kids not going into the trades is what's making it so expensive to build houses now. And it just doesn't really check out to me given how expensive the houses are. And where I'm in like a outer suburb kind of exurb and there's the big developments. And what I find to be so interesting is like people will move into these big developments because they want to be sort of outside the suburban zone.

But then they kind of want to close the door behind them. And they're like, why don't want any more of these outer developments happening? Because I came here because I wanted it to be semi rural. so they, I mean, I just was wondering, does that happen in Phoenix? Does that happen in Atlanta where people are like, I've got enough money, I bought my house, I just don't want more people coming here. Yeah.

Ed Glaeser (08:29)
That happens everywhere. That happens

everywhere that we've empowered local people to make rules. once you create, once you've got your own thing, having new building is unlikely to be a big plus for you, right? mean, there's some inconvenience of the local building. You kind of like the low density thing. That's why you chose to live there. I have a theory that people are more frightened of change than they should be. That in fact, building the new development will not be as bad as they think it is. But it's unlikely to make their lives better in some way. Now that's

kind of a problem and maybe we should figure out ways so that new developments will make their life better in different ways. And some places have already done that, but if they're gonna make their lives better in different ways, then it's gonna raise the cost of development. There's no avoiding that. And in some sense, the reason why I think this is kind of tragic is it feels like America, which I think all of us dream that there should be a country which outsiders can come and find their future. mean, that's what the Statue of Liberty is all about, right?

that view of a nation of outsiders has been replaced by a nation of insiders. And the framework that I'm taking on this really comes from Manker Olsen's Rise and Decline of Nations, which he wrote 43 years ago. And that's a book that argues that in stable societies, increasingly collusive groups rise up that figure out how to protect their interests at the interests of other people. Now, when I read this book, probably 1991, right?

I looked at and I thought that doesn't sound like America to me. Maybe that's New York, maybe that's California, but you know, that's not Texas. That's not Missouri, for goodness sakes, right? That's not, that's not, you know, the places that are more dynamic. 40 years later, as I look at what's happened to construction, as well as things like occupational licensing and other forms of things, I feel increasingly that Olson is right and that we have become a nation of insiders, like your friends who move out to the excerpts and then say, then pull up the drawbridge and say, one else. And, you know, it's the young people who are paying the cost.

Susan Pendergrass (10:13)
Yeah, I I saw an article within the last week about how mobility has greatly declined. People moving within the same county, within the same state and across states, all down. And it was sort of highlighting the difficulty for young couples as they have kids typically used to move out of their starter home, move to their next home, and they are not able to do that now. They're stuck in their starter homes because of price. And I know partly interest rates, but...

they're afraid to give up this starter home because then they don't have any place they can buy. And that seems like such a shift in how this society in the United States has been.

Ed Glaeser (10:50)
It is. And I think I think you're right to push back on these very local things because this is not a three year trend. This is a 30 year trend. And, you know, there were low interest rates during much of that time period. There were not supply chain issues during much of that time period. The labor cost issue is a thing, but I want to stress something about this. so and so, you know, in some sense, our work on productivity and construction was inspired by the early work on sort of construction at writ large by Austin Goulsby and Chad Syverson. And

Susan Pendergrass (10:56)
Yeah. Yeah.

Ed Glaeser (11:17)
Their view is that what's going on here is what's called Baumol's disease, which is even as other sectors of the economy become more productive, they bid up the price of labor. And that means in an industry that's stagnant, think being a barber, the price of getting your haircut also goes up. My response to that is, yeah, but in most industries that doesn't happen because they innovate, because they change technologies, because they figure out new ways of building. The weird thing about construction is they haven't been able to do that. And that's where I would push back on the view that, it's just about labor costs.

because it shouldn't be about labor costs because in fact, you we're no longer using nearly as many people to build cars as we were 50 years ago because we've changed the way the cars are built, but we have not changed the way that houses are built. And so it is much more dependent on labor costs than it should be.

Susan Pendergrass (11:59)
If anything, we've made it harder, right? Like my experience with my limited experience with building not even a full house is like where the outlets have to be placed. The inspection process, the permitting process has become, you know, almost so difficult that a lot of people just don't even want to do it anymore because it's just so difficult to get through the process. And the IRC, the industry code has gotten bigger and bigger. And, you know, then there's fewer people who know how to do the work too. So.

Ed Glaeser (12:01)
deep.

Absolutely. And we have also both sort of local zoning and a variety of different federal rules about the federally subsidized mortgages make it much more difficult to sort of have a thriving modular industry than you otherwise would have. I mass production of housing is a perfectly credible model. The Japanese have it and it's sort of kind of beautiful there. What's interesting about Japan is they do have local zoning, but they only have something like nine different zoning codes in the whole country. So you can choose zoning code A or zoning code B, but you're not allowed to write your own rules.

And so that means that there's a fair amount of uniformity which makes mass production much more feasible. And the mass produced stuff is nice. I mean, as it is nice in Scandinavia, there's no reason why you can't have a mass produced house that is perfectly attractive. And in fact, it can be somewhat customized. It's not like it needs to be like you can have a different facade, can do it different. Alfred Sloan figured out how to have like individualized cars in the 1920s. Certainly you can have individualization and mass production at the same time.

Susan Pendergrass (13:17)
So where do see this headed? if your premise in the paper that I read is that we're seeing the decline of the suburb, which again, used to be people moved out there as they accumulated wealth, where do you see this heading? Are people gonna return to cities? Cause that's another whole problem. Or are people just gonna be stuck and they won't be able to move when they want to.

Ed Glaeser (13:38)
Well, there's certainly a lot of pain unless we change our policies. It is certainly true as a share of building, there has been more in cities in the Sunbelt metropolis now than there was 50 years ago. In some of those cities, actually the amount in the urban core has gone up. In some of them, it's just the suburban building has gone down by so much and the urban stuff has gone down by less. In some cases, urban building is easier because you have areas without a lot of neighbors.

So you have brownfield sites, you have areas which are close to offices, you have areas in which, and typically as opposed to a suburban community where the only people at the table are the homeowners who really don't want more building, in a city you have the employers, you have the construction workers, you have a variety of other people, have bankers, you have people that actually want new construction. And so the politics of getting to yes is a little bit easier on this. So I think cities likely are one type of place. We will continue to have some.

building in the excerpts, but it's going to go down over time unless we change the rules. Now, there are the ability to change the rules. There are sort of three different levels of changing the rules. I think actually trying to convince a bedroom suburb that they should make building easier. I think that's a fool's errand. Like, I'm happy to make fun of people who simultaneously are against building and then spout other liberal hypocrisies about how they care about poor people in different ways. That's just sort of fun. But like, I don't think it changes hearts and minds or anything. I think it's just my own amusement.

the state government.

Susan Pendergrass (14:59)
I have to say I agree with you

there because I can't tell you how many people are like, we need to worry about low income housing, but I don't want any apartments. They are like, I don't want apartments where I can see them with my eyeballs. As long as I can't see the apartments, let's do it. Yeah, I agree with you. Anyway, sorry to interrupt.

Ed Glaeser (15:06)
Exactly. Exactly.

Exactly. No,

no, no, that's quite right. At the state level, no, and I will say sort of my conservative counter argument, think actually the conservative case against building is more coherent, but there I will just keep on talking, which I truly believe in that this is an issue of freedom for me. This is an issue of allowing property owners to do with their property what they want to do without excessive state regulation. So that's where I would argue there.

the city governments, I think there is room and I think it is a good idea to work with mayors and to try to help them figure out where they can put the housing in a way that's gonna be both valuable for the people who live in it and valuable for the city as a whole. State legislatures are the front lines of these battles. there are states that have already gone the wrong way in a big way like California where they're consistently fighting in the opposite direction. The big issue on...

California right now is the so-called builders remedy. they already have a system which they allot housing to different communities. And the big question is what happens when the community is in non-compliance as they frequently are in non-compliance. And if the courts and the legislation decides to give the builders home remedy, builders remedy, that means that the builders basically just do an end run around local rules and they just have to follow a state building code. There's a similar process in Massachusetts called chapter 40B.

which is also sort of a state work around the local rules. If you're building a certain type of affordable housing that includes enough units and so forth, and if the community is expensive enough. I worry also about the, or I worry about the changes in the Sunbelt. And I, you know, would love there to be more, you know, aggressive sort of work against this happening at the state level. So, you know, it is perfectly legitimate for a state to put whatever limitations on local zoning that they want to do.

And so, you they could just pass a law that says you're allowed to have one of these three zoning codes. You're not allowed to have any other things like this. That would be a great thing. But, you you can do other things at the state level that are all sorts of limitations on what's going on. I would love for, you know, the state of Texas or the state of Missouri to do more to sort of limit the sort of rise of NIMBYism blocking building within within your states. And then, of course, there's the national level and there it's very hard for

the nation to make a difference. I am very excited about the Build Now Act, which has just made it out of the Banking, Housing and Urban Affairs Committee, which ties a relatively modest amount of community development block grants to new construction. And so you're using a little bit of the carrots and sticks that are available through community development block grants to encourage more building at the local level.

Susan Pendergrass (17:35)
Yeah, what Missouri has done, which has not been successful in the least, is they had a set of tax credits for builders of low-income housing and they dispersed these credits out. If you agreed to build a certain number of units, then you got these tax credits. But then they made the tax credits themselves tradable, basically. So then the builders got into the situation where they were swapping their tax credits around.

not actually building units for low income people, but the idea, so this is sort of the premise I want to get to, the idea that you set aside this pot of money and these incentives to encourage people to build housing for low income residents, and that's going to fix the problem to me is counterintuitive when if you just allow building to happen and more middle income building and more upper income building, then you'll just, you won't have people who are middle income.

now stuck in the lower income housing, right? Like if you just freed that up, then we would probably, like you just said, 15 million units, is that what you said we would have if we had just kept building at the same rate, then we wouldn't have to build properties specifically to satisfy the low income need. But, Yeah.

Ed Glaeser (18:45)
Susan, I strongly agree with you. I strongly

agree with you. I'll make a couple of points. One of which is, poor people typically drive used cars. There's no reason why they shouldn't be living in used houses. That's not a thing. It's a much more sensible thing to happen. And so the view that we're going to build new houses for the poor rather than expect a natural filtering process, that's kind of weird. Two, it is fundamentally unhealthy to think about there being two classes of built environment.

an affordable class and a non-affordable class, right? Because it allows the politicians to point, I built these affordable housing units, I'm doing something. But if it's a small number of units, you're not really solving the problem. And real affordability means that anyone can come to St. Louis or Kansas City and rent an apartment or a house at a reasonable price. That's what real affordability means. Not that you got lucky and won the lottery to get some state subsidized thing. Now, I will say in favor of

And I think this is completely true in the Missouri environment. In the Massachusetts environment, where we are so screwed up that it is almost impossible to figure out how you'd get anything affordable without things like the low income housing tax credit. I'm still not really in favor of it, but I'm not going to waste any effort arguing against it. I think in the coastal markets that have just made it so far from imagining ordinary affordability, it's not a thing that I would argue against. It's a thing in which I can see the argument.

I certainly see the argument for.

Susan Pendergrass (20:07)
Yeah, mean, some there are communities that I know of people looking for houses and they can't seem to find anything below a million dollars. I mean, there are some really just crazily well inside the Beltway in D.C. and in like parts of Portland, Oregon, it's just there's just nothing available. And it's it's a shame because then I would think it leads to sprawl, but it sounds like even sprawl is.

either not happening on the same level in the suburbs or maybe people are going further out. I was just in Phoenix. It felt like there was sprawl there, but I know that 10 years ago they were building much faster.

Ed Glaeser (20:42)
Yeah. So you're right. I mean, think this is point that I also try to make is that often the justification for these rules in the suburbs is environmental and it's almost always backwards, right? Both because if I prevent building, wherever level it's going to go further out and that's going to mean more driving and more carbon emissions. And certainly like California is naturally the most low carbon, is the lowest carbon emissions part of America because of, not because of any California environmental policy, but because the winters and the summers are just unbelievably mild relative to the rest of our

And so, you know, if you actually wanted to reduce America's carbon footprint, you would be in favor of as much building as possible in the California, in San Francisco Bay. And yet California environmentalists for 60 years have been doing exactly the opposite. not all of them, to be credit, but certainly, you know, there have been a, there have been a, and I think that's sort of another thing that's sort of important to throw into the mix.

Susan Pendergrass (21:28)
Yeah, yeah.

Yeah, it's a very difficult topic this and I know that a lot of people think about it and I do know plenty of people who worry about having enough housing for low income people, but I think it is such a counterintuitive way to get to it and your work certainly informs it a lot at a very academic level and I appreciate it. You always have interesting stuff coming out and you make it understandable for me. So I really appreciate that. ⁓

Ed Glaeser (21:58)
That's, try

and I'm always grateful to be to be on your podcast and to do anything with the show me Institute.

Susan Pendergrass (22:01)
Wonderful.

That's lovely. OK, well, thank you so much for joining us. I do appreciate it.

Ed Glaeser (22:06)
Thank you.