Hous(ing) of Cards: Why US Housing Policy is So Timid

Fractionally Legal v17 explores the US housing crisis and our lack of response to it

I’ve spent the last few weeks in Hawai’i, a state with two industries: real estate and tourism. A subset of real estate, developing and managing housing, is a favorite topic of mine, and also a major focus of my law practice. Being in Hawai’i, the state with the highest housing costs in the country, and the ongoing Presidential election in which housing affordability has become a major issue, made me think: Why are housing costs so damn high? And why is the problem so persistent when the answer—build more housing—is so apparent?

First, the facts as lived on these Islands: the median price of a single-family home is $850,000 in the state of Hawai’i and $1,100,000 in Oahu/Honolulu. That might not faze my readers in high-cost mainland cities like New York, Boston, Washington, Los Angeles, and San Francisco, but Hawai’i does not have diverse economies like those places, with high-paying jobs to support a robust housing market. Tourism jobs, for the most part, don’t pay very well. Neither do agricultural jobs, which is a third industry (see below for my thoughts on agriculture in Hawai’i).

So why is the cost of housing so high in Hawai’i? It's the same principle that causes housing affordability issues nationwide: a supply and demand imbalance. It's not that anyone doesn’t want to build housing—everyone does, or at least claims to.

It's a crisis decades in the making, caused by a conflict between those who have housing in their communities and therefore really don’t care if more gets built, and those who don’t, who want housing but have very little to say about it because they don’t actually live or vote in the community. The anti-development people talk about “local control.” But for those of us who try to get residential developments done, “local control” too often means “keep off my lawn.” Combine NIMBY-ism with the fact that home building in the US is a very speculative industry, requiring huge outlays of capital before there is any return, and you see why it’s hard to build.

The financing issue can be solved with smart developers and their clever lawyers :). But the regulatory issues, AKA NIMBY-ism, are a much stickier problem to solve.

“Local Control”/NIMBY-ism is exacerbated in a place like Hawai’i. I’ve written before about how environmental concerns are often a tool of NIMBYs to obscure their true agenda. In Hawai’i, it's actually a double whammy of NIMBYism: both environmental concerns and the idea that the land is sacred to Native Hawaiians, so even if a development is environmentally sound, it might upset someone's cultural sensibilities. And so we have the most expensive housing in the country. To be fair, this is a place where the locals have been subject to 200 years of colonization and about 125 years of forced Americanization. Local control around here is seen as an antidote to all that. It's hard to be critical of it, but it does create the most expensive housing market in the country, which is having the unintended consequence of causing many of those local Hawaiians (“Kama'aina”) to leave the islands for cheaper housing.

Granted, I am sure most Kama'aina would love to see some affordable housing built. But that is not what is getting built since it’s hard to make it pencil without robust subsidies (more on that below). The developments that make financial sense without subsidies skew toward luxury. But even luxury developments help ease the crisis. Those of us who do this for a living know that any supply, even luxury supply, helps reduce prices since money, like water, will wash over everything if not channeled correctly. Need an example? Look at the West Village in NYC, Noe Valley in San Francisco, and Silver Lake in LA.? But most NIMBYs are the economic equivalent of flat earthers, denying the unimpeachable law of supply and demand.

So we have a situation where, even with vocal opposition, many luxury developments actually get built (which breeds resentment in Hawai’i, and almost every other place in the US) and those that don’t cause gentrification and displacement.

None of that is actually solving the housing affordability crisis. Housing affordability nationwide is a big issue, so big, in fact, that the Democratic nominee for president has made it the centerpiece of her economic agenda with the promise of $25,000 in downpayment assistance, a $10,000 tax credit for first-time home buyers, and cutting costs for homebuilders by expanding the Low-Income Housing Tax Credit and a few other goodies.

By and large, it's a good plan. The tax credits and downpayment assistance are probably not the best way to solve the crisis since they stimulate demand, which drives up prices. The supply-side stuff is way more interesting and way more effective since it incentivizes developers to build, and more supply makes housing more affordable. Personally, I’m in favor of the federal government getting involved in building housing again, but more on that later. The most controversial part of the Democratic plan, and one on which the Republicans have nothing to say, is something I’ll write about in another piece: the proposed cap on rent hikes and the ban on algorithm-driven price-setting tools for rents. Both are of great interest to some of my clients, and I’ve written about price-fixing algorithms before. Rent caps won’t do much to create affordable housing. It would probably have the opposite effect and discourage construction . . . except for luxury.

The Democratic plan is flawed, but it's so much better than anything the Republicans have to say about housing affordability. Republicans, according to Project 2025, want to make sure you can’t actually build housing by, apparently, using federal authority to preempt states and localities from banning single-family zoning. Single-family zoning is basically why in American cities we have transit-rich inner-ring suburbs where everyone wants to live, with very limited and very expensive housing. Single-family zoning requires that each lot have only one “family” (I’ve dealt extensively with the definition of family under the zoning code. Suffice it to say, it's stuck in the “Leave it to Beaver” model, which was old 40 years ago). When we eliminate single-family zoning, we’re not talking about high rises next to grandma’s house—there are still sensible floor area ratio restrictions to prevent bulk, and you can have setback requirements if sunlight and yards are your thing. But it means more population density and an easy way to create more housing, fast. Easily doubling the number of units in those re-zoned communities within 5 to 10 years.

Which is to say that a housing policy that promises to keep single-family housing is really retrograde. But that seems to be what the Republican Party stands for in 2024. To quote from Project 2025: “Localities rather than the federal government must have the final say in zoning laws and regulations, and a conservative Administration should oppose any efforts to weaken single-family zoning.” (page 511). Ouch. Of course, you won’t hear that from the Republican nominee. He just says that by building more housing, Democrats are bent on “destroying the suburbs." They should rename Project 2025 “Get Off My Lawn!”

The Republican Party’s other solution to housing affordability is as dumb as it is craven: kicking out immigrants who are claimed, without data, to be taking up homes that are presumably better occupied by native-born Americans. Kicking out immigrants and expropriating their homes is not a serious solution to the housing affordability crisis. Apparently, we’ve gone from “get off my lawn” to “get off your lawn.” Wiser people have also pointed out that it would have the effect of kicking out many of the workers who actually build homes. Oops. Remember “Dazed and Confused?” On housing, the Republicans are “Mendacious and Confused.” Basically, if housing affordability is your issue, the choice is clear.

In my opinion, the Democratic plan is too timid. I’d like to see the Federal government get more involved in housing production. For one, there should be an active movement to repeal the Faircloth Amendment/Faircloth Limit. That little-known law freezes the number of public housing units whose operating and capital costs can be paid for with Federal funds at the level they were in 1999. It amounts to a freeze in Federal funding for new housing development. Yes, that is really a law. That is how far we are from actually solving the housing affordability crisis.

Repealing the Faircloth Amendment would be the carrot: if a locality wants to build housing, the Federal government will pay for it. But there should also be a stick. I’d propose that unless a locality allows more housing to be built according to a quota system (X amount of new units per year over 10 years, for example), either by having the state or locality build it themselves or by reforming their zoning, they risk losing federal funding for other policy priorities (highway funding would be my choice). The carrot and the stick are wholly constitutional and well within the power of Congress to execute. All that is missing is the political will.

As they say in Hawai’i, a’a i ka hula, waiho i ka maka’u i ka hale – (Dare to dance, leave shame at home) and ‘a’ohe pu’u ki’eki’e ke ho’a’o ‘ia e pi’i – (No cliff is so tall it cannot be climbed). I’m not sure about that last one as a logical matter, but as I always say in my native language:

“Keep building, keep thinking,”

Jesse

P.S.: Real estate and tourism are the two main industries in Hawai’i, but there is also an agricultural industry here. My understanding is that it's shifting from sugarcane and pineapples for export to something more interesting because high costs make those crops non-competitive on the world market. That next thing—local/organic/artisanal whatever—has yet to catch on. Ironically, outside of a few pricey farmers' markets and farm stands, you don’t find many fresh fruits and veggies for local consumption on these islands, yet. And the local coffee is wildly expensive due to another major supply and demand imbalance (or some type of price-fixing conspiracy). Let's hope that gets fixed.

Hi, and welcome to my newsletter! I’m Jesse Strauss, Your Fractional General Counsel. I’m a lawyer with a private practice based in New York City, helping clients in the United States and globally with their US legal needs. My expertise spans various areas, including raising funding rounds, employment issues, negotiating master service agreements, intellectual property, compliance, legal process management, and dispute resolution. My focus is on founding and nurturing great companies from seed to exit. Discover more at www.yourfractionalgc.com and book a complimentary 30-minute consultation at Contact Your Fractional GC. You can also follow me on Instagram and Threads @lawyerjesse, on TikTok @lawyerjesse, on X @lawyerjesse, on YouTube @lawyerjesse, and my Substack https://fractionallyyours.substack.com/ (follow me on nNotes) and on LinkedIn https://www.dhirubhai.net/newsletters/fractionally-legal-7147764173140103168/.