Tackling America’s Housing Crisis with Mercatus Center’s Salim Furth

Mike Simonson here. Thanks for joining me today. Welcome to the Top of Mind podcast. If you follow along with Altos Research, you're familiar with our weekly real estate market video series With the top of mind podcast, we seek to add context to the discussion about what's happening in the market from leaders in the industry. Each week, altos research checks every home for sale in the country, all the pricing, all the supply and demand, all the changes in that data. And we make it available to you before you see it in the traditional channels. People desperately need to know what's happening in the housing market right now. And so if you need to communicate about this market to your clients, to buyers and sellers, go to altos research.com and just book a free consult with our team. We can review your local market and teach you how to use market data in your business.

(00:48)
Alright, let's get to the show. So it feels to me like American housing policy is making tectonic shifts slowly changing from the 20th century to the 21st. Everyone knows we have affordability problems and policymakers seem to me like they are starting to take note for many years. And so much of this country housing policy was aimed at blocking development. And the question is, is that finally changing? These are complex issues and I'm interested in understanding what's happening and also what's best for America for Americans now and for in the future. So today we're talking housing policy with Ali Firth. Salim is a senior research fellow and a director of the Urbanity Project at the Mercatus Center at George Mason University. His research focuses on housing production and land use regulation. Salim is one of the foremost experts on these big challenges facing the American real estate landscape. So he is published scholarly journals, testified before state as well as the US Senate and House of Representatives. EM has a PhD in economics from the University of Rochester. And so we're talking housing policy today. Em welcome to the show,

Mike. Great to be with you.

Great. Okay, so I like to start with your background so that the listeners know where you're coming from. Tell us about your work, you and your work at Mercatus, at GMU and the Urbanity project. Tell me, give me some background.

Yeah, absolutely. So Mercatus is a university based research center at George Mason University, which is the largest public university in Virginia. We're just in the DC suburbs, Arlington inside the beltway. So we're very policy connected. We're kind of bumping shoulders with the people who are talking housing policy at HUD and in the White House. But we honestly work a lot in my project more with the states and cities around the country. And I'd say in the time that I've been there, I started six or seven years ago and I thought, why wasn't it nice? They're letting me work in this kind of quiet backwater of zoning reform and housing policy nobody really cares about, but I think it's important and interesting. And lo and behold, we went from having an issue that was relevant in California, New York, Boston to an incredible, I wouldn't say quite nationwide, but covering at least half the country at this point where people say housing prices in my city have always been normal. They've always been within reach and they suddenly feel out of control. And a lot of times that's actually precipitated by a cost refugees from California or New York moving in and bidding up prices relative to what the locals can afford. So we're getting interest from Arkansas, Florida, Texas, Montana, places that five years ago didn't think that housing cost problems were their problem.

Wow. Yeah. And isn't that always the way the best innovative late career mid-career stuff starts with like, oh, I'm just choosing this little boring backwater and then suddenly you're thrust into the spotlight and certainly you are thrust into the spotlight right now and policy and zoning. So I think that's really fascinating thinking about the state and local. This is really a state and local challenge that we're talking about and it feels like while everybody knows California has messed up housing policy for 50 years, it feels like a lot of the rest of the country is facing the issues. The same issues now. And maybe that's a good next question, which is what are the issues, what are we affordability? Sure. And even affordability in as you say Arkansas or Montana, but what are the right ways to say we didn't want to stack rank, this is what America's facing, what are we facing?

So the reason I got into housing, I was actually trained as a macro economist and I started, I was looking at cost of living from a macro point of view and the more I looked at it, the more I thought, wow, I dunno. The US for instance, has really bad sugar policy. We make sugar twice as expensive as it should be. We could fix that and it would save the average household 20 bucks a year. That's nice, but that's couch cushion money. And then you look at housing and you say, whoa, we could save the average house hold five or $10,000 a year. This is just a different scale. Why are we even putting these in the same category and housing? So it's the biggest item in most families budgets. It's also connected to everything else. You can live anywhere you want and choose how much sugar you consume.

(05:56)
That's kind of separate all your other decisions. But once you've chosen where to live, you've implicitly narrowed down your choices of job, school, recreation, friends, travel. So there's almost nothing that we do. I suppose we're recording this podcast remotely. So we have communications now that let you do anything from anywhere online, but if you're talking about the real world, it's all tied into where you live. And so people call this the housing theory of everything. When housing's unaffordable, it spills into every other domain from the fact that working class people are fleeing California, which means that if you're trying to build houses in California, you can't find tradespeople to do the work, which makes it a double whammy. Or if you're thinking about upward mobility, can people who are born into the lower half of the income distribution get a good job? Well, it turns out that they can't live, they can't get an apartment to start that first job in a New York or a Boston. And so they end up living in Cleveland or Atlanta where wages are a lot lower and they're not going to experience that same mobility. So you end up from climate change to property rights to education, everything else. You can tie it back to housing. And sometimes I feel like I'm a little bit of a conspiracy theorist, but then I look at my own life and everything I do is connected to where I live,

The housing theory of everything. It's really true. And we can certainly state that as a fact in our conversation here in this audience. We can talk about the housing theory of everything. And I think that resonate in a lot of ways. I think about my own experience. I live in San Francisco and a lot of tax refugees who leave California and what are you going to sacrifice in terms of all the other things? And I haven't yet found the spot in the world where that makes sense to me. Oh, I stay in San Francisco and so I buy that very, very clearly. And so housing is the big lever that we can move to impact people's lives. And so the things like construction and inventory and does Montana have an under building problem in the same way San Francisco does or what are the problems? What are the things that are, when we look at it, okay, sugar policy is lousy and it's lousy for these four reasons. I'm sure American housing policies has a lot more nuanced in that because it's also local. So what are the big things that we're tackling?

That's great. So let me break your question into two parts. So first I think your audience is mostly people who know more than I do about the real estate industry, buying and selling and looking at products and that they're going to be way more sophisticated than me. I come from an economics background and one of the just starting point differences in the way that these two worlds look at housing is economists usually think about supply and demand as being the total stock. So it's every home that exists in the San Francisco Bay area is part of the housing supply. So when economists say supply, we're talking about that kind of long run. Are there places to live? And obviously only a small number of those units are on the market at any given point. And so market participants are really focused on the supply flow, what's available at the moment.

(09:40)
So you can have in a healthy housing market, you'll have booms and busts and there'll be times when that flow of supply is tighter or looser a buyer or seller's market. But the fundamental difference between a healthy and an unhealthy market is that San Francisco an unhealthy market. The stock that permanent supply of housing is really low relative to the kind of long-term share of Americans who would like to live and work in the Bay area. And so we've dealt with, there's quite a few fluctuations over the last five years and they haven't changed those fundamental underlying facts. And it's occasionally we need to be reminded, oh yeah, just the fact that home prices fell 1% last month doesn't mean they're low. 1% of a million is still a lot. So that's the first, just a different mindset and maybe a different lens to look at things.

(10:32)
And I have to remind myself to sometimes try to get into a practitioner mindset when I try to learn something new. But then getting to the real meat of your question, what is it that's wrong with the American housing market? To me the real fundamental long run thing that's wrong is that we've made it really hard to build new housing primarily through geographic restrictions, what we usually call zoning. Sometimes it shows up in a different part of law that isn't zoning. It might be a green belt policy or conservation land, or it might be a subdivision ordinance or unified development ordinance, we'll call it zoning for the sake of conversation. What we've generally done is said, we don't want to have more than such and such a number of houses. It might be zero, might be one per acre, four per acre, 12 per acre.

(11:24)
We don't want to have any more housing than this on all this land. And if you do that in one neighborhood, well it changes that neighborhood. If you do that across every metropolitan area in the entire country, it changes the country. And so where people live and where they can afford to live ends up being distorted by the aggregate impact of all these restrictions. And I don't have a good way, there's no one magic bullet policy if San Francisco only raised a tight limit or something like that. It turns out that having done this now for 50 or 60 years, American cities have, you can think of grooves. So you run the same wagon over the same trail enough times. There's these deep grooves of this is how we know how to build builders who are trying to do products that aren't allowed go out of business insurers who are looking at the market, they ensure things that are usually built. Local government officials, even if you change the law, they wouldn't even know how to evaluate a project that is just completely out of that track. So it actually turns to be really hard. I think zoning is sort of the original sin, but we shouldn't imagine that if we just change zoning that the cart can go anywhere at once. It's actually going to take quite a bit to get that cart out of its ruts

For sure. And you see that momentum in all kinds of places you see it. And some of this will get into a little bit of these things later on with some of the shifts that are underway. And you just published some work on the 50 markets that where things are starting to shift. And we can talk about that in a little bit. I want to go back to your comment on how we view supply. And so from an economist supply is all the homes that exist from a market price. It is, these are the homes that are for sale and there's actually a third view of supply that we look into which are the new listings in a given week. So we can watch the homes coming to market. And right now we can see inventory supply is up 39% from last year at this time, but the new listings in a given week are actually very low.

(13:48)
So what that means is that we have any marginal increase in demand inventory falls, that middle level of supply falls and we get price pressure right now and it's one of the reasons that we focus on inventory and the new listings volume each week to understand what's happening in the housing market. So on though the every home question and because from the latter two total inventory and new listings, we have a shortage if a shortage of homes for sale, normally there might be in the last decade there might be a 1.2 million single family homes on the market in the middle of July. Now there are 668,000 this week. So that's a shortage of homes for sale. Do we have a shortage of homes? Yes. The top level, yes

We do. And the way we measure it is through price. So you basically look the price, you could say the price may be relative to the hard plus soft construction cost, which is going to differ place by place, but not a huge amount. So if I say, well, it costs maybe 250 to $500,000 to build a new home in the US but I see the prices in some places are 2 million. And I say, well, okay, even if we assume that it's quite expensive to build 500,000 say, that reflects a massive shortage. And so I look at, we don't know perfectly what the size of that shortage is, but if we take an estimate of the elasticity of demand, then we can kind of get a ballpark of how many homes were short. And I think it's interesting, we've seen some different studies that estimate the national shortage from of 1 million homes or 4 million homes or 20 million homes. And it depends how you're measuring because you also get the sort of, well the country's big and so there's a big shortage of homes in the Bay area, but if people move there, they'd be moving away from somewhere else which would actually alleviate pressure in that place.

Okay. So by looking at the fact that it costs 2 million bucks for a house, but it's it's 800 K to build or whatever, that indicates that there's a structural shortage because if there wasn't that purchase price would come down to the construction price, it'd be roughly, it would be much closer.

Right now, I think it would be really interesting to take the kind of the week by week view and what would you get if you added that up over 50 years, right? There's going to be some gluts, there's going to be some big shortages. Those should cancel out over time. I don't know, do you get to the same number or are these just so, such different perspectives that they don't need to add up and we shouldn't worry about it too much?

And isn't the sale price isn't that at least partially influenced by that middle level of supply, that active inventory level of supply, which is low? And it gets to another question I have, which is when we compare the US housing market to other housing markets, we have different zoning and different construction and different those kinds of restrictions in other countries, but we had big price run-ups in a lot of the world over the last 15 years. Are we under building everywhere in the

World? Good question. So certainly in the major English speaking countries, so we share a lot of institutions and there's a sort of, you can think of these places as running the same computer code on different machines and they're getting very similar results. And New Zealand is the one that has really broken away and they've started to bring prices down since they made major reforms, very small countries, it's easier to turn a small ship than a big one. And now in Canada, both candidates for Prime Minister are talking seriously about setting major home building targets and pushing really hard on localities to change their regulations to achieve those. So there's at least some sense, and Steiner, the new prime minister of the UK is talking about taking away local authority to say no to new developments. We'll see, I don't want political pronouncements are maybe worth the heir that they are spoken with, but if those do mean something, we could see a real shift in the anglosphere.

(18:38)
And if you go to the whole world, well then there get to be a lot more caveats and differences. And I sort of see you're pushing towards macroeconomic factors. Those do matter. No one's saying that overall economic growth or the availability of money doesn't matter at all. But when I look at say, and here I'll defend the large stock view, if you said, well, we experienced a market where inventory was above average in San Francisco, but below average in Memphis, I still bet that the home for sale in San Francisco, it might be lower than it usually is, but it's still going to be way more than the home in Memphis. And that reflects that kind of long term. Structurally over 50 years, Memphis has roughly enough houses for the people who want to live in Memphis. The Bay area doesn't. A short-term shift is good. That's a step in the right direction, but it's going to take a lot of steps to cover the distance between Memphis and San Francisco.

Yeah, for sure. Okay, that's cool. Lots of things that are coming up, for example. So Nimbyism is universal, or at least it's an Anglo file, Western universal characteristic and therefore, okay, alright, so that makes sense to me. I buy that. And then in terms of supply San Francisco versus Memphis one use referral all time. There's a stat that we use because we're tracking inventory, tracking every home for sale in the country every week. That the stat that I have looked at fact almost 20 years ago when we were starting and the bubble was bursting is inventory per capita. So available inventory of unsold homes per capita. And we can look right now in Silicon Valley, Santa Clara County, which is several million people, it's San Jose, it's tech high-end demographic, and there's a thousand homes for sale for several million people. If you go to Austin, same demographic, there's 10,000 homes for sale in Austin. It's a slightly smaller market. And so we can see exactly what you're talking about. They build more in Austin, but there's also California property taxes are locked in forever. And so we hoard our real estate more and Texas taxes are higher. So it's a much more robust resale market. Things get more expensive faster to hold and so they resell. Okay, so that's really interesting. I'm writing down lessons already. It's terrific.

(21:20)
We've been talking about sort of under building and therefore, and this shortage, a structural shortage of too few homes is really a function of under building, is that what you'd call that?

Yes, I would say under building and we're talking about a 50 year problem. There's a great book published in 79 called the Environmental Protection Hustle and written about the San Francisco Bay area. And it's kind of like its early steps into nimbyism and how neighborhood activists were bargaining down the size of each new development. So something that had been planned for a hundred homes ended up being 50 and you could see the prices going up accordingly because the developer of course had to cover their land and infrastructure costs. This is not something that nobody saw coming. It has been coming, people have been talking about it. I think what's changed is maybe how deep into the market, how deep into the income levels the pain is reaching and therefore the political will that exists to do something about it.

And we're in a situation now where you're in political power and you realize your kids can't buy a home and it becomes very acute even though you have a lot of home equity and wealth, your kids have to move to Arkansas or South Carolina or someplace and that's very noticeable. So I think that the tide is changing there, which is the point of our conversation today. Okay. Do you have a number on how you look at the total under building that there's a big spectrum? Some people say we're not even underbuilt.

I usually don't like numbers. I think of myself as theory driven rather than data-driven because the data's going to change tomorrow and the theory will stay sound okay. I've seen two papers that I like, one that estimate said at 4 million and another at 20. And I think those are both correct depending on how you ask the question. And what we need is a really, really large amount of building in the high demand places. So the high demand places need to build more than the total national deficit because some people are living in Memphis who would like to be living in the Bay Area and who would move there and get a better job and contribute more to their society themselves, their family if they could afford to live there and have that job. And so this is again why prices are more important. I really don't want the government, the next president to come in and say, okay, well we had our bean counters lined up and we decided there's like 6.27 million homes and we've assigned them equally to all the states. That's not going to work because then California will get a proportionate a number and that's not enough. California needs way more than a proportionate number of new homes. Boston needs way more than a proportionate number of new homes and Iowa's probably fine. And so the only reason that prices are getting bit up in Iowa is that there's people who would rather live in Chicago or Austin or Miami and they're instead buying houses in Des Moines. And that's enough to push the prices over the top.

Yeah, the way I've described that is we used to build houses where people want to live now people want to live where we build houses.

That is exactly right.

Okay. So 20 million is a really fascinating way to look at it because in aggregate maybe it's four, but if it's like where people want to be there optimized for their life and their productivity and their creative contributions, we may be 20 million. That's a bigger number than that I've considered before. That's really fascinating. So this topic, it flows into affordability of course. And so right now we have, prices are up, home, prices haven't come down, mortgage rates are up. The combination creates the least affordable payment in probably 40 years at least. And maybe more what do we do? What do do about affordability?

Good question. So like I said, there's deep wagon ruts and the first thing we need to do is remove the fences so that somebody can even try to get the wagon on a new track. So there's no point in telling insurers to do something different if it's not legal or builders to do something different if it's not legal. And some places have taken steps. So we are seeing cities like Austin, Texas, they saw home prices in Austin for a few months were higher than in metropolitan level. Metropolitan Austin were higher than metropolitan Washington DC briefly. And they've had such an influx. They have a growing tech sector, really high quality of life and great culture and they're growing up from being a cool college city to being a major American city. Some growing pains there. They have taken some big steps. They cut their minimum lot size from about 6,000 square feet to I think 1800.

(26:31)
And they have slashed what they called compatibility requirements, which implicitly created a really tight height limit if you were anywhere near a single family house. So you couldn't build multifamily, you were far away from a neighborhood, which of course meant you couldn't build multifamily in places that are nice to live. And so they've cut those two requirements they're dealing with, they're lucky. They had a lot of downtown multifamily zones where a lot of multifamily was built. And so they've had rents dropped by something like 10% from their peak, but they're still above where they were in 2019. So let's not get too excited. So that's what a healthy market looks like. There's going to be booms and busts, but the bus follows the boom and you don't just boom and stay booming forever, which is what would've happened in la. And so Austin's a great example.

(27:18)
We've seen cities all over the US getting rid of parking requirements, which are a cost driver for a new multifamily, but also new single family if you have to build a four car garage on every house. And we're seeing states getting out on the act, and this is the study that you mentioned, it's called Laying Foundations Housing Risk Supply Reforms in 2024, and that's available on the mercatus.org website. My colleague Eli K, my research assistant, he did most of the work on this, I got to give him full credit. Eli's great and he was really working hard to sort of track and synthesize something like 300 bills around the country that were in state legislatures. A handful of states really took the bit in their teeth this year, a couple of them after failing the year before and have advanced major state level reforms, which could kind of nudge a whole metro area out of these ruts. But implementation, that's a big step and we got to see how they play out.

Great. So Austin is good and some states are really jumping on it this year. Who else is a good example of doing good work?

Well, so Denver or Colorado at the state level is one of the ones where the state took action. Governor Polis there I think thought this was going to be something he could easily get his party around last year and instead got ran into a stonewall. Republicans didn't want to play ball and suburban Democrats were like, well, we're not going to risk our seats over this. He came back this year with a slightly more modest proposal, but the requirement now is for every Denver area suburb that has transit service to significantly up zone to allow multifamily, they get to choose to some degree where it is and whether to do moderate density over a large area or really high density right near the train stations, but they're supposed to make these major changes. And if you see all of the cities in a metropolitan area making this change together, you might really move the needle on that.

(29:20)
Some builders would say at that point, okay, it's worthwhile for us to start developing new products and new models that fit in different contexts, not just the five acre site. Let's think about the quarter acre site that was a old single family home, but now I'm allowed to build up to four stories and multifamily on there. What can I do with that site? There's no one doing that model in most cities now. And so if you want transformation, you got to think about some different business models and then going in that direction. Okay, what do you do on a small site? One of the reforms outside of zoning that's really gained traction this year we saw in five states is taking steps toward allowing what they call single stair buildings, which is very, not descrip, but it basically means instead of a double loaded corridor, long hallway large site, if you use higher quality fire prevention measures, so you don't need a second egress to maintain the same level of safety, can you go up to four or five six stories and put two to four apartments per floor?

(30:22)
Those are much more family friendly, it's more like a large condo, a place of you can live with your two little kids rather than the place you live while you look for a starter home. It can be your starter home. And again, we're in early stages on that. We'll see what the fire marshals say as the state study this and sort of do the implementing regulations, but that's how most of the world builds apartment buildings. The US is quite exceptional in how we construct apartment buildings and maybe we have something to learn from all these countries where there's far less fire deaths than here and we should be positive about that and not skeptical. So those are some of the areas where I see really promising change at the state level.

Yeah, it's funny that the stairway thing is such a fascinating legacy of the 20th century where you have a tragic apartment building fire and not enough exits, and that's so that we change the laws to require the exits, but meanwhile the fire detection and suppression technology is move way beyond and we're building everything with fire extinguishers everywhere in a building like that. And our inspection processes are very high. And so those things are working and so is the double stairway, is that something that can go? And that's a really fascinating change. It's hard to imagine any one of those solving our problem, but in aggregate it allows us to build more and better and build for the 21st century.

Yeah, that's right. And ultimately we need the professions, the industry to deliver, right? Laws don't build houses. And if I think about what do I need to do as I talk to legislators, what do I need to do to let builders do their job? A big part of it's certainty and permanence, right? It can't be a, well, we're going to have a impact fee holiday and let you permit a ton of buildings in one year. Somebody tried that. They got a lot of applications. I don't think those buildings are actually getting built. Everybody said, oh, okay, if it's free to do the application, I'll put the stake in the ground and then I'll do the numbers. Well, it turns out that when everybody else's building is a terrible time to build, you can't get contractors. Your property's going to sit on the market forever when it comes to market.

(32:55)
So they didn't get followed through. And what you need is you need to make investment worthwhile. I want somebody to say, oh, it's worth investing in the capital equipment training. The workforce orienting my career around whatever it's building town homes, building single stair buildings, creating commercial to residential conversions for a very long time. People don't do this as a vacation. This is a career. And we need to kind of respect that by saying we're going to put the guardrails in so that you can have this career, whether you're the owner or an employee and it's going to put food on your plate for 40 years and the, it took us 50 years to get into this problem, it's going to take us a comparable amount of time to get out. And the only way is by convincing people that it's worth staking their own time and fortunes on. And it's not something that you can just legislate away.

Right. Okay. So the permit holiday, we don't want, the bandaids are not effective, but the shifts. Okay. It brings up a couple other questions. One that's top of mind, it's a little left field. Have you done any work with the land value tax, the Henry George, and is that something we should be paying attention to?

I think it's overrated. There's some keen insights and it's, I think a split role is a good idea where you have a higher tax on land than on property. But I don't think the idea that you should tax away the entire increment of land value. I think that's actually a poisonous idea because it prevents the redevelopment of land. So if we say, Hey grandma, you're sitting on a parcel that's worth millions and millions of dollars, wouldn't you like to sell it and move somewhere quieter with all that money so that somebody can build a skyscraper there because it's downtown, but also the taxes are so high that it's actually not worth anything. So if you fully do a land value tax, you strip away all the land value and grandma gains nothing from selling. It's painful for her to hold, but not that painful because the tax value is actually really low once you take the taxes into account. So if you put taxes into the equation for land value, you quickly make all land value the same. So I think there's an insight. There are also much easier ways to get the same value without ticking voters. Often voters actually get really ticked off when you do this. It feels unfair to them.

It feels scary. Yeah.

So in Pennsylvania, this is allowed and it keeps getting rolled back because voters just, they hear stories where two people live next door and one of them happens to have a deeper backyard and pays twice as much tax. And they're like, that's not fair. These are basically identical homes. And I think the way that Ohio has actually handled this really well is to allow tax abatements on new construction. So the way that Walmart will come to a town and say, Hey, give us a 15 year tax abatement if we move to your town. Well, how about instead of Walmart? You do that just for anybody who improves or creates residential property.

So a tax abatement for I am improving the property and I get my tax as opposed to what happens in California, which is the opposite of that. That's the only time I get my tax

Right. So California said, here's a good idea, let's flip it around backwards so that it's an extra idea.

Are we ever going to get past prop 13 in California?

I think the only way out is by steps. So one would be making prop 13 not apply to newly created property, which appeals to everybody who already has their property because then they're like, oh, I get the free ride. But then you create this sort of unfairness wedge and that's a leverage point in the future. And then eventually you say, well, okay, we'll grandfather everybody in, but anybody who after you buy a home in 2035 or whatever, then Prop 13 doesn't apply anymore. And just sort of slowly back out of it without hurting the people who are already bought in because you are just not going to win something where you say, Hey everybody, would you like to pay $10,000 more per year in taxes? And then maybe you also need to pair it with an income tax cut because income is great. We would really like people to earn more, to be more creative, to work harder. That makes us all better off. And so I think if they said, Hey, we're not just going to do this so that we can spend more money, we're going to make this revenue neutral, but we've recognized that incredibly unfair and regressive prop protein.

Yeah, for sure. You get in San Francisco, one 2 million house next to another one, the one's been in the family for 50 years paying $1,800 a year in property taxes and next door you bought the house for 2 million bucks, you're paying 25,000 a year or 20 or 35,000 for a year, and it's the same house and so therefore you don't ever sell it. Okay, I'm on that. I'm fighting on that hill all the time.

Yes, it's worth it. People should be convinced that this is bad and poisonous and exclusionary.

Yeah. Yes. Okay. You mentioned, so it's not just getting the permits done, it's actually getting the builders to build. And it brings up one of the variables that I'm looking for better insight on, and that's immigration. So I'm an immigration maximalist. Immigrants create wealth, more immigrants create more wealth, bring 'em in, bring 'em all in. And I also am of the view that one of the reasons we don't build enough is we don't have enough skilled trades people and we get most of those from immigrants. So we want to build more immigrants in where does my take fit into your view and what should I know better? The other side of that, of course is that immigrants mean population means household formation means more affordability, pressure. So how should I think about it?

No, look, I think you're absolutely right. That targeting immigration, whatever the level is, targeting it towards people who are going to thrive and contribute a lot when they get here would be a huge improvement. The idea that we're currently targeting towards people who are desperate enough to pay a human trafficker to get them across the border or people who have family already here, those are basically the groups that I have a relatively easy time coming to the US and then some H one BV salt holders, but not nearly as many as there's jobs for. That's not a great way to run a rodeo. And it would be vastly better if we said, Hey, trade unions tell us who's your counterpart in sending countries? And let's absolutely bring people here who have passed the electrician license exam in another country and put them on a fast track with the union here to get them licensed.

(40:16)
And I think we could immensely gain from that in terms of home construction and quality. Honestly, if you see construction around the world, the US has some things to learn. Part of that is how we choose to do Pinewood framing, which is obviously not an especially durable quality of building, but there's a lot of countries around the world which have great building traditions, and we would absolutely gain from bringing in master builders who have done great work in Europe or Africa or South America and letting them do that here. We're a diverse country, and it's actually interesting to me when I go, especially to the southwest, it seems like they're missing the heritages that ought to inform the way construction is done. And so if you're in, I dunno, New Mexico has a lot of restrictions that things have to look Pueblo revival, but they don't actually have to be Pueblo revival.

(41:11)
So they're building a pine frame house and then slapping some finish on the outside and it looks terrible. It doesn't fit at all. And there's so many places in the world where Americans come from the Middle East, from Central America where you have a very similar climate and they have really interesting building traditions that work really well. I lived in a summer in Morocco teaching English and lived in a un-air conditioned place, but the walls were so thick that it was always 70 degrees inside. And so there are ways to build for that climate that are actually delightful and comfortable, and instead they've sort of taken what worked in Massachusetts and just copied and pasted it and put a different finish on the outside. Yeah, I think we have a lot to gain regardless of the, I have my own views on immigration, I'll keep those myself, but regardless of the numbers, how we target it could be just vastly better.

You don't have to keep those views to yourself. If there's something, if there's a way to inform me, I'm all,

I largely agree with you, but I'll stick to my name. Okay,

Great. Terrific. What about the affordability side of that argument? So when I talk about this, if I talk about this on Twitter, they're obviously the anti-immigration people who come out and say affordability. If we bring in these people, aren't they driving up our housing costs? Do you have any insight on that?

Yeah, so imagine brings somebody Alaska to enter the US who doesn't work in the trades and isn't going to contribute anything to construction. So premise that they have to live somewhere so logically they're going to compete with the rest of Americans. But where are they competing now if they're a Silicon Valley engineer, well then yeah, absolutely they're part of the problem. But if they're staying in a homeless shelter in New York, they're competing with an end of the market that is already looking at low prices that they can't afford because they have no income, very low quality, often vacant units. And I actually have an email that in to get back to from my old landlord in Rochester, New York where I went to grad school, lives in a poor neighborhood and now has 50 Afghan families renting in houses that they own. So a lot of the places that poor immigrants are going are places precisely where housing is cheap and sadly where there aren't many jobs.

(43:39)
And I think the ultimate answer is if we start building enough housing, the total number of immigrants we get isn't that big and spread across a large country and we'll be able to house them if we insist on not building anything. Well, yes, then you're just cutting the pie into smaller slices. And so not building creates a scarcity mindset. And you see this, I think most in Hawaii actually. It's where even people from the mainland are viewed, other Americans from the mainland are viewed as immigrants and unwanted because they're coming in and they're cutting the pie slices smaller. And that's a really poisonous form of nimbyism. That is what you get when you have decade after decade of not building

Enough. Yeah, yeah. Okay. And the other element on that, as you pointed out, a lot of the immigrants, especially the low end immigrants are coming because they have family here and then the living arrangement is doubling up in density with that same family. Okay, that's useful. I appreciate that expertise. Let's then talk about population over time. So one of the basic assumptions we started with here is that we have underbuilt, have underbuilt view, and we've had pretty dramatically consistently growing population over the last 200 years. And in the last 50 there are signals, especially if we clamp down on immigration, that population maybe has peaked or maybe not peaked, but certainly grows significantly slower. And as the boomers age out and die, I'm Gen X, so I'm in the low, I'm very sensitive to population swings around the country. You have a view. So are the assumptions of building and over or under building, are they based on population trends of the last 50 years that maybe are changing now?

So this is a really good question. I have had the privilege of talking to some of the best urbanists in the field, and this is the question they don't know the answer to is how does society deal with population decline? So there's a few things. So one is yes, you're absolutely right, the US population is peaking, but it's going to take a while because that's happening mostly through low fertility. It's going to take a while for the number of adults to start shrinking. So I've got four kids and one on the way, and so I'm doing my part, but the reality is there's lots of people my age, not too many people my kids' age, and it's going to be when they're adults and later that we really start to see change in household formation because adults form households. So that's just one technical note we don't know.

(46:49)
So I do worry, what does all this mean for Flint, Michigan or Mount Vernon, Illinois? If we build lots more housing in Washington DC and Austin and the Bay Area and say, Hey, everyone followed Ali's advice. They built more townhouses, they built more multifamily, and these houses are there, I think those will be occupied, the ones that are high demand now. So if your listeners are like, oh my gosh, is anybody going to want to live in Santa Clara 50 years from now? Yes, yes, you're going to be fine as long as the other things stay under control. But the places where old housing is already not in great shape, you can get a kind of death spiral where it's not worth making major investments in the housing. So then it gets even worse. So then middle class families look at it and say like, well, I have an okay job here in Mount Vernon, but I could move to a gorgeous new condo in Austin, pay more, but my wage is concomitantly higher.

(47:51)
And then as you get your middle class people moving out, then you're left with retirees, people who work in resource extraction intensively local industries, and then government, which is burdened with overhead costs of paying for vintage roads that are underused now and retired personnel who need to be supported through their retirement. So there's real problems with population decline, and Japan is maybe the forerunner of this where you look at rural Japan, they've got these kinds of problems. I don't know what that looks like in the us Japan's different enough socially and economically that I don't know that we can just say we're going to have the problems they have.

(48:30)
I would love to see via, again, we're talking over an internet connection thousands of miles apart. I'd love to see a constellation effect replace the superstar effects instead of a few superstar cities seeing more places. It's not going to be everywhere. It's not going to be every little village, but more places where there's a little enclave around a university or a really beautiful historic town or something like that where you do get lots of high wage people clustering and kind of creating the economic cluster that then lets everybody else succeed. That lets the local government do a great job and have that tax base to work with. That would be really nice. But I don't know, a declining population country just creates these urban questions that we really have never grappled with before. And that might be my next major project in 10 years.

Okay, that'd be good to know. I will be tuned in to see, I have vague apprehension about that, and I think there's a lot of assumptions in this country that is predicated on growing population, and it's going to be fascinating to see which collapse. We assume our retirement grows by 6% a year, and what if that goes to zero? Because with population, because there are those kind of things that are really, that'll be fascinating to see, which are basically predicated on purely population growth. So when we look at the longer term future, we, we've got crisis level problems in housing right now in a lot of ways. We have some shifts, some policy shifts underway. Give me a sense for what happens next and then longer term in terms of optimism. Do we have enough momentum to solve some of these? What should we look at?

Good question. I'll give you the pessimistic scenario first. So imagine in the next three years, the US goes into another deep recession for any reason. That's enough to take the edge off home prices to refocus all the policy people on things other than housing and zoning reform. And so we just don't make much more progress on the things that people like me are advocating for. And I have to switch what I focus my work on. No one wants to talk to me and then the economy resumes growing and we don't have a collapse because of population. That's the pessimistic scenario where we're essentially on the same track. And then I think you'll see, I think a really, really deep, long-term level of inequality between cities where I don't think that it's the death of Silicon Valley if they can't build affordable housing because the truth is a club where only very successful people can live is very delightful in a lot of ways.

(51:41)
So everyone you meet in Silicon Valley is going to be a very good programmer or somehow serving that industry, and it will just get more and more distilled. And if anything, the agglomeration effects from a highly distilled exclusive club of a few million people. That sounds like a recipe for immense creativity, and they'll make themselves even richer and create even more demand to live there pushing the back office to Salt Lake City or Albuquerque or whatever. But the front office, the real creativity stays in the Bay Area. I don't think it kills the Bay Area. I don't think that it ruins Los Angeles, Boston, New York, but it makes them more and more exclusive clubs. And some people with low incomes hang on because they own property or because they have a place in existing public or restricted affordable housing. But ultimately that's actually a small portion of the lowercase a affordable housing.

(52:43)
Most affordable housing in our cities is just older housing and not the best neighborhoods, not right next to downtown. And so you have to drive a little further for your commute, but it's a respectable place to live and you can raise your family there that eventually gets squeezed out as those areas become the only place where the next generation of young professionals can move. And then you get the Sunbelt continuing against continued as a very large, not especially high wage concentration of people who do want to live in a nice house and do want to live in a suburb and not in maybe the 1930s house in St. Louis that they grew up in. And you'll continue to get the rust built on its same trajectory. So I think it is just more of the same, just turn it up to 11, turn it up to 12.

(53:31)
That's the pessimistic scenario. And maybe that's not so bad. America's a great place to live. I don't think we should overstate how bad our problems are. The good scenario is that we do see these big ships begin to turn, and I think I just can't emphasize enough. I don't think it's going to be quick. I think it's going to take a long time. I think there's going to be growing pains. I think you'll see some of these superstar cities really get it right. I wouldn't be surprised if that's a Seattle where they already seem to have a head start Washington DC already pretty good with really vigorous competition between the states around here, dc, Maryland, Virginia, and some of these areas will actually create booming, rapidly growing population, but remaining high wage, high productivity cities. And then hopefully some of the Sunbelt cities will be able to augment their, they're still going to sprawl but augment their sprawl with higher density infill and build some great neighborhoods and towns so that people really feel like they have a place where they belong and they can gain some sort of multi-generational attachment to organically grown tight neighborhoods in a way that, I dunno, honestly, the current subdivision model does not lend itself to, I don't have a great prediction for California.

(54:50)
I think California has so many things to fix. It could be a place with 200 million people that probably does not want to be that place. So if we get your immigration policy and my housing policy, we'll make it to million Californians. I don't know that that's going to happen because there's so many barriers and there's a lot of sacred cattle that need to be gored. There's some space south of San Jose for new greenfield development, and you could do some really high quality dense development and fit another a hundred thousand people down there. You're not going to fit tens of millions and the sea is there, the mountains are there. You're not going to build there.

(55:27)
You would've to knock down a lot of people's houses to really change the core of Los Angeles or the core of San Francisco. And I don't see the political will for that to happen. So my positive scenario for California is that the population decline reverses and you start to see Hispanics and African-Americans be able to move into California instead of out. And people with working class incomes to be able to afford to live within half an hour of their jobs. Those would be really positive steps for California. But it's got to crawl before it can run.

Yeah, some of those on both the pessimistic side and the optimistic side, I share, I see that experience, I see that reinforcement of the exclusivity happens around me all the time. And on the one hand it's like, yeah, there's some really neat people around, very dense and really cool people. On the other hand, it's like hard to do a lot of basic things in life because of it. Fascinating shift on the topic you mentioned in there real quick and then we'll start bringing it to a close. You mentioned Seattle as potentially a city that might get it right. Give me a few of those and do you cover that in the paper that you mentioned the research with?

No. In Lang Foundations we don't. We're just doing state level policy there and it's a 12 month look, so it's just what's happened lately. Seattle's been doing a number of things for a few decades, so it has allowed more density, not enough, but more density and transformation within the city through its urban village model. So it has a bunch of urban villages scattered throughout the city. The premise is not that you're going to live and work in the same place, but that those places can be high density and have the kind of commercial core and are then apartments above and around and then back streets around so that you can really get a neighborhood feel that's been able to soak up some of the demand. They've also allowed those single stair buildings that we were talking about. So they're the one city in the US with a really proven model.

(57:46)
And I guess two if you count New York, but New York is a very different built style. Seattle seems to me like the one that would translate best to other US cities. So you are getting those kinds of buildings in these replacing single families in these urban villages and the physical geography, as with many west coast cities, there's a lot of water and a lot of mountains nearby. And so Seattle planters have not been able to just say, well, it'll just go one more mile out. They recognize they're going to run into mountains real soon. And so there's been some quality there. And I think the quality of the political discourse as well, there's a strong environmental turn and an understanding there. And also I think this is really interesting. In Red State Montana, we had really the same dialogue where people get it that if you don't build in the cities, you are going to build in the countryside.

(58:42)
And that the way to preserve the wilderness is to let your cities be cities. I think it's really interesting that deep Red Montana, that was the message that Republican voters and legislators responded to. Like, yeah, governor Gian Forty's plan, this was the 2023 legislative session Governor Gian Forty's plan to really limit local zoning and force cities to accept more density is because we want to preserve the rangeland. We want to preserve the mountains and the Montana way of life. And that's kind of a Rockies and Northwest value that because they're relatively new places, they do understand that their wilderness is a value and they want it to stay close. And the way to do that is to let more people in the cities.

That is a terrific view with a positive for Montana. Yes. So that's great. I love to hear that. And that paper, that Laying Foundations is the name of that paper. And we'll do a link for that. And so it, it's documenting the 50, I think you called it 50 up from maybe 30 a year ago. Places that are

Bills enacted. So it's 50 bills enacted by state legislatures,

50 bills, so 50 bills that are doing good work to increase density, to fight things like affordability. It's up from 2030 the

Year, yeah, 30 last year. So we had 30 bills that were enacted last year. And this year so far it's been 50 bills in 20 states.

That is terrific. We'll make sure people can see it. It's actually really readable. I was reading it the other day, and it's like, so sometimes they can be, the academic papers can be a little dense, but that one it is great. Very clear, very readable. Nice. Good work. Alim Firth, thank you so much for your time today. It's been really insightful. It's exactly what I wanted to get resolved. You're on Twitter, where else can people find you?

Twitter, LinkedIn, and then the mercatus.org website. I also write as a blogger occasionally for market urbanism.

Market urbanism, okay. Yes, and we'll provide those links. Yeah, the Mercatus Center obviously does a lot of free market remarket research in the world and has some great content that comes out of that organization, so it's a cool spot. Thank you so much for your time today, everybody. This is the top of Mind podcast, and if you enjoyed the conversation, do you like getting geeky with me on the housing market? I certainly appreciate the listen, but also give us some five star reviews on wherever you get your podcast because that helps other people find us and participate in the conversation like we had with Selim today. And we will be back very soon with another episode. Thanks everyone