Once again, I am baffled by lawmakers who think they can slice the same pie differently and end up with a bigger pie. That is not how it works. They can make different-sized pieces, but not more pie. I am referring to a couple of recent pronouncements about how our president and various lawmakers plan to “fix” the housing market.
Shuffling pieces around
At the federal level, some are touting 50-year mortgages, as well as portable and assumable loans.
I’ve written about these before, but as a refresher, the idea behind 50-year mortgages (as opposed to our current 30-year mortgages) is that the loan’s longer term would reduce monthly payments, putting home ownership within reach of more people. This would reduce the cost of purchasing a home in the short term, allowing developers to sell houses at higher prices, while buyers are able to make lower monthly payments. This dynamic will add stock to the housing market.
An assumable mortgage allows a home buyer to acquire the home seller’s loan, presumably one that has a below-market interest rate. The key point here is that the assumable mortgage is tied to the property, not the borrower.
A portable mortgage benefits the seller. Instead of the loan staying with the home, it is transferred to the new property when the borrower (owner) moves. These two options could create movement in the housing market, but it’s shuffling the same pieces around on the board—not creating new pieces.
Another federal initiative, this one from the executive branch, is that we prevent institutional investors from owning so many single-family homes. President Trump wants more homes to be owner-occupied. While that’s a fine goal, unless we have more houses for people to live in, we still have a housing shortage.
At the state level, legislators have put forth Assembly Bill 1157—yet another rent control law. This law would keep rents more affordable for those who already have housing, but rent control damages the housing market overall. Happily, this bill was killed in committee.
Whenever I see legislation in favor of rent control, I want to offer everyone with a vote a free class in basic economics. Anyone who knows the first thing about economics knows that rent control is bad for everyone in the long term. Here’s why: the larger the supply, the lower the price. Conversely, the smaller the supply, the higher the price. If we artificially reduce the price investors can earn on their rentals through rent control, the number of rentals on the market will decrease. This does not reduce the number of people who need housing, however.
Creating housing supply through deregulation
The fundamental principle for a robust housing market is creating more supply, and the best way to do so is by removing regulations rather than adding them. More regulation means more time delays, more risk mitigation costs, more building codes, and fewer places to build because of zoning restrictions.
If you’d like an example of what the housing market can do when regulators don’t have a stranglehold, take a look at ADUs (Accessory Dwelling Units). They’ve been the only part of the housing market experiencing significant growth in the last several years. Sadly, AB1157 would have applied to ADUs, potentially stopping this growth.
To be clear, I’m not against safety restrictions that make sense or legitimate restrictions that limit housing when there simply isn’t the infrastructure or natural resources to support it. I’m against regulations that don’t make any sense. If we let the market forces run, they will limit growth where it doesn’t make sense. No water? No one will build there.
Many regulations create false barriers that prevent sensible development. Some of my favorite examples include the fact that single-family homes now require sprinklers, adding $3-$5 per square foot to construction costs. And the worst of it? These sprinklers may cause more damage than fires they’re supposed to suppress, and they do nothing to address damage from wildfires.
Years ago, I was chatting with a retired building inspector who estimated the difference between building legally with all codes versus building to actual needs could easily cost an additional $75,000 for a 2,000-square-foot home. And don’t get me started on school development fees—the school district gets funds to cover the cost of new schools each time a new house goes in. This is questionable, at best, when at least two school have closed in the last ten years due to declining enrollment.
Until government officials offer ways to increase the housing supply, they are simply moving affordability from one group of people to another. They are not actually fixing anything.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.
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