Are Oligopolies to Blame for Lack of Affordable Homes?
Originally published by: Washington Post — October 17, 2018
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When the smoke cleared after the Great Recession, the home builders who survived were in a surprisingly strong position. They had fewer competitors and more power in their local markets. They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.
U.S. housing debates rarely involve the “O” word. But oligopolies, a cousin of monopolies in which a few powerful players corner the market, are emerging everywhere. From 2006 to 2015, the number of builders who controlled 90 percent of a typical market dropped by a quarter, according to a recent working paper by economists Luis Quintero and Jacob Cosman of Carey Business School at Johns Hopkins.
A completed house in Brandywine, Maryland, in 2013. (Gary Cameron/Reuters)
The economists find this dwindling competition has cost the country approximately 150,000 additional homes a year — all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.
From 2013 to 2017 home prices grew more than twice as fast as they would have if the market hadn’t consolidated, the economists found.
To be sure, industry experts note that the creeping oligopolies that have come to define the housing market are often a symptom of deeper problems with scarcity of land, cost of labor, restrictive zoning, NIMBYISM (also known as not-in-my-backyardism) and the financial markets.
On a national scale, mergers among building behemoths, such as Lennar’s 2017 union with CalAtlantic, have increased the market share of the top 20 builders from 21 percent in 2008 to 29 percent in 2018, according to the National Association of Home Builders. But a casual observer still might not consider the housing market as an oligopoly. After all, there are still thousands upon thousands of builders across the country.
But oligopolies in housing are fundamentally different due to three simple factors, which we will list for the first time here: location, location and location.
Consumers are shopping for homes in a narrowly defined town, suburb, neighborhood or other market, and the only competitors that matter are those within the same market, Quintero said.
To understand the difference, consider the cardigan sweater. They are easy to ship, and — if we’re being honest — one wool sweater is about as good as the next. Consumers who could not afford something knitted in Virginia could still get an affordable sweater from a supplier in Alaska or Arkansas.
But land is not like sweaters. It is harder to ship across state lines, for one thing. A beautiful shovel-ready plot in Alaska is useless to a federal worker who’s being priced out of the market in Northern Virginia. A wealth of competitors in Anchorage would do little to intimidate a developer in Arlington.
Quintero and Cosman evaluated data from Metrostudy, a housing-data firm whose representatives pore over local records and visit sites to track construction progress. They analyzed data from 137 local markets stretching from the southern suburbs of D.C. to the northern suburbs of New York City. They extended their analysis to the rest of the country using federal data.
To exclude less-competitive markets, they limited their analysis to Census Bureau-defined places with at least 25,000 residents.
By 2015, most of the 137 housing markets they studied were concentrated in the hands of just a few builders, according to a metric government regulators use for antitrust calculations. That’s a large increase from 2006, when the economists’ analysis begins, and enough to raise red flags among regulators if it happened at the national level.
Oligopolies are theoretically linked with higher prices, but Robert Dietz, chief economist for NAHB, said it is difficult to disentangle consolidation from the other forces making housing expensive in the United States.
Housing and land costs could be a cause of consolidation, not an effect. As land prices and other costs rise, developers sometimes acquire smaller competitors to gain access to their inventory of lots, Dietz said. “Market concentration is occurring in many markets, but it is often due to a lack of land and a lack of builder loan availability.”
Ali Wolf is an economist with Metrostudy’s sister company, Meyers Research. She agreed land availability, along with the costs of labor, regulation and materials, is driving the lack of affordable housing as well as the consolidation in the industry.
“Land is a scarce resource, and once you use it, it’s gone,” Wolf said, adding later that “it’s not like we have those huge tracts of land in the most desirable cities that are available to be built on today like in the past.”
The largest builders are national publicly traded companies that have thrived even as new-home construction remains far below historical levels, but success in real estate is local. Relationships with city or county officials, which oligopolies have used to cement their advantage since the recession, are often decisive.
Brookings Institution affordable-housing expert Jenny Schuetz praised Cosman and Quintero’s analysis and said that while market concentration helps explain part of the housing shortage in high-cost regions, the debate always comes back to expensive regulation and its cousin, NIMBYISM.
NAHB estimates that from 2011 to 2016, regulatory costs rose 30 percent to $84,671 for a typical new U.S. single-family home. That is a high bar for smaller builders to clear.
“Most of the ordinances and rules under which the county building and zoning departments operate are so convoluted and confusing that they don’t mean anything,” local developer and Washington Post columnist Justin Pierce wrote in April. “The entire system benefits the large developers who pay huge impact fees to the county and strike deals to get a project passed,” he added later.
Big firms’ advantages are compounded by their access to capital and credit, Schuetz said. They can hoard land for years and try to time the market, which further restricts the supply of new housing.
“If zoning and other local permitting processes are complicated, land is expensive, and the time needed to develop a project is long, then only large, well-capitalized, politically savvy developers will be able to build,” the Brookings fellow said.