SPENCER: Alex, welcome to the Clearer Thinking Podcast.

ALEX: Hey, I'm really excited to be here. I really admire the show, and I think we're going to have a lot of fun.

SPENCER: I'm brimming with questions for you, seriously. I really want to understand this topic of what has gone wrong with housing in America, and maybe the world, so let's start with how big a problem this is.

ALEX: Well, yeah, housing is the largest single consumer category. If you're looking at the consumer price index, it's about a third of what consumers are spending their money on, and the fact that it's very unaffordable makes it a really big deal. It's bigger than healthcare in that sense, and it's also the driver of, you may have heard of a popular essay called The Housing Theory of Everything. Almost anything you could find often has the housing angle on it. So, I would say, yeah, it's genuinely a big problem, and the academic estimates are that it's on the order of trillions of dollars of economic damage to the United States alone, with problems in other countries too, but that's the US value.

SPENCER: To what extent is this a global problem? Are we seeing housing prices kind of skyrocket around the world, or is this a US thing?

ALEX: The Anglosphere, basically. I like to joke, in matters of housing, trust no one who speaks English, but basically the UK, Australia, Canada, and New Zealand are pretty uniquely bad. Although New Zealand has recently taken a sharp turn, in other places, though, it's also increasingly a problem. Paris was affordable for most of the 20th century, but as their commuter rail sprawl model worked for a long time to preserve the core, the boundaries are now built out, and house prices in Paris are going up. Berlin was a relatively affordable capital for a long time, but the supply overhang from East Germany has basically been gobbled up. I would say it's differently bad in different places, but everywhere that restricts growth and has high demand to live there is getting worse.

SPENCER: And what about in the US? To what extent is this a problem of just a few major cities versus a more distributed problem across the US?

ALEX: It started as just a few cities. Ed Glaeser, the most published urban economist in this field, has made a career out of both academic urban economics and real-world think tank work on this. He actually started in the early 2000s with a piece where he was almost arguing that it's limited. He talked himself into starting to focus on the so-called superstar metros, while generally arguing that it was not a national problem. More and more metros have been entering that realm of having a huge wedge between the marginal cost to stack an extra unit onto a multifamily building versus the rents and sale prices for those units. It has been spreading, but it did start as a kind of New York, Boston, San Francisco issue, and then spread to more coastal cities. Now we're seeing more metros enter that club of excessive home prices.

SPENCER: Could you explain that point you were saying about the marginal cost?

ALEX: Yes, that's when you're stacking an extra unit on top of a building; you don't have to buy more land to build that next unit. The land is a fixed cost with respect to your building to stack that next floor. The question is whether it's profitable to add one more floor. This is what you might call the YIMBY problem. This original math was laid out in a 2011 Atlantic piece. This is actually what got me into housing policy when I was an undergrad. Ed Glaeser wrote this piece in The Atlantic called "How Skyscrapers Can Save the City," and he noted in Manhattan, and this is 2011 prices, you can build an extra 1,000 square foot apartment for about 400K, and you could sell it for about a million. So, why do so many builders stop at such short buildings? There are four sets of laws that prevent you from doing that, and that's why even though it would be extremely profitable to build many more homes in Manhattan, you're just not allowed to.

SPENCER: Could you explain the idea of YIMBY and NIMBY? I think people have heard that, but not everyone knows what that means.

ALEX: Yes, NIMBY is an old term that's been around for a long time, meaning "not in my backyard." It can refer to different kinds of land uses. It was originally about housing, and then YIMBY, in its modern form, was crafted in the 2010s, although the word can be found before then. As we understand it, as a kind of coastal and national movement, it was written in almost ironic reaction to "yes in my backyard."

SPENCER: Right, so the NIMBY concept is that they're saying, "Oh yeah, you can build housing, but you can't build it next to me, where it's going to block my view or cause construction noise, etc." Then you propagate everyone saying that in their own backyard, and suddenly you can't build anywhere, is that right?

ALEX: Yes, that's exactly why the modern pro-housing movement is focused on raising decision-making to the level of government that internalizes the costs and benefits of growth. All the way back to the original political economy, in the Middle Ages, there was a famous medieval question: Who will bell the cat? All the mice agree that if you could put a bell on the cat, all the mice would be better off because they would be able to hear the cat coming and escape. But any one mouse who does it is going to get eaten by the cat. So, who will bell the cat? How do we solve a collective action problem? It's the aphorism that predates modern political economy. Local municipalities that are small relative to their labor market commuting zone cannot build enough to get an entire labor market region and whole metro region out of a housing shortage, with some exceptions of a large enough center city. In other words, you get this local collective action problem that only a regional government, if it existed in theory, or a state government in practice that oversees local control, can internalize the whole of society's costs and benefits of growth.

SPENCER: So, you're talking about an economist, which is a useful way to think about it, but how would you translate the lay language? Is it that you've got this little micro neighborhood, and they're not actually getting the benefit of more building, they're just paying the cost of construction and all this kind of stuff, whereas that somewhat broader region is actually getting the benefit of more building?

ALEX: Yeah, exactly, there's a combination of these things. Good infill development makes higher quality infrastructure viable; it creates thick market externalities, is what an economist would say. What it does is there's more people nearby to buy and sell from, so in a denser neighborhood, you don't have to be afraid of a chain store opening up and eating the consumers from your favorite independent business, because when there's tons of foot traffic, there's plenty of business to go around. The more restaurants and specialized things there are, things like live theater, are only viable in the very, very largest cities. Live comedy, there are about four and a half cities that have a serious live comedy scene in the United States. There are things that come from density and growth that are benefits; it's one reason why people want to live in metro areas overwhelmingly. That said, there are costs, like traffic and congestion, and when parking isn't priced like a market good, you get a tragedy of the commons for street parking. There's also a deeper sociological tendency for people to want to sort themselves by socioeconomic status, and that can be a powerful driver of local land use regulations, especially in suburbs.

SPENCER: So, would you agree that NIMBYs, who are blocking a lot of stuff happening, a lot of construction and such, are being rational for their own self-interest, even though it's causing a huge problem in society?

ALEX: Yeah, this is a fun one. The classical economic account of this, to explain in narrow economic rational terms, is a combination of what's called the home voter hypothesis and fiscal zoning. There are key cases that those can explain, but there are also a bunch of key cases where that fails, and we could dig into that if you want. What do you think?

SPENCER: Yeah, let's do it. How does it break down? Because I think it's an important difference if NIMBYs are acting rationally for their own self-interest, but they're causing problems in society, so we need to broaden things and solve the collective action problem versus they're actually not acting in their own self-interest. That would potentially argue for some different communication around it.

ALEX: Yes, basically. There's evidence that there are not narrowly economic goals, plus economic misunderstandings about how housing and land markets work, and what will happen when we change land use regulations. There are instances where in the very highest demand places in the country, think of the suburbs of Silicon Valley, like Palo Alto, where during 1950s ranch houses that are 1,200 square feet, where the structure, the actual sticks and glass, are worth maybe 300k, but the home sells for $5 million because it's mostly the land value to locate there. If you were to change the rules to allow larger multifamily buildings, the uplift from the option to build would offset the decrease in the price per structure in a way that would make a lot of money for people in those places. So, if they're just voting their pocketbook, then it's not strictly rational for them to be anti-growth there. The most fascinating instance of this is actually in Vancouver, where a First Nations tribe in Canada got their 10 acres of land back from the Canadian federal government, right next to downtown Vancouver. Now, if single-family zoning was profit maximizing, they have tribal sovereignty over the planning, and they get to write the zoning regulations for this 10 acres. If it were profitable to restrict density, they would have done single-family zoning, but in fact, they decided to allow and are now building a bunch of super tall skyscrapers. They're making billions of dollars for the tribe and housing the tribe on site. The question is, why are the older baby boomer homeowners next door mad at the tribe rather than trying to get together and become billionaires themselves? For a narrowly dollar-maximizing story, that's hard to explain.

SPENCER: Do you think that other non-dollar maximizing factors explain it in terms of being rational? Like, "What's the problem with lots of construction in your area? It's a mess, it's noisy, maybe you don't like it being so busy, maybe you want less foot traffic, maybe you're worried that if there's lots of building, the cost of your immediate unit will go down."

ALEX: Exactly. A good econ professor or teaching assistant, when they're teaching undergrads, will have an undergrad bring a problem to them and say, "I found this instance of someone maximizing non-pecuniary, non-dollar interests. What is going on here?" The instructor will say, "Undergrad, don't worry, firms maximize profit, people maximize utility. People do what they think is all things considered best from their perspective, based on the information they have."

SPENCER: Very optimistic view of human nature, yeah. It's an approximation.

ALEX: There are very powerful things you can do by stipulating that and then seeing what you can observe from prices and behavior, even though it's not strictly true. Things like behavioral economics are about relaxing those assumptions, but the point being basically we know that people are not well informed about how markets work. Renters and homeowners are pretty similar in their NIMBYism. If renters wanted to get rents down and homeowners were trying to get home prices up, after a public hearing, you'll see renters go and say rezoning will make rents go up, and a homeowner will go on stage and say, "He's going to make me lose money." They'll get off the stage and high five each other and say, "Wow, we did such a great job opposing new housing," rather than being like, "Wait a minute, which one of us is right about how housing markets work?" One aspect is information; the other is there are non-dollar things. Some people might be willing to pay an enormous amount to preserve boomer vibes at great expense, both to homeowners and renters.

SPENCER: I think something I don't understand is what's wrong with the argument that says, "Look, if I allow a bunch of building in my area and I'm an owner, we are now going to have more supply right around where I live, and so my housing should drop in price, and so I will lose money."

ALEX: The value of your structure can go down. Let's say you're the owner of a condo in a high-rise, which is more structure-rich and less land-rich. Those condo prices, those multifamily prices are really exposed to a decrease in the value of structures. In theory, those homeowners should be a little more worried. If you are a single-family homeowner in the urban core or a really high-demand first-ring suburb, you're more land-rich than structure-rich. Upzoning is going to unlock the option to build that will offset the decline in per-structure prices. Small development homeowners with huge development options and homeowners who have zero development options should have different perspectives on upzoning. Does that make sense?

SPENCER: It does. So, even owners may not have the same incentive as each other based on exactly what they own.

ALEX: Exactly, owners with development options, if they're maximizing dollar value, should be aligned with renters, if renters were maximizing lower rents for structures. Against that, you would have people who own land, let's say on the far periphery, like the Los Angeles high desert, the very marginal spots that are only just now getting built out, as people spill out from the core. The high desert, where the weather is bad and it's a 90-minute commute, that land is only valuable to convert to residential use because you're not allowed to live where the weather is good, closer to the water. So, people on the periphery in those marginal residential areas, plus homeowners that don't have a redevelopment option, in theory, should be economically NIMBY, and then everyone who can gain from construction, plus renters who want lower rents, if they were acting purely economically, would be structurally YIMBY.

SPENCER: So, you've given really good, nuanced answers, but where do you actually think things net out? Your average homeowner in the US, who lives in a big city, are they being selfishly rational if they try to block development, or are they not understanding their own interests in terms of total utility? I know it's a hard question.

ALEX: Yeah, and I think in the urban core, in high opportunity suburbs, it's a mixture of misunderstanding, plus the fact that different places are different. The academic who came up with the home voter hypothesis, his name is William Fischel, and he warned that cities above, I don't know, 300,000 or something, he never tried to explain majority homeowner majority renter cities. His theory was that homeowners are value maximizing, and the median voter in a typical suburb is a homeowner, and therefore they can outvote renters. That was his theory for the structures. There are still these different places where attitudes are different. People self-select into city centers that have higher density, and when you survey them, they have more favorable attitudes towards higher density, in part due to that preference sorting. I would say that the mix of explanations, whether it's that they want socioeconomic separation, where they know that regulations cause unaffordable housing, they just don't want poor people nearby, that is one faction. There's another faction of people who want to help poor people but are confused, like imagine a progressive, like a New York City DSA person before Zohran Mamdani. They would have been super anti-housing before; now that's completely changed because the understanding has changed. In other words, there are a bunch of sub-segments you'd want to consider in different geographies. In different places, there's an overlapping consensus that created NIMBYism, and the unwinding of that will have different drivers as well.

SPENCER: When it comes to NIMBYism, are owners the main issue, or are renters actually a significant force?

ALEX: In New York, the citywide downzoning in New York City was in 1961, and housing growth has never recovered to the grandfathered permits of the early 1960s. You could finish your pre-1961 permits for a couple of years before then. Permits have never recovered to that level, and so it's been, for most of living memory, that New York City, despite being a supermajority renter, has been structurally NIMBY, and that has only just begun to change. I would say that, for a long time, it was also renter attitudes in majority renter cities like New York.

SPENCER: So, renters, even though they don't own, still have enough sway that it matters, because they could put pressure on local legislators and stuff like that.

ALEX: Yeah, I guess so. There's a theory that Bryan Caplan wrote about in his book called The Myth of the Rational Voter, where he goes through his interpretation of the political science literature on this. There's this idea that no one voter is likely to change an election, so why is it that people will turn out to vote? In almost all circumstances, your vote will not have an effect on the outcome, whether you vote or don't vote, at some low level of turnout, obviously, the chances of casting a tie-breaking vote become non-zero, but what motivates people to vote? It's often thought to be a sense of duty and social obligation, the stories we tell our children about how to be a responsible member of society. When people vote, they're not necessarily always voting their pocketbook; they're trying to vote — what Bryan Caplan is saying expressively — which in this case means in a way that they think reflects well on their moral universe, "What would be good for my community? The way I see it is, what does casting my vote say about me and about the values I care about, rather than just the dollars and cents?" Your vote is very unlikely to change the outcome, so to the extent that people are voting for what they think is in everyone's best interest, or at least the local community they care about, then changing people's views about what advances that shared interest can potentially change their vote.

SPENCER: The thing that's fascinating, if you do the math on this, is that the closer an election is, the much higher probability you have of affecting the outcome. So, if it's like 60-40, there's no way your vote is going to matter, but if it's really close to 50-50, it could actually have a much higher probability. In theory, you could check this by looking at when the elections are closer. Do people actually vote differently?

ALEX: Yeah, or turnout spikes is another thing. You can have this. That's a great point. It's so funny because a decade ago I had a thread criticizing Bryan, saying the home voter rational theory of pocketbook voting is directly opposed to his myth of the rational voter hypothesis, and I was like, "These are inconsistent like Bryan." At the time, I was very convinced of the home voter theory, and I've gone back and revisited, and I wrote an apology thread to him several years ago, where I was like, "You know what, I actually think Bryan's right, it's expressive voting and economic illiteracy that really explains more. The home voter theory is falling down the ranks of my explanatory list."

SPENCER: It reminds me, I met a woman who told me with a lot of excitement about a personal project she'd been working on for three years, and the personal project was to block a particular building from getting built. The reasoning was that she thought it was really ugly, and it would make her neighborhood ugly, and she felt incredibly passionate about this. I wouldn't say she's wrong; she might really value this that much, and she assumes that other people do too. Of course, that really sucks for building new housing.

ALEX: Exactly, that's the thing. We do have to be careful about the fact that there's value uplift for single-family homeowners in high-demand locations, which is important for avoiding mortgage market distress. People would rightly worry about that, but just realizing that you can get rich from upzoning, people might still hesitate to vote for that if they believe that doing so would harm their community. Again, there are different types of people, and people vote differently, but I think for the most part, people would hesitate to vote to narrowly enrich themselves if they thought it was going to hurt everyone they care about. That's in part why I think YIMBYs have been able to make progress quickly: we've established first an elite consensus, kind of like people who are following newspapers and magazines closely. That conversation, the intellectual battle is won, and now it has been flowing on to public policy. It's not that we've changed the material conditions so quickly, but I do think we've changed a lot of hearts and minds about what actually is good for our society.

SPENCER: From just a really simple economic analysis, most people listening to this have heard about supply and demand, and you can figure out the price of a thing by looking at where the supply curve and the demand curve meet, right? While that's not a perfect theory, it's a pretty good theory, and it describes a lot of stuff. Is that the right model for housing? Could we just think of it as a supply and demand problem, and the reason housing is too expensive is because of where the supply and demand curve meet?

ALEX: That's the right first-order way to think about it. The complicated thing is that there are long-run market conditions that are the sum of many short-term supply and demand curves crossing. When a change, like when a land use change makes a place more attractive, like when Los Angeles starts upzoning, LA is going to become a better place to live in the shorter term, rather than a worse place to live. Right now, when people are comparing LA and New York, they're like, "Ah, man, LA with, or New York with the subway, the urbanism, the businesses, the walkability, it's so amazing, but boy, LA's weather, and its natural outdoor amenities, and everything." Imagine New York land use in LA weather; there would no longer be a debate about what the best city in the United States is. LA would become simply the best place in the United States to live because you would have New York in LA. It'd be amazing. The long-run demand for an awesome Los Angeles is a lot larger than the current demand for current Los Angeles. The short-run market cycle over any one business cycle only needs thousands, tens of thousands of units to be built, but over 50 years, the natural size of LA as a whole commute zone is probably like 40 million people. It would probably be as big as Tokyo if it were allowed to be on a 50-year horizon.

SPENCER: Yeah, it's interesting. That kind of local model can be misleading in a way if you're just focused on it at one time slice. You have to think about the bigger picture.

ALEX: Yeah, so there's this question in housing markets. Imagine there's this thing called spatial equilibrium. This is from the perspective of someone choosing where to live. Everyone who moves between metros and even between neighborhoods is constantly deciding, "Should I stay here or should I move there?" From the perspective of the marginal migrant, the marginal mover, the all-things-considered price for wages and amenities is constantly being equilibrated across places. I sometimes call this the-nowhere-can-be-crappier-than-Atlanta theorem. If where you live is worse than Atlanta, you would move to Atlanta. If Atlanta is that there's always some reservation utility, some place that you could move. Atlanta is less open than it used to be, actually, but that was a classic kind of 1990s example of a booming sunbelt city where anyone could move for very low cost. When you make a land use change to a place like Los Angeles, you kind of punch a hole in the national, imagine the National Spatial Equilibrium. The system of cities is like a bathtub, and the surface of it is, maybe if you shock it, there are waves, and then they settle down. If you punch the Los Angeles part of the bathtub, is the fluid in the bathtub molasses or is it water? If it's molasses, you can punch a hole in it, and it won't backfill right away. So, even a short-term supply shock could maybe push down prices for some time. If it's water, and the migration elasticity is really elastic, people flow in immediately, and it becomes really hard to push prices down in the short term. Only achieving the long-run natural size can kind of get supply and demand across in the long run. This question is the one part of the urban econ literature where I don't think we know what intermetro elasticities are on different time scales. We know the long-run demand for great jobs, great weather, and great infrastructure is really big. The question is, how fast will people move when you make those big changes? I don't think we know exactly what that is.

SPENCER: You could imagine it being slowed down by factors like huge transaction costs to moving, literally costs of moving, but also psychological costs. People get attached to their friends nearby, their families in a certain place. There are a lot of reasons not to move.

ALEX: Exactly. When I mentioned that about spatial equilibrium, and all things considered, that includes what you might call endogenous amenities, things that are created through the course of the system itself. When you grow up in a place and all your family and friends are there, and there are places that you know and things that you care about, whatever the weather and the jobs are, you have reason to be attached to that place because of where you grew up. So, yeah, exactly, that's right. That is also a factor. When we say amenities, we don't just mean weather; we mean everything that a human being might care about in their location choice.

SPENCER: Yeah, and we get attached to whatever we have experience with. There are friends and family, obviously, but even just sentimentality. If I grew up in America and ate oatmeal for breakfast, I enjoy oatmeal, but if I grew up in Asia, I might have eaten congee, and I would like congee, not oatmeal.

ALEX: Yes, there's this very funny little literature on climate homologs, like places where people from Nordic countries moved to Minnesota. Even though in the United States, there's been this massive move towards places with warmer Januarys, if you had to pick one variable to predict migration from the end of World War II till 2000, if you could only pick one variable, you would use January lows. Anyway, there's a famous paper on January. Despite that shock enabled by air conditioning, it's nonetheless the case that all the Swedes moved to Minneapolis back in the day.

SPENCER: Because it just feels like home. Is that why?

ALEX: Yeah, there's at least a paper on this.

SPENCER: So, if we think about supply and demand, there are two parts of that, supply and demand. How much is increasing housing prices driven by each of those two things?

ALEX: Yeah, this is a great question, and there's so much more heat than light on this, because the thing is that an economist might say the scissors of supply and demand cut together. There are places with really bad zoning where nobody wants to live, and so the housing isn't very expensive there. Then there are places where people like living a lot, but they have pretty accommodative land use regulations that allow builders to keep building until the cost of building plus the competitive gross margin is just equal to that local submarket's marginal supply cost. A place like Houston has been, they just added a million people in a single decade; they added more than all of San Francisco added to Harris County in a single decade. Despite that huge inflow, Houston is one of the cheapest cities in the country, certainly among large or medium-sized places to live. In other words, holding land use regulations constant, demand sets prices. If you wanted to forecast prices, the other thing is that supply takes a long time to change. Even if you have pretty accommodative land use rules, permitting a building takes three to five years, depending on the place. If you get a short-term major jobs boom, it takes time to catch up. Demand is going to predict prices; you have those short-term movements of prices. For forecasting, you really want to think about demand, but for what causes a long-run deviation of prices from costs, then you have to look at the supply rules.

SPENCER: Right. Also, demand, what are you really going to do about that? You don't necessarily want fewer people moving to particular cities, and you couldn't control that anyway, other than by making the place worse. So, what do you actually have to work with? You've got supply, is that fair?

ALEX: Yeah, there are demand-side things you can do; they're just not powerful levers. You can, for example, New York City banned Airbnb. In theory, that created an infinitely small but non-zero decrease in rents by unlocking, I gotta remember, 20,000 or 30,000 units that got turned back into long-term rentals. That's like a small neighborhood, like a neighborhood rezoning in New York City, which nobody thinks that the Gowanus rezoning was great. It's going to produce a ton of housing, and it does help South Slope gentrify 10 years later than it would have without the Gowanus rezoning, but nobody thinks that the 20 million metro area New York commuting zone is going to be affected by 20,000 units. The urban economics is so small that you can't observe it with certainty, but people think that the Airbnb ban might have reduced New York City rents by like $5 a month or something. I think Sophie Calder-Wang has a paper with the estimate; it's like five or $8 a month, in theory, too small to observe.

SPENCER: Do you think that was worth it, or what's the cost that's being paid for that, reduced tourism, that kind of thing?

ALEX: Oh, yeah, it's reduced tourism. I do joke that I was happy to sacrifice Airbnb on the altar of getting people to think about supply and demand when they're like, "Look, we're gonna get 20,000 or 30,000 units on the market." I was like, "Buddy, if you care about 20,000 units, I've got a plan for you." I don't know how well that actually translated into an educational opportunity. It seems more like it was exploited as a talking point. I've seen hotel prices in New York recently. People know when they have family coming to town, they just resort to kind of gray market, like Facebook groups to do short-term rental.

SPENCER: What's the most powerful demand intervention? Is there any that's powerful enough to even talk about, or is it all kind of just negligible?

ALEX: In places where there's lots of vacation and tourism demand, in theory, a vacancy tax can have an impact. Vancouver passed a modest vacancy tax. Before China's crackdown on Hong Kong, Vancouver had a ton of what I call regime hedging demand. People used to say, "Why are people from Hong Kong buying condos in Vancouver and then just holding them?" After Hong Kong was cracked down, a bunch of people fled to their apartments in Vancouver, and it became clear why they were buying those. Before Hong Kong got cracked down, people used to think it was just speculative. That vacancy tax encouraged more people to rent out their homes, and a bunch of those ownership units did go on the market and modestly reduced rents a little bit, but it was comparable to a modest rezoning, not a major thing. I always like to say that if you can tie that to a meaningful supply change, then that's like the sugar to help the medicine go down, the Mary Poppins recipe.

SPENCER: Before we get to talking about what's actually effective, let's talk about some things that people believe in or are pushing for that are just not going to work, or they're going to be so negligible, it's barely worth it. So, what's popular, but not helpful?

ALEX: Oh, yeah, the big one recently has been large institutional investor bands. They own corporations that own more than 350 single-family homes and rent them out. They own less than a percentage point of the American housing stock.

SPENCER: This would be like Blackstone, that kind of thing, right?

ALEX: Right, exactly. This is a huge thing. This is highly memetic. It's always tempting. If it's big corporations and Wall Street, and also I don't have to change anything, that's a powerful story. Now, as a share of single-family rentals, large corporations can own 20 to 30% of single-family rentals, but most single-family homes aren't rented, and single-family homes aren't the only homes. So, when you actually look at all homes, how many are owned by Blackstone? It's so small, I almost can't measure it.

SPENCER: Would it be a problem if, let's say, they owned some huge percent, like 40% instead of 1%? Would that actually be a really big problem, or is it almost missing the point, it doesn't even matter who owns?

ALEX: The thing is, I don't want to make too strong of a claim because I'm not a market design guy, but in theory, I don't know. This is where you'd want to go to a competition economist and be like, as long as concentration is sufficient for Cournot competition, then in theory it should still get a competitive outcome, but there's more risk the more concentrated. The more concentration you have, the more you might have at least a temporary attempt at market power.

SPENCER: Let's say they can't collude, or they don't have a monopoly, that kind of thing. I think people have this intuition that if it's big investors, like Blackstone owning it, that somehow that's pushing up prices broadly. Does that logic hold, or is there something wrong with that logic?

ALEX: Right, the problem with this is just understanding that most people haven't ever met a large institutional investor or gone to business school or understood what an investor does. Why is Blackstone doing this? What they're doing is arbitrage between the rental and the owner market. After 2008, we cracked down on home lending to an extreme. We basically said, "If you don't have a great credit score, you don't get a mortgage anymore," and Dodd-Frank did that. We did that on purpose. They call it tightening the credit box.

SPENCER: Was that over correction or an appropriate correction? Obviously, things got way out of hand before that.

ALEX: We overcorrected, which we've actually loosened up a little bit, not completely, but it caused basically. Have you ever used the New York Times buy-rent breakeven calculator?

SPENCER: Should you buy or should you rent, and what's worth it?

ALEX: How many years would I have to hold to offset the closing costs? You spend 6% when you sell your home, and it includes everything. It's actually sophisticated. How much would you have earned on your stock investments on your down payment had you kept them in the S&P 500 instead of doing the down payment? Considering it's a newspaper calculator, it's amazingly detailed. When the federal government quickly restricts credit access, it causes buy-rent spreads to blow out. Basically, in tons of places around the country, it was profitable to buy, and home prices crashed relative to rents. Blackstone is looking at this going, we've never tried renting out single-family homes before because we always assumed it would be too hard to have scatter site locations and send a plumber in a van to drive around to different places. Nobody had ever done single-family rental, but they were like, "Look, home prices have fallen so far relative to rents that there's just a huge arbitrage opportunity to buy this home and rent it out." So they started doing that and actually kind of put a floor under home prices. It kept prices from falling even more. What you see is wherever buy-rent spreads go in one direction or the other, institutional investors buy or divest. Smart money, now that interest rates are high, is finding that buying relative to renting in many submarkets is not so great right now at these interest rates. A lot of smart money has been divesting in many submarkets. Once you understand this, when they buy a home and rent it out, it doesn't destroy the home or take it off the market; it removes one from the homeowner market and creates one in the rental market. Again, if you're thinking about two bathtubs next to each other, institutional investors are trying to make money by getting the levels of those two bathtubs to be equal.

SPENCER: It causes it to become more equal. As they do that more and more, it would liberate the two markets.

ALEX: Exploiting an arbitrage reduces it, yeah, exactly. And so, basically, once you understand that, "Oh yeah, this is just an arbitrage activity between the rental and the ownership market, it's not changing the supply of homes to live in; renters still live in it, owners still live in it, it's just a tenancy type between the two."

SPENCER: So, in this case, it would help renters and owners, or no?

ALEX: Well, it bids up prices. Well, it makes rents; every single home that is purchased and turned into a rental makes home prices in that micro market, in theory, go up just a little bit, at least for a short period of time, and rents go down at least a little bit for at least a short period of time, in theory, and then when you do that enough, you keep doing that until it's no longer profitable to turn one type into the other type.

SPENCER: It's almost like people are imagining they're buying it and doing nothing with it, right?

ALEX: Exactly.

SPENCER: We own it, and now we get to live in it, which would be incredibly irrational from their own point of view. The whole point is that they need to put it on the market so they get money from it.

ALEX: Exactly. Yes.

SPENCER: But there are sometimes investors that do that, and we talked about that a little bit. In Canada, there are some kinds of investors that will not live in it, but I guess that's just because they plan to move into it eventually.

ALEX: Yeah, there were some, again, I call that regime hedging demand. It was so funny, in the 2010s people were like, "Why are Russians and Hong Kongers buying these apartments?" After the Ukraine war and after Hong Kong got in Macau, it was like, "Oh, now we understand why there was regime hedging demand." It turns out that bet, that hedge, eventually came in the money sooner than I think a lot of us expected. In New York, one thing that's funny is chain of address filtering, the idea that when there's a demand shock to live somewhere, high-income, high-wage people are able to buy on the open market, and the people who cannot win in that auction are people with lower incomes. If you can divert a demand shock into new luxury housing, that's how you prevent gentrification. Gut rehabs or combinations of multiple smaller homes into one big home — that's how you prevent gut rehab gentrification of existing homes, is by allowing it to go up — even for things like regime hedging demand, that actually still applies. In New York, our Billionaires' Row, 57th Street, is just one street, a couple blocks. In London, they have the low-rise version of that in the embassy district, where it's almost like a little bit of a ghost town of second homes, but it's an entire neighborhood, or a huge chunk of Westminster. Even that second home demand is still responsive to allowing it to be accommodated in the land use regulations.

SPENCER: Better to let them stack it up into the sky and feel very powerful about themselves, that they live in such high places.

ALEX: Exactly, especially as long as we were charging appropriate property taxes, then it's win-win. It doesn't consume that many services, but that's the thing, the governor just approved a pied-à-terre tax in New York to balance that a little bit.

SPENCER: And that's probably good because those pied-à-terres, they actually take the housing off the market.

ALEX: Yeah.

SPENCER: A small amount.

ALEX: Relative to someone living in them full time. It's technically true. Yep.

SPENCER: Yeah, something that gets talked about a lot is building expensive luxury housing, and people argue, "Well, does it actually help other people? If you're building a bunch of billionaire housing, does anyone else get a benefit?" There are arguments on both sides of that. On the one hand, only billionaires can afford it, so how does it help anyone else? On the other hand, there's the idea that it's more housing, and maybe as long as you have more housing, the costs have to go down elsewhere. So, what's the truth about this?

ALEX: Yeah, basically, the no-build condition, when you're saying if we build this or don't build it, building an apartment building, even a luxury apartment building, does not cause tech bros to be poofed into existence, fully grown at age 25 out of the quivering subatomic soup of the universe. Human beings that are adults who have jobs all exist, whether they live in this place or a different place. Not building even a luxury product doesn't cause those people to disappear; they still exist and live in places. If they don't live in that place, they will live in whatever place they would otherwise live. The best way to think about the short-run benefits, especially, is where would this luxury renter or buyer have lived had this building not existed? An economist would call this the neighborhood with the most cross-price elasticity. For a change in this place, what would have happened over here? In Gowanus, there's a lot of luxury housing going up right now. After the rezoning, it went from being a Superfund site that was literally illegal and unfit for human habitation to becoming one of the nicest places in brownstone Brooklyn, with great supermarkets and retail and all these types of businesses. The rents are relatively high, but the question is, would people there have bought or rented older homes and fixed them up, gentrifying them in South Slope and Sunset Park, further out on the train? The reason we know that demand is not infinite is because gentrification is a time-bound process. In the 1960s, this is a forgotten history. The 1961 downzoning was done on purpose as a community development tool. The suburbs were growing so quickly, even though Long Island, New Jersey, and Westchester have restrictive single-family zoning, all that land had not yet been built out, even to just single-family homes. New York City proceeded to lose a million people. We drained New York City into the suburbs and the Sun Belt for a full decade. There was a thought that the West Village is kind of like the original downtown gentrification ground zero. In the 1960s, during the Jane Jacobs era, people said, "Why should we build any housing here? You should go live in the East Village, you should go live in Chelsea." My ex-girlfriend's mom lived for free during law school in the 1980s by babysitting a vacant brownstone in Chelsea. The friend said, "You don't have to pay rent, just make sure no one squats in it." That's because Chelsea was not Chelsea. Over the course of 40 to 50 years, demand spilled out from the West Village to the East Village to Chelsea, then to Williamsburg, then East Williamsburg, and then Bushwick. When the community development people said, "Hey, don't build here, go repopulate Brooklyn, go repopulate the Lower East Side," they were right about getting people to rehab and fix up those old tenement units, many of which were boarded up. My apartment in Bushwick was in the 1980 tax files; they have a picture of it fully boarded up. We occupied those buildings, but after we repopulated the city, we never lifted the growth controls. The fact that it was gradual and not instant — Bushwick didn't gentrify in 1960; Bushwick gentrified in the last 15 years — shows that if we built more in Williamsburg, we could have delayed the gentrification of Bushwick by another 10 years.

SPENCER: The very mental model is that if they build a new apartment building for billionaires, it's a hundred million dollars or whatever to live in per unit. That could attract billionaires that didn't live in New York City already, but let's suppose it attracts ones that already live there. Then they are living somewhere in the city; we don't know where. They move into this really expensive housing that frees up a spot that's maybe slightly less fancy than the thing they just moved into, and then someone moves into that. That person used to live somewhere, presumably in the city, and then that frees up a spot there. It's kind of this chain of these things opening one after another, and a lot of people actually end up benefiting, even non-billionaires.

ALEX: That's exactly right. Pew Charitable Trusts just made a video of this last week, where they follow someone and then interview the person who moved from that one, and then they interview the next person. It's incredible that we actually did this before in the 20th century with suburbanization and what is often called white flight. This was socioeconomically and racially characterized by who moved where, but when we built the suburbs, it was most extreme in the metro areas that didn't grow. The Buffalo metropolitan area is around the same size it was in 1950, but they built a ton of houses. Home prices in the suburbs never fell deeply below replacement costs for a long time, even as rents and prices in the city of Buffalo went below profitable building costs, and the entire East Side of Buffalo completely depopulated. Some land use scholars call these metro areas sprawl without growth. Not only can builders at the regional level build our way into affordability, but you can actually build your way into blight in extremis. I think we're a very long way from building so much that we could, because remember, the end of a vacancy chain is, or sorry, the end of a moving chain is vacancy. In theory, as you build that next good unit, whatever the worst unit is in the metro area should be vacated, unless someone moves in from a rural area who would have wanted to live in the city but wouldn't at the previous price. The end of a moving chain is vacating the worst unit, wherever the last person moved from. In the very extreme, that was why New York downzoned in the 1960s in part was to spread out demand. I don't want to raise it as a problem; I'm not worried about creating blight from building too much. I would love to have people in buildings instead of homeless people; I would swap those problems in a heartbeat. I just think it's going to be a while before we get people in buildings at that scale.

SPENCER: To what extent are housing prices a cause of increasing homelessness versus other factors like drugs and other causes of poverty, etc.

ALEX: Yes, that's a great point. There's a nice book and some long-form essays on the idea of homelessness as a housing problem, and it's amazing that there's a pretty good simple bivariate relationship between contract rents and homelessness rates in a place. One reason for that is that in a place like New York and San Francisco, even upper-middle-class people don't have tons of spare bedrooms or a spare basement ADU that's vacant, or a garage ADU that's vacant in places like rural areas and left-behind metros that have really low housing costs and lots of slack in the housing market. In places like historically Baltimore, Buffalo, or Cleveland, or anywhere in the Rust Belt, those places have lower homelessness rates. Despite having, in some instances, higher rates of substance use disorder, for example, West Virginia has worse substance use disorder than many other states, but substantially lower homelessness rates, because if your cousin runs into trouble and you're in a place where housing is cheap, you've probably got a garage, a basement, a spare bedroom, or something. If you're in Manhattan, you might have a couch, even a rich person.

SPENCER: The kitchen counter is about it.

ALEX: Exactly. If your cousin has a manic episode and you're trying to help them get treatment and stuff, you don't just have a spare room sitting for them. The amount of slack in a housing market affects how well people's social connections can cushion the life shocks that cause homelessness. Even though you might look at that and go, the first-order thing looks like substance use, the first-order thing looks like severe mental illness. What their social connections can afford affects what that person's options are.

SPENCER: So let's talk about the deeper causes going on here. Because we could talk about housing prices rising because of regulation that prevents building. We could talk about NIMBYism. How do you divvy up the causality, and what's really going on with why prices are out of control in New York, San Francisco, and in places like that?

ALEX: Yes, so one thing is again to your point about for who can afford what, there's no denying that. So high-rise construction costs are pretty high. If we eliminated zoning, we could get Manhattan condo prices down to five to 700,000 from 1.2 million, which is a huge drop and is very meaningful for a typical couple. Incomes in New York are really high.

SPENCER: That would be, you could build anything you want, basically.

ALEX: Exactly, yeah, if you went to pre-1916 law, now a $700,000 two-bedroom is not deeply affordable. It might be, that's like a 40% price cut. That can deliver a huge price decline for a median condo in Manhattan, but people are still going. People without market incomes will always need income support to afford market housing, and no YIMBY denies that. If they do, then they're mistaken and just spouting off on Twitter or something. That's no policy. Everyone understands that you have to have income in order to afford things, and so there will always be a role for work supports and income supports.

SPENCER: What do you mean by income supports, work supports? Because obviously this ties into things like putting in price controls on rents and things like that, but I assume that's not what you mean.

ALEX: No, I mean things like vouchers, whether it's vouchers or cash supports, child tax credit, social security, all the things that we do to transfer income to people who don't have market incomes. To afford market housing, you would have to have some kind of income, and if you don't have a market income, you need a non-market income, like an income support, whether that's a voucher or another type of assistance. One thing is when we're looking at housing cost burden, when you're looking at housing costs as a share of a person's income, that can confuse us because that's two concepts being stacked together into one fraction. You can have housing supplied at cost, but have people who are just really poor. Some of America's poorer cities have surprisingly high rent burdens, and you're like, "Oh, what's going on here?" Because the housing is cheap, it's like, "Oh, the incomes are low." San Francisco has one of the lowest rent burden rates because the incomes are really high, even though the housing is way above marginal supply cost. Just looking at that can confuse us because there's a poverty problem, which has been with us forever. Then there are "houses selling and renting for more than they cost to build" problem. Now, YIMBYism can't directly end all poverty; it can make poverty less painful by bringing prices down, but it does not cause people to have incomes. YIMBYism can solve the prices above cost problem, and so you just always have to be clear-minded about those. They are two separate things, really, or related, but separate.

SPENCER: That's helpful clarification. So going back to the causality, how do we break it down between the different factors that are causing high prices?

ALEX: There's a combination of zoning, which includes bulk height, floor area, and other geometric controls, and then strict controls on the number of units that are allowed to exist in a city.

SPENCER: Who sets that usually?

ALEX: City governments are delegated zoning, which is a police power that belongs to the states and is delegated to cities at the pleasure of the state. Before 1916, cities did not have any zoning powers. After Herbert Hoover, who was the Commerce Secretary in the 1920s, they created a model federal code called the Standard State Zoning Enabling Act. I think a couple dozen states still use that original statutory text to delegate state zoning powers to cities. So, it's at the pleasure of the state, exercised by cities.

SPENCER: Got it. So we've got zoning, so that's one thing. And then, what are the other things in the causal story here?

ALEX: And then permitting and procedures. Most state environmental review that Governor Hochul in New York just signed yesterday to change what's called SEQRA, that is a 50-year-old environmental review law. It's not a substantive environmental law; it doesn't require you to make the environment better or worse. It just requires you to do a review and have a litigation attack surface for the study you do on that review. It's not like the Clean Water Act or the Clean Air Act, which dictate the water must be this clean, the air must be this clean. These are procedural laws that are just a lawyer-fest, paperwork plus red tape. Only seven states subject housing to these procedural review laws, but they're big states, so it's New York, California, Massachusetts type of places. Most states don't have one of these, but on the permitting stack, this is after you have zoning entitlement. When your local department of city planning says, "Yeah, you're allowed to have three units on this land, and here's what you're allowed to build, there's another stage to getting the building permit." On the East Coast, we have our big cities. This was a learning thing for me because it's different in different places. Cities like New York have bad zoning but good permitting, where as long as the zoning allows it, you have what they call a by-right building permit. If zoning entitlement leads to building permit entitlement, if you need every zoning, then you have to do all the environmental review and all this other nasty entitlement process. But as long as you have the zoning, you have the building permit. In the West Coast, it's not like that at all. Zoning entitlement is just step one. There's a brand new paper from Evan Saltus at Princeton, and it's in Los Angeles. Thirty percent of the wedge between price and cost is caused by permitting, not zoning.

SPENCER: Okay, so we've got zoning, we've got permitting slash approvals. What's the next one?

ALEX: Building code is the next one. This is supposed to govern life safety, but there's actually this incredible historical record of using life safety rules to discriminate against multifamily housing. Back when it was feared that early on, zoning people wondered if zoning would be considered an unconstitutional taking. Even in the 1920s, there was a view of, "Oh, you know, it's a relatively new precedent. This has never been a power that cities have used before," but life safety rules had existed before that. All the way back to New York City essentially invented this type of stuff with the tenement laws in the 1860s, like, "What kind of egresses do you need? Does a bedroom need a window? Is a fire escape required?" Fire escapes were required from the mid-19th century until they were banned in 1968. That's why you never see fire escapes in New York anymore. If you have one, you may not remove it, but if you haven't built one yet, you're not allowed to build one. It's a very funny world we live in. So, yeah, life safety already had precedent. Early on, they were like, "Let's add as much life safety stuff," because regular voters are going to be like, "Oh, of course, safety is safety, right?" Our building code has accumulated things over the years that don't actually matter for protecting the building occupants or furthering their health, safety, and welfare. The US has diverged; the US and Canada have diverged from the rest of the developed world. We've kind of imagined the Pachinko board of history, a path-dependent thing, where once you start going this way, once you're off over here, you start bouncing off in another direction. We split off, and we now mandate that every apartment building that's more than three stories tall has to have two stairwells, while the rest of the developed world allows what's called a single stair up to the height of a fire ladder. The second egress is the fire ladder. Interestingly, New York never went down that route, but the rest of the country followed. We had a fire escape plus a single stair. In the 1960s, we got rid of the fire escape requirements; we just had this kind of modern version of fireproof buildings having the single egress. Other jurisdictions, when they got rid of fire escapes, kept the second egress requirement, so they were like, "No more fire escapes, but you need a second interior stairwell." Until very recently, only New York, Seattle, and Honolulu were US cities that had European and Japanese style single stair allowances. Since 2021, that's exploded as a building code change that allows you to do narrower small lot infill. There are a variety of other things on plumbing and elevator size, adopting the international standard for elevator regulations instead of having a weird regulatory capture thing, where the American elevator market is extremely fragmented and off on its own, and doesn't allow entrance from global elevator markets. It's very interesting.

SPENCER: Wow, I've never heard of big elevators.

ALEX: Big elevator, that's right.

SPENCER: That's the thing. Okay, so we got zoning, permitting, building codes, anything else major that should go in the causal tune here?

ALEX: That's the big stuff. Those are kind of what set the break-even construction costs. There are other things, like financing tweaks. If you subsidize financing, you can lower the break-even return required on a building for it to pencil. You could imagine things we already have. Obviously, Fannie and Freddie have large secondary markets for multifamily. FHA does a little bit of multifamily and also all the FHA single family. That's the Federal Housing Administration at HUD. So we have both directly government-owned and then government-sponsored enterprises that provide huge secondary market liquidity, but they already exist. If they didn't exist, you might be like, "Oh, we would need a Fannie and Freddie, maybe, to provide financing," but obviously they are doing trillions of dollars of secondary market liquidity. The other thing is the possibility of innovation if there are technological changes, whether that's to materials and building science, construction procedures, off-site construction methods like modular and manufactured housing. We actually do have offsite construction. There's a national building code for factory-built housing, as long as it is built on a permanent, theoretically mobile chassis. It used to be called mobile homes since the 1970s, now called manufactured housing under the so-called HUD code. Those are factory-built and very cheap, but many cities ban them because they're cheap. A lot of jurisdictions will have a single zone for a manufactured home park, an old-fashioned trailer home park, where we have the technology, but again it goes back to the regulatory issue. We banned those houses because they're cheap.

SPENCER: So where does NIMBYism fit in this? I don't see it in this causal story, but maybe it's hidden in there.

ALEX: Yeah, NIMBYism is what causes the zoning and permitting procedures to be...

SPENCER: Okay. It's just deeper in the causal chain. It's how we got there, but it's not that people are protesting in their local neighborhood, saying, "Don't let this building go up." That's not a major force of direct opposition to building projects.

ALEX: Oh yeah, absolutely. That's when you're asking how did it come to pass that we have these rules? Before 1916, none of these rules existed, so sometime between 1916 and now, cities banned themselves. How did that happen? By what means? Zoning, permitting, and procedure are the means, and the political economy of NIMBYism is the why, along with institutional factors. Income and racial segregation explains some of the suburbs fighting against blight and some of the urban restrictions. The emergence of automobility rather than mass transit is significant. Before World War II, people didn't have that many cars, and transit has increasing returns to scale, like a positive flywheel technology. The more people who live near you, the more a transit agency can afford to run frequent service and eventually upgrade that service. My neighborhood in Jackson Heights was originally built with a three-track elevated rail, the Flushing Line, the seven train. As Queens kept growing and densifying, the Queens Boulevard line came through as a four-track express, and the travel time from my neighborhood to Midtown went from 22 minutes to 12 minutes. Life not only improved with added capacity, but it also got better for people who live in my neighborhood because of growth. When everyone is driving, more people can, at best, have driving only as good as it is when the road is empty. Adding more people doesn't make my road better; it's a congestible technology. So, there's a mixture of the transition to automobility, along with income and racial segregation, and in some cases, a misunderstanding of how the economics of land use regulation will work in the law.

SPENCER: Now, I think I know what you're gonna say, "But why can't the government just declare prices to be lower? Why can't they put rent control?" Or say, "Hey, you just can't sell a house for more than x?"

ALEX: Well, you can do anything, and we do, but what's wrong?

SPENCER: What's wrong with that? Why is that not a good solution?

ALEX: Well, you can lower the contract rent on an existing unit by placing price controls on it, but you can't change the underlying physical scarcity. If a lot of people want to live in a place that has great infrastructure, some mix of wages, infrastructure, and weather, wages and amenities, the number of units that are allowed to exist in that place caps how many people can live there. You either ration by price, ration by waitlist, or by lottery. We have housing lotteries for income-restricted housing units.

SPENCER: But they don't get to decide who gets the apartments, or who gets the housing exactly. You could say, "Oh, you have to wait in line," and then eventually you'll get it, or you could say, "Oh, we'll pick it randomly," or you could say, "Well, whoever has the most money," and basically you're kind of choosing between those three distribution systems, is that the idea?

ALEX: Exactly. So, Stockholm has comprehensive, extremely robust rent regulation. The waitlist for an apartment is around 10 years, and there's a black market for subletting in between, so you can monetize your below-market lease as long as you don't get caught. Incumbents do get cheap housing in Stockholm, but if you want to move to Stockholm, you've got to wait 10 years or you have to pay black market prices.

SPENCER: So you're just moving around the type of pain, basically. It's like, which type of pain do you want? You can change this type of pain, but it doesn't necessarily make things better overall.

ALEX: Exactly that the scarcity is prior to the allocation regime.

SPENCER: Would you say also that things like rent controls are kind of a redistribution system, moving money between different people? That might be good; it might be what you want, but let's call it what it is. You're not creating more housing for people to live in; you're moving money between different parties, right?

ALEX: Yes, in the same way. It's funny; economists call this allocative efficiency. Finding the right price is about matching to someone who wants it the most, in addition to providing the right incentive to supply the thing. They say that a price is an information signal wrapped in an incentive. I think that's an educational catchphrase. On the left, it's easy to understand that when people get really rich, the marginal value of $1 is lower to them than it is to a person in the middle class, working class, or in poverty. They'll buy a second home that they may not use as much as someone who is poor and using it as a primary residence. Everyone understands that; it feels like it gives people the ick. The other thing is, if you're a middle-class person who has a price-regulated unit, you can have that same thing happen. For example, "Oh, I've got a rent-controlled unit in Manhattan that's $1,000 a month, but I have kids, and it's a one-bedroom. I want to move to the suburbs for a better school district, but I'll keep a pied-à-terre in the city for $1,000 a month. It would be silly to give that up." You can end up with misallocation from people who are not rich, just as a billionaire might have a vacant unit. That is another consequence of rent control that the right loves to talk about: the misallocation of rent-regulated units. The left loves to talk about the misallocation of billionaire units, but one is a substitution effect, and one is an income effect. They're both conceptually similar in terms of not maximizing the use of the resource from the perspective of a middle-class person.

SPENCER: Obviously, efficiency isn't the only thing people do or should care about, but we should be honest about the fact that there's a cost to efficiency if you don't use real market prices, right?

ALEX: Exactly. I love Jackson Heights. I live in this neighborhood in Queens where the buildings are all large co-ops and rentals that are above the rent regulation threshold. I'm really glad that, on the one hand, Long Island City is a lightning rod for outbound gentrification from Manhattan. The reason my neighborhood is still cheap is because of that. Have you seen the soldier arrows meme? The soldier takes the hit so that the civilians can sleep soundly. Long Island City Towers are like that; they're taking the inbound from Manhattan to keep the Queens Boulevard line cheap. In the meantime, if we don't build enough, rent regulation does ensure that it's the most diverse neighborhood by national origin, with 160 languages in one zip code. I'm really glad, from a social preservation perspective, that at least this way, if we don't get enough housing built, my neighbors will be around, even if it could cause different types of misallocation, at least for a while.

SPENCER: So before we wrap up this conversation, I want to get to one of the most important things. What do we do about this? What actually works? It sounds like if we improve zoning, permitting, building codes, and maybe use innovation, and as long as we don't do it in a way that jeopardizes safety or other important things, things could be a lot better. So, how do we make those things happen?

ALEX: Well, yeah, it's both changing the information people have about what is good for everyone in the long run, and the fact that when people realize that owners and renters can gain from growth, the economic growth that it unlocks is going to raise a lot of boats. In my case, I own a two-bedroom, but even if home prices go down in New York City, and I lose some equity on that project with my future labor income, I'll be able to afford a three-bedroom. The thing is that because everyone, whether you're truly long housing in a portfolio sense, depends on whether you own more or less housing than you want to own. Even when you own some housing, you might still be partially short housing because you would prefer to consume more of it than you currently do.

SPENCER: If rents go down, you lose money on your apartment you own, but then apartments are cheaper, so you can upgrade, and you're like, actually, I lost some money, but I'm actually happier.

ALEX: I lost some money, but now I can afford a big house, and I could have my kids and stay in the city. "Oh my god, this would be awesome." So, getting those messages out there that we can help everyone, and that nobody has to be demonized in this, there are actually positive ways out of this. That's one thing. The other thing is just the institutions. When a jurisdiction, like I was saying, no one neighborhood rezoning can build New York City out of the housing crisis, not even one borough can, but the whole city, plus the two dozen counties of the New York metropolitan area, all together we could build our way out of the housing shortage, the city plus the suburbs. That's where moving action up to the state level is important. You'll find that the larger someone's purview is as an elected official, the more structurally YIMBY they tend to be. Governors are YIMBY, and single district city councils tend to be NIMBY. Almost all governors are YIMBY. Small area single-member state legislative districts are not always NIMBY, but relatively less vocal than governors tend to be. The really hard thing to change is moving city council elections to at-large elections, like Cambridge, which just passed the biggest voluntary upzoning in a blue city not compelled by state action, done by an at-large single transferable vote style council.

SPENCER: What do you mean by at-large?

ALEX: At-large means you are a city councilor who is elected by the whole city, and so you run like you have the same district as the mayor.

SPENCER: Rather than really local regions?

ALEX: Rather than just a hyper-local district. And so we see intervention there, how do you make that to the state?

SPENCER: How do you actually make that happen, right? How do you move things upwards?

ALEX: Yeah. I was going to say changing city council charters is a little hard. New York just did the ballot measures that created a mayoral override and other overrides, fast tracks that avoid these single-member city council district things. So one thing is you can go straight to the voters; ballot measures are really expensive, they could be risky because you have to get everyone to turn out, but we put housing to the voters in New York, and they said, "By super majority vote, absolutely, yes, do not let the city council keep blocking projects." So going directly to voters is one option, and then the other thing is when you move things up to the state level, local control of zoning is a power that is delegated by the state. The state can modify that delegation to ensure regional and statewide interests are represented in local decision-making, and that can mean making sure that common sense densities, whether that's near transit, high density, or far from transit, reasonable, ordinary things like ADUs, things like allowing starter homes again on smaller lots, not requiring you to buy so much land per unit, even when it's single-family. If you could build that single-family home on a lot with a smaller amount of land, it's going to be more affordable as a starter home. Basically, states can directly modify land use regulations. They can also make it more attractive to permit by giving per unit bonusing. The state and federal governments give huge amounts of funding; local governments run most of your local services, even when the funding comes from higher levels of government. We could make sure that dollars chase heads, all of this, all the transport and education funding, and essentially all domestic policy spending could ensure that you're growing public services as fast as housing growth is happening.

SPENCER: If you tie it better to head count, then it creates better incentives, basically.

ALEX: To unit production and if failing that, at least to changes in, when we have these per capita formulas that make sure that you can do well by doing good. Some states have property tax caps, so that new housing can't pay as much in property tax as it might need in local services and infrastructure. When the state and federal government go, "Hey, here's 10 grand for permitting that new apartment," fabulous, it makes it attractive. So it's both about modifying local control, but also making housing growth fiscally attractive. Just make sure that growth pays. Again, simply making growth pay alone will help, but there are many cities where growth is fiscally positive, and we still don't quite allow enough, so that alone doesn't completely solve it. But it makes sure that when you have that state action to say, "Hey, we're modifying local control, and you have to allow homes, it prevents a backlash from service congestion." Imagine you're in a property tax cap state, and the state preempts your land use, and now you have a sewer problem, a school problem, you're not adding transit. There's going to be a voter backlash; voters are not going to be happy about that. We have to head that off by making sure that infrastructure and services from state and federal assistance are scaling.

SPENCER: Any other major interventions we should be aware of that could be very effective?

ALEX: There's a stylized toolkit that actually the Mercatus Center does an annual roundup of all the state bills, but we see a pretty common pattern. That's things like accessory dwelling units, in which in California they call them casitas, on these coasts we sometimes call them granny flats. So that's allowing a small, naturally affordable second home in a basement, attic, garage, or a little backyard cottage. Minimum lot size reform, allowing starter homes on less land, allowing residential in commercial districts, sometimes called RACZ, residential and commercial zoning, transit-oriented development in places that have mass transit systems, relaxing those height and bulk controls within walking distance of mass transit. These are the typical reforms that we're seeing around different states, and those are the kind of toolkits that states are requiring cities to allow that many cities are allowing on their own now that hearts and minds are changing.

SPENCER: If you want to leave the listener with one thing, what would it be?

ALEX: You cannot have more houses by banning houses. You cannot get richer by mandating that you have less stuff. Have faith that in the long run, housing abundance is not going to impoverish us as a society. Don't worry that allowing more housing is going to make society poorer. It will, in the long run, make us better off. In order to have more houses, you have to have more houses. So, yeah, I would say it's positive that some homeowners don't have to lose, and you don't have to build this movement on resentment. It's about building solidarity across people coming from different places, sometimes with different motivations and views, but ultimately in a positive way.

SPENCER: Alex, thanks so much for coming on the Clearer Thinking Podcast.

ALEX: My pleasure.