The “Hou-Supp Effect,” “Musical Chairs Theory,” and the math behind the housing crisis, displacement, and homelessness
By: Andy Kerr
Tags: California, Housing, California Politics, Homelessness, Housing Crisis

Many of us involved in housing advocacy in California have been promoting for years now that we need a major paradigm shift in how we think about housing production and its direct connection to how much displacement and homelessness we’re willing to tolerate. The correct answer is always “none,” of course, but there always seems to be a disconnect between our stated values and the values of our actions (or lack of action). It should be clear even to the casual observer that the influx of homelessness at the same time we are experiencing climbing rents and home prices, as well as vanishing vacancy rates, are all interconnected. And yet, I continue to be amazed at the number of folks who do not see a relationship between these issues and even blame displacement and gentrification on the building of new housing.

The directors at the NYU Furman Center addressed this issue head-on last year in their paper Supply Skepticism: Housing Supply and Affordability. These urban policy experts concluded from their research what the basic laws of economics would suggest, that the net effect of building new homes makes housing more affordable, while the constricting of supply does the opposite. It is important to note, these experts also warn that the market will never supply enough housing for low and moderate-income earners. Which is why building and protecting affordable housing with land use covenants are critical. And yet, in spite of this warning, the Furman Center concludes “…the preponderance of evidence suggests that easing barriers to new construction will moderate price increases and therefore make housing more affordable to low- and moderate income families.” I believe I can help explain why this is and further explain why with housing, attention to the needs of the entire marketplace are critical to taking pressure off folks who are the most likely to experience poverty or homelessness. I also attempt to explain why, according to the Furman study, “…the housing stock in one submarket can fairly quickly affect prices and rents in other submarkets by alleviating competition that would otherwise be diverted to those other submarkets.”

We are clearly seeing a supply problem in the Los Angeles County region and across the State of California. I believe it’s important to ask how we got to where we are in order to agree upon the solutions to getting ourselves out of this crisis.

It begins with the economy. For too long we have collectively disassociated the real need for housing with the economic conditions that make housing unavailable and unaffordable. We are currently in the longest economic expansion in U.S. history. California has been a leader of this national economic growth as the fifth largest world economy. Ironically, it is this economic progress that contributes to the rise in poverty, homelessness and displacement — all connected to the increasingly high cost, and scarcity of housing. The difficult question that arises in this discussion is then, “How much housing needs to be built? By when and where? And for whom?” And who is ultimately responsible? A year or so ago, I wrote “NIMBY-ism runs amok because it can afford to.” So far, obstructionism has been given a blank check. A lot of hurting folks have been stuck with the bill.

In the Information Age, our political leaders and administrators are increasingly relying on data-based solutions to providing good government. This is good news; however, on these questions of housing and its inter-connectivity to the most important issues we face, there appears to be very little open government data (OGD) or data-based decision making around fixing our production problems. At least at regional and local governments, I believe we are consistently failing to look at key data points that would help us answer basic questions if we just considered the basic math driving these economic pressures. This would also help us see in real-time the huge deficits we have been operating with that lead to the enormous housing deficit we know we are experiencing as an entire state. The “Housing Suppression,” or “Hou-Supp Effect” is my attempt to explain the math we have been failing to pay attention to around these issues and what happens in a growing economy when housing supply and demand are not adequately addressed. Hint: it’s not good.

The interactions between these data points have been swimming in my head for about three years. This is what it looked like when it first came out on paper.

While I believe I have identified the critical data points that can get us to a good understanding of the scope of the problem, I don’t believe my work to be as comprehensive as it could be with more time and research. I also have not done the research to identify any of the actual data to test the math I propose here. As this kind of analysis and research is not my job and is not what I get paid to do (and because I clearly need to get a life), I guess I’m trying to “open source” this math problem to my fellow housing, poverty and homeless advocates or academics to help me see if something like this tool could be useful for cities and regions to understand their housing responsibilities in a growing economy. At that point, I think we can do a better job of answering the questions of how much? Where? For whom? Etc. And then, finally, we need to resolve to actually build the housing that’s needed to change the answers to the equations that would lead to everyone having access to a home they can afford relative to their jobs, income, or pension. And if we hope to meet our carbon emission goals in combating climate change (not to mention provide a meager quality of life for folks), we better not build these new homes a hundred miles away from where the jobs are.

Another data point we must do a better job understanding are short-term rental units. We all know people (or we are people) who own a second home that gets rented on the short-term market. A sort of economic sweet spot occurs when these units can be rented for less money than a hotel room, but for more money than could be made if that unit were rented out long term to someone who would live there full time. It’s a win-win, right? Not exactly. We need to grapple with the fact this is a win-win-LOSE equation when it comes to housing scarcity and affordability. More and more studies are coming online that show this dynamic is taking units out of the supply of housing and have a dramatic effect on housing costs. Just this one factor alone may be responsible for raising the cost of housing 33.6% since 2011. Some cities are trying to push back against these pressures. This may be like trying to hold back the ocean. I’m not arguing for or against this business model. I’m simply pointing to the obvious as a data point — we made a mistake in not adjusting for the production of housing to accommodate this business model. If short term rentals are going to be a legal way of doing business, the housing stock should have been replaced and moving forward these vacation units must be in the data we look at to reconcile our deficits in housing. If you are a NIMBY who doesn’t like the idea of new housing, that horse has left the barn — you should have been anti-short term rentals. It seems very few folks were. But to be fair, very few of us have been concerned about this effect of STR’s. That must change.

While I am neither a mathematician nor an economist, I am a chief financial officer by profession and a multi-decade housing and homelessness advocate. I do have an undergraduate education in business and economics as well as a graduate level degree in public policy. I believe my unique combinations of training and experience has allowed me to look at this problem in a pragmatic, data-oriented way while my passion for helping the growing need drives me to push for structural changes that might have the biggest impact for the most people. This combination of thinking and feelings lead me to the Hou-Supp Effect concept and what happens when a city or region successfully builds the elements of a growing, job-creating, business-creating environment, while simultaneously suppressing the amount of housing creation that would occur if housing production were an actual free-market, “laissez-faire” system where any private land owner could develop any type of housing the marketplace wanted, anytime they wanted to build it (without any government incentives or disincentives, and without any obstruction from neighboring residents or businesses).

To be clear, I am NOT making an argument for a laissez-faire economics. I believe there are important values in strong laws that protect people and our environment. What I am saying is there are also severe consequences to the most vulnerable in our communities when we fail to use the mechanisms of government and public policy to make sure people are not left behind — whether it’s food insecurity, whether it’s healthcare, and whether it’s shelter and housing. I am arguing there is artificial, unbalanced generational wealth that is created as well as a sacrifice of younger generations when we forego providing them with housing opportunities we gave earlier generations. I am saying a growing number of our elders also missed the boat on that artificial wealth creation and are now falling into homelessness or facing a dire choice between a growing rent payment or life-sustaining medications on an inadequate fixed-income that got them by just a few years ago — because we failed to balance our books on housing.

I do want to make it clear, I understand the state does have a process for assessing housing needs and that (in theory) every city and regional government authority is responsible for their Regional Housing Needs Assessment (RHNA) targets. It’s just very clear that process is broken, and I’m not hopeful SCAG, our local regional authority, is on the right track to fix the historical problems with this process. I appreciate Governor Newsom is pushing back.

It’s now time for those of us responsible for doing something about the homelessness epidemic to make it clear to all of our leaders what the consequences will be if we continue to fail to get at the root of the problem. We cannot be hopeful about reversing the trends in poverty and homelessness in this state and region until we solve the fundamental problems with housing production. The better understanding we all have on the key data I’m identifying and the correlation between economic growth, displacement, and homelessness will make it harder for us all to put our heads in the sand from the knowledge of what shift must happen to dig out of this crisis. If we want a healthy economy and all of the benefits that come with that, we cannot ignore the housing requirements associated with that growth no more than we can ignore the utility needs, internet capacity, or office space required of new and growing businesses. We need to do the math, then we need to get to work without excuses and without caving in to NIMBY’s. In CFO speak (my profession) — it’s time to balance our books.

Lastly, in this paper, I want to describe one of the most insidious consequences I believe is happening to the most vulnerable as a result of the housing crisis, the Hou-Supp Effect, and in our attempts to increase the capacity of our homeless services systems in dealing with the fallout with growing homelessness. It’s what I’m describing as “Musical Chairs Theory,” that as we house and re-house people at risk of homelessness, that if we are not simultaneously increasing housing production at the affordability levels needed at the Low-Income Earners (LIE) and Very Low-Income Earners (VLIE) levels, we are, in fact, contributing to the very displacement rates we are trying to alleviate as we lift some people out of homelessness, but not others. As in the game Musical Chairs, there isn’t a place for everyone. When the music stops and some people are housed, others are left outside in the cold. The harder we work on housing folks, without drastically increasing affordable housing supply, it’s simply “rinse…repeat” on this cycle.

Worrisome for me is that the influx of cash from programs like Measure H and the state’s Homeless Emergency Aid Program (HEAP), buying power and demand increases for a limited housing supply which economic theory tells us further increases the cost of housing. Until we figure out how to back-fill our housing deficits — especially for the LIE and VLIE levels — we will be getting a declining investment from every dollar we spend on subsidies that aren’t directly tied to an increase in production, and may be causing as much harm as benefit from our work. I am certainly not arguing we shouldn’t be doing everything we can to help the most vulnerable — I have believed the exact opposite for decades. We just need to be aware this is ultimately a band-aid approach until we combine these efforts with a massive housing boom — one that addresses simultaneously every submarket AND affordable housing for the LIE and VLIE submarkets, to take the pressure off the lowest earners who suffer the most from our past failures. Walking and chewing gum at the same time is now a must. That combination is the only winning strategy.

We can no longer afford to look at housing and homelessness as two separate issues. They have always been intertwined. By ignoring the math and our production needs, we have set-up our homeless services and prevention strategies for failure. It’s time to change the equation.