At a recent Republican meeting one of my fellow candidates for state house who is in his mid 20’s making what many Americans would consider a really good income talked about the housing crisis. He expressed that while he’s making good money he’s still living at home with his parents because the cost of going out and getting an apartment or buying a house is so high that while it’s not exactly out of reach is cost prohibitive. At first, when he shared that he made more than $100k a year as a banker I said to myself and later to him “You can afford to buy a house or a condo it just won’t be your dream house.” Later while doing some investment research on CNBC I noticed an article talking about how much annual income is required on average in America to purchase a “starter home” and it was over $115k. I still believe there is a path to home ownership in Maine for less than that on an annual basis however it is extremely expensive to buy a home. This is very sad and dangerous for our society because the single greatest wealth-building tool for Americans is home ownership.
Over the past couple of months, I have continued to think about this issue and have been trying to figure out what are the main causes of the heightened cost of buying a home. I don’t expect my list here to be exhaustive but I do think it will get to the core of the problem and I hope we’ll be able to identify some potential solutions to appropriately address the problem at hand.
#1) Sanctuary Cities/Sanctuary State
According to some reports we are 80,000 housing units short in supply in Maine to meet the current/future demand which for a small state like Maine is a gargantuan number of housing units to be short. Where is that coming from though? Part of the demand side shortage in housing units is connected to Maine’s approach to Illegal Immigration & Asylum Seekers. I have a heart and I care about people going through tough times but before determining who else we can help we need to ensure that we don’t endanger ourselves in the process and ensure we can actually handle the number of residents we currently have, let alone adding to the number. At some point there are limits to how many people we can help before we begin creating a worse problem and we crossed that threshold a long time ago. The problem is our current infrastructure can’t handle the current amount of people we have. Contrary to popular believe money and resources don’t grow on trees in America as is evidenced by the increases in the cost of every necessity in America. Intentionally attracting all of these immigrants we have created/enhanced our housing problem. We’ve created additional demand without having any sort of a plan to encourage the free market to create more housing, in fact in many ways we’re discouraging development. In Portland, the biggest of the Sanctuary cities they have increased regulations on landlords discouraging builders and developers from building more rental units by making it cost-prohibitive to build/develop anything other than expensive condos, not because they don’t care about the poor but because for them to be in business they need to make a profit and the only type of building to be done where one can make a profit are those expensive condos. Rent Control is another contributing factor as rent control creates additional risk for landlords and thus causes them to not put money back into their buildings because it’s cost prohibitive as costs continue to increase but the city doesn’t allow them to increase rents at a level that will keep up. Add this to the fact that developers aren’t going to build more rental units in this type of an environment because there aren’t any/many landlords who’d want to buy and manage those properties. It’s important to note that supporting the migrants raises taxes for everyone who owns property in the town supporting them which indirectly also impacts renters. Rents have to increase when taxes increase to cover the public assistance dollars that are spent on housing and feeding migrants not to mention the additional costs required for the school system accommodating all the new students many of which don’t speak or write in English driving up the cost of education.
#2) Government intervention
In comes the government to help “fix” the problem they created (rent control, excessive development fees, increased demand due to policies attracting migrants, etc). They say the solution is there needs to be more “affordable housing” and since no landlords can afford to offer what they determine to be “affordable housing” then the government decides they’ll come in and do it either directly (think Portland Housing Authority) or through proxy non-profit organizations (think Avesta). The problem with the government/governments is that they are inefficient because unlike for-profit businesses that…need to make a profit…the government is spending other people’s money and tends to take longer and spend more.
Maine Housing Authorities program of paying for the housing of those who qualify for assistance has also been a driver in increasing the cost of rent. 3 years the maximum Maine Housing the maximum rent for someone receiving subsidized housing for a 3 bedroom apartment in the Greater Portland area was $1600-$1700 with everything included. Maine Housing has since increased their vouchers because of higher rent prices so now for a 3-bedroom apartment they’ll pay almost $2700 and the inevitable impact here is a significant rise in rents because if Maine Housing will pay that much most landlords are going to increase their rents to get at least that much.
Government intervention here doesn’t only hurt the housing market at large it also hurts those living in government housing. Over the years working in banking, I have listened to many people talking about how they have to avoid making too much money because they will lose their housing thus making them stuck under the thumb of the government. This hits at a larger issue I may attempt to address at a later date about how the welfare state in its current form is a form of slavery because it offers no path off of government assistance other than a cliff that very few people can survive or are willing to risk.
#3) Unnecessary/Harmful Regulations
I believe that some regulation is necessary and helpful but there is a point that is reached where it becomes prohibitive and harmful to the economy and people’s lives. I was talking to a builder recently who shared that between taxes, fees, insurance, workers comp, and other regulatory requirements to break even he needs to charge at least $65/hour for each of the guys on his team. That’s just to break even and doesn’t include the effects of recent regulations which will drive up costs for employers such as the family leave bill and retirement requirements that will be going into effect over the next couple of years. I don’t pretend to be an expert in building either so I won’t speak too much about unnecessary requirements in the building process though I know that they are there. Why else would it cost $300k to build a 1000 square foot home not including the cost of the land? Deregulation here is 100% necessary if we want to increase the housing units at a reasonable cost that will allow everyday Mainers to own a home and ease the cost to rent.
Since the original writing of this post I realized that one of the specific challenges causing the cost of building a home to be so high and also impacting the supply of housing is regulation at town hall. Many towns have very restrictive building codes significantly increasing the cost of building. Portland is the most notorious but some towns even have limits to the number of homes they’ll allow to be built each year. These regulations which are again decided at the local level are working to maintain the bottleneck that is causing the substantial increases in the cost of housing.
#4) Shortage in the trades
This is something we’ve been hearing for a while now in Maine but there aren’t enough workers in the trades. We have shortages in Plumbing, Heating, Electrical, Construction and more because our corrupt education system has been pushing for decades that anything short of a 4 year college degree is second rate when the reality is in the current job market there is a better path to financial health that doesn’t require taking on $100k in college fees/student loan debt where you can make a decent living and provide for your family. This shortage in the trades allows those who are skilled to negotiate higher rates of pay which gets passed onto the consumer thus increasing the cost of building homes in Maine. This hits the supply side economics as right now there is an incredible demand of people in the trades but not enough supply and in real life economics the end result is higher prices.
#5) The Federal Reserve
On a local level, there isn’t much we can do about the Federal Reserve but they’re at the top of the list of contributive factors to the heightened cost of housing. First, they created an ungodly amount of money during the pandemic period not only created the current inflationary environment of which we’re all feeling the effects. In addition to the costs of average goods, they created so much money that went into mortgages and created the incredible refinance boom that allowed everyone to refinance at really low rates. These low rates created great opportunities for people to sell their homes for much higher than they were previously worth and move to more desirable areas like Maine, especially for those retiring to Maine, purchasing a second home in Maine, or taking advantage of the work-from-home boom. They brought their loads of cash courtesy of the federal reserve’s inflating housing prices in the cities here to Maine and aggressively drove up prices. But the Federal Reserve wasn’t finished as they have since gone hog wild in raising interest rates causing many people who locked in at low rates to essentially be stuck. Who with a 2.5% interest rate on a $300k Mortgage is going to buy even a $450k house at 6.75%? Their Principal & Interest Payment would go from approximately $1275/month to $1945/month assuming they still had a $300k mortgage on the purchase. So most of these people are staying where they are rather than upgrading further hurting the supply problem, not to mention that housing prices have continued to climb. Buyers also aren’t able to get approved for as expensive of a house as that much of an increase in interest rates. Where they may have been pre-approved for $450k now they can only afford $300k which you would think would drive prices down but due to the continued increased demand housing prices either aren’t falling or aren’t falling enough to matter. Unfortunately this is a federal issue and there’s not much we can do about it locally but I felt it needed to be mentioned due to the significance of its impact.
In conclusion, if we care about helping affordability we need less government intervention, fewer government (city & state) regulations on the housing industry and small business owners in general, encourages more of our youth to enter into the trades rather than wasting time & money on an overpriced education, and the Federal Reserve to stop manipulating the market in ways that favor the rich and the powerful, and we need to stop attracting migrants as we don’t have the resources to help our own let alone everyone else who has come here.