Washington, D.C. —Amidst widespread outrage and intense debate over the nationwide shortage of affordable housing, the American Economic Liberties Project today released a new paper, “Capital Crunch: How the Fall of Local Finance and the Rise of Shareholder Primacy Warped Single-Family Homebuilding in America—And What to Do About It..” The paper illuminates the policy choices that created today’s financialized homebuilding industry, which bends to the will of Wall Street, restricting single-family home supply and raising prices, which has helped large builders control over 1 million lots while construction lags 1990s levels by 20%.

“You can think of Wall Street as the ultimate NIMBY. It’s impossible to solve America’s housing crisis without understanding the deep structural perversions in how homebuilding is financed.” said Laurel Kilgour, Research Manager at the American Economic Liberties Project. “For much of the 20th century, tightly-regulated local lenders channeled long-term, steady capital to neighborhood homebuilders, fueling an ample supply of single-family homes. But in a series of blunders—spanning the 1970s inflationary shock through the Great Recession—policymakers destroyed this financing model. The largest homebuilders turned to Wall Street, fundamentally reorienting the industry towards maximizing margins, and away from abundant production. The results of this shift—land hoarding and ‘inventory discipline’—are the dark matter that explains a core piece of today’s shortage of single-family homes. Meanwhile, smaller homebuilders cannot fill the gap because they lack the reliable local financing they used to rely upon.”

The paper begins with a discussion of how the federal government successfully promoted widespread home ownership in the New Deal era. One key method involved maintaining a robust network of community banks and savings and loan (S&L or thrift) associations, which were legally required to focus on channeling local deposits into financing for local homebuilders. From the mid-1940s through the 1960s, there were around 6,000 thrifts throughout the country, which funded between 25% and 50% of annual new home construction and sales. With broad credit availability, America’s homebuilding markets were characterized by a large number of local and regional firms engaged in vigorous price competition. Because firms had to build new houses before demand materialized in order to beat competitors, there were periodic surpluses in housing stock.

This system was dismantled in a series of bipartisan policy decisions spanning from the 1970s inflation crisis and the Great Recession. Both the Carter and Reagan administrations tolerated the Federal Reserve’s brutal “Volcker Shock” interest rate hikes, which made thrifts structurally insolvent because they held many long-term loans at old, low interest rates while having to borrow at new, high rates. Meanwhile, Congress, under both parties deepened the crisis by deregulating the thrifts in the early 1980s, effectively abandoning their original purpose of encouraging home ownership and instead encouraging risky, “gamble for resurrection” speculation. As thrifts went insolvent en masse, small homebuilders lost a critical financing mechanism, and the largest homebuilders turned to Wall Street for financing; as public companies subject to shareholder primacy earnings expectations led them to expand aggressively. Then, in the aftermath of the Global Financial Crisis, these increasingly-large public homebuilders would receive generous government support, while many remaining small homebuilders went bankrupt. The total number of single-family homebuilders fell by half between 2007 and 2012 and still has not recovered to early 2000s levels.

The upshot was that by the 2010s, homebuilding was becoming dominated by giant publicly-traded firms whose interests are counterintuitively opposed to those of homebuyers. As the paper illustrates, Wall Street demands a focus on maximizing price over volume, rewarding “disciplined” production. Public homebuilders achieve this in part through “land banking,” or wielding their capital advantages to control large shares of land and hold it off the market so that potential competing homebuilders can’t develop it. In parallel with this trend, the cost of land has increased about two and half times as much as the cost of labor and materials in the past decade.

Following a discussion of additional factors that may impact single family home supply—such as anticompetitive laws and regulations limiting the deployment of manufactured homes, the rise of “build-for-rent” homes intended for investors, and restrictive zoning and permitting requirements—the paper concludes with an extensive menu of policy recommendations for Congress, federal agencies, and state and local governments. These include:

• Expanding lending to local homebuilders
• Adopting a land-value tax to discourage land hoarding
• Banning corporate ownership of single-family homes and mandating divestiture 
• Enabling more scrutiny of homebuilding M&A to stop concentration trends
• Reforming excessive regulatory barriers to entry
• Investigating supplier price discrimination favoring large homebuilders

Unlike proposals focused solely on zoning and permitting reform, these recommendations address the market dynamics that enable large builders to restrict supply even in the absence of regulatory barriers.

Read the full report: Capital Crunch: How the Fall of Local Finance and the Rise of Shareholder Primacy Warped Single-Family Homebuilding in America—And What to Do About It, here.

Read the executive summary of the paper here.

Learn more about Economic Liberties here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; foreign trade arrangements support domestic security and democracy; and wealth is broadly distributed to support equitable political power.