Give the market a chance on housing
Only freeing up supply and demand can produce the volume and diversity of housing stock required to broadly restore affordability. Politically, it's worth holding out for.
If there was any doubt that Arizona cities cannot be counted upon to create a regulatory environment conducive to the quantity and diversity of new housing stock the Valley needs, their proposed alternative to the Starter Homes Act should remove it.
The Starter Homes Act (House Bill 2371) would broadly deregulate the housing market in Arizona, leaving what gets built more to the interaction of supply and demand. The alternative advanced by the League of Cities and Towns (Senate Bill 1698) would leave the housing market largely throttled.
The bill demonstrates the inadequacy of what the cities propose to do about an acute housing shortage, and the inadequacy of what Gov. Katie Hobbs has expressed a willingness to do as well.
The approach by the cities, and heretofore Hobbs, is to subsidize some housing deemed, by politics not market forces, as affordable. And to carve out or require some set-asides for some housing units also given the political designation of being affordable. SB 1698 falls in the latter category.
Under the bill, cities with a population of more than 30,000 would be required to lower building requirements for as little as 10% of future new homes. However, two other requirements pretty well dry up any potential market for what could be constructed under the relaxed requirements.
The price of the new home couldn’t exceed 120% of median family income, which in the Phoenix metro area would create a cap of somewhere in the vicinity of $105,000. Or a deed restriction would be attached limiting any resale of the home for a 15-year period to a purchaser with an income not exceeding the same threshold.
I’m not sure what kind of a detached, single-family home can be built for $105,000, and whether it would be anything anyone would want to buy. And if there were a market for it, who would buy a “starter home”, which implies a desire to move up, that so sharply limited the potential resale market?
This would be a carve out that would do no more than all the other existing subsidies and carve outs have done to make a dent in the Valley’s housing shortage. It would leave things exactly as they are for the hugely underserved market between the League’s carve-out price cap of $105,000 and the $450,000 median housing price in the Valley.
The only approach that will have the reach and scope to meaningfully expand and accelerate new home construction in the Valley is to unleash the market forces of supply and demand less suppressed by municipal restraints. Something like the misnamed “Starter Homes Act”.
It is misnamed because there is a wide range of building products and price points that an unleashed housing market would create, and what would result is unknowable in advance. What is knowable is that what will be created will be preferable to what a constrained market is producing, or people won’t buy the new products that become available. And homebuilders are knowledgeable enough about their consumers not to produce something that won’t be bought.
HB 2371 isn’t completely the Wild West when it comes to homebuilding. Cities would still have authority to designate where single-family homes can be built. The deregulation would only apply to new developments of 5 acres or more. If there are existing homes, cities could still require larger lot sizes. So, established neighborhoods aren’t going to be invaded by tiny houses.
Cities would still be able to enforce building safety codes. But cities with populations greater than 70,000 would be less able to regulate lot sizes, design features, or amenities. In new developments of 5 or more acres, the interaction of supply and demand would determine what gets built.
In vetoing similar legislation last session, Hobbs wrote that it “would put Arizonans at the center of a housing reform experiment with unclear outcomes”. That’s mostly correct. The housing market in Arizona would be considerably freer than most places. However, housing shortages are a common feature of almost all urban areas. And many other areas are having similar discussions about freeing up the housing market. Sticking with the conventional ain’t going to get it done.
And while the outcomes are unclear, they will be restrained by the demand curve. If the unpredictable alternatives aren’t regarded as a preferable value proposition, people won’t buy them. Dystopia doesn’t sell.
Some of the opposition talking points are illuminating, although not in the way intended. One of them is that nothing in the Starter Homes Act requires that starter homes actually get built. The housing market is, or at least ought to be, a continuum. Building more product at any point on the continuum frees up existing product at other points on the continuum. In fact, the way most starter homes become available is by people moving up from existing stock. More product at any point on the continuum puts downward pressure on prices throughout the continuum.
Another argument is that homebuilders won’t actually bring to market lower-priced new homes. They will just pocket greater profits.
If homebuilders offer less home for the same price, no one will buy them. And if homebuilders make a larger profit from smaller, lower-priced homes, that’s a good thing in terms of reducing the housing shortage. It induces more building at lower price points and a larger range of options for middle-class and even upper middle-class families.
For decades, the movement has been to larger and larger homes. Builders say there is now a large, unmet demand for smaller homes across a broad demographic group, from young adults to retirees. Will the profit margins be greater on those products? I have no idea, but who cares, if consumer preferences are being better fulfilled.
Other talking points suggest addressing the problem through limits on the demand side, rather than freeing up the supply side, by limiting corporate purchases of single-family houses and short-term rentals. Such limits on who can purchase a home won’t really make much of a dent in the lack of supply at the lower end of the market.
There are a lot of headwinds on increasing housing stock, including high mortgage rates and shortages of construction labor. But nothing short of freeing up the market to allow the interaction of the supply and demand curves to work their invisible hand magic has any hope of producing the volume and diversity of housing needed to broadly restore affordability.
There is a surprising degree of support for this conclusion in Arizona, including among legislative Democrats. Several Democrats voted for last year’s vetoed version. This year, Democrats split their votes evenly in committee, half in favor and half against.
Although HB 2371 passed committee, reportedly it is being held to attempt to negotiate something Hobbs will sign which, it is assumed, will require it be something that the League either supports or doesn’t vigorously oppose.
Ordinarily, I’m in favor of compromise and making whatever steps in the right direction are politically achievable at any point in time. In this case, I think that would be a mistake.
The cities are never going to voluntarily give up their ability to micromanage the housing market, and SB 1698 isn’t even a good faith effort to introduce an expanded role for supply and demand to determine product availability. They are implacably committed to futile efforts to address the acute housing shortage through subsidies and carve outs.
If supportive legislative Democrats can’t persuade Hobbs to accept something that broadly frees the market to address the housing shortage, it’s better to leave the issue hanging for the 2026 gubernatorial campaign than pass something that is more subsidy and carve out than market liberation and pretend that it is meaningful.
There is broad enough support for market liberation to not agree to something else, particularly since market liberation could work and something else won’t.
Reach Robb at robtrobb@gmail.com.