A recent study by two U.S. economists demonstrates how national homebuilders can effectively sabotage the free market, building fewer homes to their great convenience and profit.
In response to cries for more affordable housing, the housing industry as a whole pays at least tacit support to the notion that in an unfettered free market the ‘laws’ of supply and demand allow the industry all the housing the nation needs.
Leaders in a clarion call to ‘free the free market’ are YIMBY (Yes, In My Back Yard) activist groups. They would have the nation believe that the fetters of zoning laws, development fees and housing construction regulations (etc.) hold back the housing industry from just plain building the nation out of its collective lower and middle class housing crises.
Unfettered, they say, the homebuilding industry could build virtually any kind of housing in sufficient quantity that even a luxurious mansion adds to a trickle down effect benefiting the poorest American, so resolving housing crises across the nation. This wishful analysis would seem to have Housing and Urban Development (HUD) approval, possibly as it requires no federal funding1.
And yet, as reported in a study by Jacob Cosman and Luis Quintero, economists at the Carey Business School of Johns Hopkins University, the free housing market has become more fettered by the housing industry itself. It has happened in a way that Adam Smith identified as a weakness in the broad application of his theories. (Smith is the economist who nearly 250 years ago introduced theories of the free market and supply and demand.)
Monopolies are well recognized as one way the free market of buyers and sellers can be sabotaged. A single (mono) seller who controls the entire supply to the market can dictate terms and prices to all buyers. (A monopoly can also happen in reverse, with a single buyer dictating terms to a market of sellers.)
There may be few, if any, housebuilding monopolies in America. But there are most certainly oligopolies. This less-known term refers, not to a single seller, but to a handful of them who control the market. This has occurred more and more frequently in America’s housing markets — an unfortunate result of the collapse of the housing industry in 2008.
Shaky mortgages propped up a housebuilding boom in the first few years of this century. When the bottom fell out of the market in 2008, house builders struggled. Over the last decade, the strongest house builders in particular markets have survived. Smaller and weaker house builders have not.
The result is a concentration of housebuilding capability in the hands of a few homebuilders in each housing market.
It’s true that oligopolies do not function in their own profitable interests quite as effectively as monopolies. But the deep pockets of the surviving developers allow land to be purchased and banked indefinitely. As well, the knowledge that there are only a handful of competitors provides a risk-taking confidence that enough business will come to each of the oligopolists in the oligopoly. (That’s even before cozy agreements with fellow oligopolist CEOs, or successful efforts to influence key city councillors.)
“But,” a believer of an immutable law of supply and demand might argue, “what is stopping other builders from moving into an oligopoly controlled market, driving up competition and driving down prices?”
Immobility.
Few house buyers save retirees have the luxury of buying anywhere but near the work that supports a home-owning household. House shopping, therefore, is done in the local market.
As house sellers, oligopolists have pretty much free run in their local market. Conventional houses cannot be built at a distance and dragged bleating to market at the end of a rope to compete with locally built houses. And as for a new builder setting up shop? In a market where oligopolies own much of the free land, together with a lock on the local limited supply of specialized construction equipment and labour, becoming the new builder on the block becomes a risky and expensive proposition.
So the nation is in fact a collection of small markets. And over the last decade, more and more of them have become controlled by oligopolies.
According to economists Cosman and Quintero, oligopolies controlling housebuilding timing and pricing has produced results that are at odds with the nation’s need for new housing — a loss of some 150,000 housing units a year across the nation.
Read more implications of the concentration of oligopolies in U.S. housebuilding, either the entire study or its very readable introduction at wixstatic: Fewer Players, Fewer Homes: Concentration And The New Dynamics Of Housing Supply
You can contact Luis Quinterro at leq@jhu.edu for more information on the research.
