J. D. Vance, in accepting the Republican vice-presidential nomination, offered an explanation for the rise in housing prices that made no sense. It’s unclear how much thought even went into it, as it seemed to be more about reverse-engineering an explanation that fit into his worldview than seriously engaging with the problem.
To review, here is what Vance said:
The absurd cost of housing is the result of so many failures. And it reveals so much about what’s broken in Washington. I can tell you exactly how it happened.
Wall Street barons crashed the economy and American builders went out of business. As tradesmen scrambled for jobs, houses stopped being built.
The lack of good jobs, of course, led to stagnant wages.
And then the Democrats flooded this country with millions of illegal aliens.
So citizens had to compete — with people who shouldn’t even be here — for precious housing.
Let’s start with the assertion that “Wall Street barons crashed the economy.” To the extent that this is true — assuming he means the 2008 housing crisis — the barons crashed the economy by using complex financial instruments to make mortgages cheaper and more accessible for more Americans with patchy credit histories. During the period leading up to the crash, the homeownership rate rose from 63.8 percent in 1994 to a peak of 69.2 percent in 2004, even as easy credit drove up the cost of homes.
On stagnant wages, it’s true in the broad sense that housing prices have grown at a faster clip than wages, meaning that from a relative perspective, houses have become less affordable. But to say that stagnant wages during the Great Recession drove up the underlying cost of housing makes no sense. Housing prices crashed in 2007 and did not return to pre-crash levels for six years.
As far as his point about illegal immigration, whatever criticisms one has about lax border policies, the idea that this has been a measurable driver of higher housing prices is not supported by the data. About 223 million Americans live in homes that are owned, but only 3 million illegal immigrants are estimated to live in owner-occupied homes — and not all of them arrived at the same time. Also, if we’re talking about the demand-side effects on illegal immigration, we’d have to discuss the supply-side effects. One of the other criticisms of illegal immigration is that this population drives down wages, but part of that story is also that they work in construction jobs.
The reasons for the increase in housing prices are much more complicated than Vance describes.
For one, housing prices have risen over the decades as a result of efforts by the federal government to subsidize homeownership. Fannie Mae and Freddie Mac were created in the early 1970s to purchase bundled mortgages with the implicit backing of government, while the Federal Reserve Board’s low-interest-rate policies in response to economic disruptions (particularly, after the September 11 attack and during the pandemic) allowed Wall Street to make mortgages cheaper and more widely available, as mentioned above. In addition, there is the mortgage-interest deduction, which was limited by the Trump tax cuts but still applies to interest on up to $750,000 in debt.
Houses have also gotten much bigger over time. In 1973, the median square footage of a home was 1,525, but by 2017, it had risen to 2,426. There are different reasons for the growth in the size of houses — consumer tastes and prosperity, as well as certain efficiencies in building fewer large houses rather than more smaller houses. It’s fair to acknowledge that to the young family looking for a starter home who would be content with less space, it’s frustrating not to have more options. But it’s a simple fact that larger houses cost more, and that’s a big factor in driving up prices.
Another factor that is a particularly thorny issue to admit because it divides the right is regulations and local zoning restrictions. Looser restrictions would allow for the construction of higher-density housing, but more density would also change those communities. So would Vance prefer cheaper housing or prefer that locals get to preserve the character of their towns?
Adding to all of these broader considerations are the more acute ones that drove up housing prices during the pandemic. New housing construction crashed as a result of the lockdowns and the supply-chain shock. Meanwhile, driven by historically low interest rates and the desire for more space (especially from those who became permanently work-from-home) there was more competition for houses. Once interest rates rose, homeowners who had locked in low interest rates were more reluctant to sell, which has limited the available inventory, and thus housing prices have not collapsed in response to the higher borrowing costs.
Of course, this is all too complex to address in a convention speech. But that doesn’t excuse Vance for promoting economic illiteracy by turning the issue into a simple story that happens to serve his populist brand of politics.