My neighborhood got hit pretty hard by the financial crisis of 2008. Many of the homes had been purchased with subprime mortgages, and as the housing bubble burst, values plummeted while foreclosures and vacancy rates spiked.
Since then, the area has been slowly getting back on its feet, and the days of $50,000 fixer-uppers are gone. It could be improving even faster while keeping housing more affordable for people of all income levels. The problem is that local government is getting in the way.
You see, my city has three categorizations for vacant buildings. With Category 1, new owners have to jump through a few hoops to get permission to occupy, but nothing too crazy. With Categories 2 and 3, however, the sale must be approved by the city. You’re required to retain the services of a licensed contractor and submit an estimate for their repair work (plus proof that you can pay for it) prior to purchase. And in the case of Cat 3 buildings, city government can force you to demolish the property even after the sale.
This policy is supposed to ensure houses that come on the market are ready to inhabit. Sounds like a noble goal, right? No reasonable person wants anyone, especially kids, living in a sketchy or dangerous building.
But, as is often the case with well-intended regulations, there are damaging hidden costs. In practice, these rules mean vacant houses stay empty longer, because any home put in the latter two categories—and the conditions of Cat 2 homes in particular vary widely—is off the table for would-be DIYers.
Families who might have the funds and know-how to buy and repair one of these cheap homes while living in it aren’t allowed to do so if they can’t save or borrow additional thousands of dollars to cover the labor costs of an official contractor.
So instead, these homes are typically sold to flippers, who do a basic remodel and then put the house back on the market at double or triple its original price, well out of the financial reach of customers who could have purchased it in the absence of these regulations.
In other words, as law professor Gary Chartier argues, “Governments raise the cost of being poor.”
“Building codes and zoning regulations raise the cost of housing and so make it harder for people to find inexpensive homes,” he explains. “Some people are forced to live without permanent housing at all, while others must spend much larger fractions of their incomes on housing than they otherwise would.”
Unfortunately, my city’s vacant building codes are hardly the only misguided local regulations that favor well-connected businesses at the expense of consumers. The same thing happens when governments herd people into making unnecessary purchases of any kind.
For examples, look no further than bans on braiding people’s hair without hundreds of hours of training (as has been required in many states until recently) and selling cookies you baked in your own kitchen (which is actually illegal in Wisconsin). Or, on a national scale, there’s Obamacare, which requires us to become customers of insurance companies whether we believe it’s in our best interests or not.
In each of these cases, as with the housing regulations in my city, the government’s crony capitalist rules sound good on paper, but in reality lead to a few favored industries gaining customers at the tip of the government’s sword.
This happens because it’s easier to see the benefits of such regulations than their hidden costs. We can more easily imagine the visible positive results—like nice houses—than the invisible negative ones—like families who can’t afford houses of their own.
As economist Henry Hazlitt famously wrote, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
That was true when he spelled this out as his “One Lesson” decades ago, and it’s just as true of well-meaning but pernicious regulations today. A lot of crony capitalist rules might sound good in theory—not to mention too boring to bother challenging—but in practice they hurt our economy, and they hurt the financially vulnerable the most.