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There is a bit of a housing
crisis right now in America, and
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it is driven by a variety of
factors. One of the areas of
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most concern is affordable
housing, and this is a problem
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seen quite a bit in our bigger
cities. Things like rent control
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have led cities to rely on
lotteries in order to provide
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housing benefit to its citizens.
But this isn't always a good
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thing, because it can develop a
hidden market in housing.
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Pleasure to be joined right now
by Judd Kessler, who's Professor
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of Business, Economics and
Public Policy here at the
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Wharton School. He is also
author of the book <i>Lucky By</i>
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<i>Design</i>, which looks at these
hidden markets. And he joins us
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right now. Hi, Judd, great to
catch up again.
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Thanks so much for having me.
Happy to be here.
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All right, so you and I have
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talked about these hidden
markets, but specifically, you
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wrote an article recently about
kind of a hidden market within
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the housing sector. So kind of
explain what you're seeing.
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Yeah. So a hidden market is, as
you described, a market where
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there's more people who are
demanding something at the
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prices that they're being
charged than we can reasonably
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serve. So economists like me
call this excess demand, more
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people who want something than
we have available. And in these
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markets, we need different rules
to decide who gets access to the
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scarce resources and who does
not, because the normal
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mechanism of the price goes up,
and some people decide they'll
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buy it, and some decide that
that it's too expensive. That
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doesn't work when the hidden
market is setting the price too
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low. So you mentioned this
hidden market in housing, and
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the dynamic that's playing out
is, in a lot of these cities,
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mostly kind of the large
democratic cities in the
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country, we have for decades,
not allowed there to be as much
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housing development as would be
necessary to meet population
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growth and other kind of demands
in these towns and cities. So
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as a result, rents and property
values have been going up
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steadily. This is kind of
typical supply and demand,
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right? You restrict supply,
demand goes up. Prices are going
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to rise. And so as a— as a
consequence, or as a kind of
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reaction to that, affordable
housing, housing that is set up
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so that tenants only have to pay
a fraction of their income— so
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it's— typically 30% is the kind
of maximum that you can ask a
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potential tenant to pay. There
are developments that are set up
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or sets of units within
developments that will be
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offered for— as affordable
housing for folks who won't have
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to pay market rate rents. So
will pay below-market rate
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rents, to the level that they can
afford. Now the issue with that
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is, of course, there are many
more people who want to have an
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affordable unit, because the
affordable units are much
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cheaper than the market rate
units. And that is what creates
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the hidden market. Because now
you're going to have thousands of
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people who might want to live in
the same unit because they would
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only have to pay, you know, a
few $1,000 a month, instead of
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what might be twice that if they
got it on— outside of the
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affordable housing system.
- Right.
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And no matter what, when you
have the component of lower cost
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versus supply, lower cost is
always going to win out, isn't it?
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If you are offering something at
a below market price, so at a
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discount, and you're always
going to get more people who
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want to buy the thing than there
are available. That's kind of by
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definition. That's what it means
to be offering at a below-market
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price. And so that's what you
see in, you know, live event
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tickets, when ticket prices are
very low relative to what you
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could get away for charging. Or
a lot of people want to get into
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a hot restaurant, and they're
giving away the reservations for
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free, right? These are all
situations where you have a
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below market price. You're going
to get a ton of people who want
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to be the ones to clean it.
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So then, in these cities, they
have lotteries to try and help
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determine who gets these lower-
cost living spaces. What kind of
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impact is the lottery having on
kind of the— you know, the
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general scope of real estate in
some of these cities?
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Yeah. So, you know,
there's lots of ways that you
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could try to allocate these
limited set of scarce resources
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to the many, many people who
want to live there. So
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lotteries are not the only way,
although they're becoming more
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and more common, I think because
the other ways have been
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revealed to have their own
problems. So often, cities will
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do things like long waiting
lists. Like, I sign up to— say I
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would like to get a spot in a
subsidized apartment or in
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public housing. But those
waiting lists in some cities
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stretch decades. Like, you sign
up now in the hopes that 25
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years from now, you'll get a
apartment in Chicago public
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housing. And that obviously is
going to be untenable for lots
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of families. So the lottery is
a potentially— I mean, it's a
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fair kind of potential solution
to this, where the way that it
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works is, a new development is
getting built. The development—
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the city is going to require it
to have a certain fraction of
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its units be affordable, so be
kind of rented in this
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particular way, at below market
prices. And typically, they'll
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get some kind of tax credit, or
the ability to kind of build
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more units than they would
otherwise, if they consent to
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this affordable housing,
building some affordable housing.
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And then, so that the units can
be rented immediately by people
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who need them, they will put
them into a lottery, and the
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lotteries will have hundreds of
people applying for each unit.
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So in the last full year of data
that I saw in New York
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City, there were 10,000 units
that became available in these
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lotteries, and there were 6
million entries in those
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lotteries. So in any given— for
any given unit, if you enter the
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lottery, you have a one in 600
chance of winning. Now, of
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course, the right strategy for
you as a market participant is
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just, like, enter into every
lottery that you have a chance
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of winning, because that's just
kind of more draws. More draws,
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more bites of the apple, so to
speak. But of course, not every
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housing unit is your ideal unit.
So you often end up
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entering in lotteries that are
for places that you would be
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happy to live at the very cheap
rate, but not your ideal place
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to live, not necessarily your—
even your ideal neighborhood.
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That was going to be my next
question. Because, you know,
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you're dealing with the
component of where these
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properties are. And it may or
may not be a place that you
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would want to move to in the
first place.
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And this is one of the problems
with using these lottery
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systems. At least as they're
designed, where I enter a
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lottery for each housing
development, one at a
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time in a serial fashion.
Because say you and I both want
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affordable housing. Say you want
to live in neighborhood A, I
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want to live in neighborhood B,
those are our first choices. But
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of course, we'd be happy to live
anywhere if we could get below-
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market rates. We could end up
winning the— entering, you
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know, all the lotteries, winning
in the other person's favorite
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lottery. So I get a spot in your
favorite neighborhood. You get a
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spot in my favorite
neighborhood. There's no
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mechanism for us to swap our
wins, right? I just happened to
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get lucky in the lottery that
you cared more about. So one of
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the things I talk about in the
article is, look, if this is
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where we're going to be, we're
going to be in a world where
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we're going to be doing
allocations of these affordable
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housing units by lottery. Let's
at least try to solve this low-
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hanging fruit of kind of, how
can we at least give people some
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way of signaling what their
preferred lotteries are, so we
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don't end up in these situations
where people are kind of winning
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a lottery and then stuck in that
housing development, because
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there's no easy way to swap out.
And if you're saving a few
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thousand dollars a month on rent, you
know, you're going to feel tied
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to that particular unit. You
know, maybe we could design
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these lotteries better so we
don't have these problems.
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Well, and it sounds like it's a little
bit like what we're seeing going
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through right now with interest
rates, in that if you've got a
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low mortgage rate, why would you
want to move if you got a three
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and a half percent mortgage
rate, to potentially get one
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that's six, six and a half percent?
So the people that get
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into these rent-controlled
buildings, the last thing they
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want to do is move, even if it
is maybe not the best location.
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Yeah. So— and it's— it's a
very similar phenomenon of, you
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know, kind of— we call it
golden handcuffs, right? Even
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though we're— these are— these
are units that you're in where
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you're saving thousands of dollars a
month, the same way that if your
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interest rate is three and a
half percent on your mortgage,
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you might be saving, you know, a
substantial sum versus six and a
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half percent. And yeah, if—
in this situation, where it's the
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city deciding who gets— you
know, how the lotteries are run,
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the city can make improvements.
They could say, "All right, we're
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going to not have people enter
lottery by lottery by lottery,
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but we're going to— you know,
every three months, we're going
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to take all of the developments
that are going to be lottery
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units, and we're going to let
you enter simultaneously in all
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of them, and we're going to let
you rank which ones you want
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more than others. And that's
not— you know, in New York City,
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we— families are familiar with
that kind of system because we
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do it for getting our kids into
a public school in New York. So
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in the next couple of weeks,
people who want to send their
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kids to kindergarten in New York
City public schools are going to rank
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kindergarten programs.
My first favorite program,
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second favorite program. So
these systems are
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straightforward to design and
explain to folks, and at least
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then we could make sure that,
you know, if I'm going to be
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stuck with golden handcuffs
somewhere, it was the place that
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I wanted to be, not, you know
three— three neighborhoods over,
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and, you know, where my commute is
much longer to work.
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Judd, great to talk with you.
Thanks very much for your time.
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And again, all the luck with the
book.
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Thanks so much for having me.
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Thank you. I said that
intentionally. <i>Lucky By Design</i> is
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the name of the book. Judd
Kessler, Professor of Business
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Economics and Public Policy here
at the Wharton School.
