It's become a common sentiment on Reddit, subject of numerous TILs. It's a common retort--some Redditor suggests we need more housing, and then someone else smacks it down by pointing out that we have enough vacant homes to cover every homeless person, thus disproving the housing shortage once and for all.

It seems like an intuitive idea—the homes are there, the issue is they're empty. It is also completely incorrect.

Here, I'll go over what we mean when we say there is a "housing shortage", how the housing supply relates to homelessness, and why this a bad test of whether housing supply is an issue that needs to be addressed. Since I intend to refer back to this, I'm going to go through this issue at a fairly basic level that should be understandable to anyone with knowledge of basic economics concepts.

What is the housing shortage?

It's often said we have a housing shortage, but it's worth clarifying what that actually means. In economics, shortage has a more technical meaning—it refers to a market that, for some reason, is out of equilibrium. For example, if the government were to impose a price cap on bananas that was below the market clearing price, a shortage would result. Colloquially, we use the term "shortage" to refer to things that we want more of. If we don't have as many doctors as we want, we might say we have a shortage of doctors. The market for doctors may very well be in equilibrium—the equilibrium price is just very high. This would be a shortage in the colloquial sense, but not necessarily in the economic sense. This becomes especially confusing because economists sometimes use the term shortage in the colloquial way as well.

When it comes to the housing market, the term shortage is being used in the colloquial sense. Specifically, we are concerned about the slope and position of the supply curve. A well functioning housing market should look something like this in the long run. The supply curve slopes gently upwards because we can build more units. Over time, the price of housing will trend to the marginal cost of construction. Unfortunately, as has been extensively discussed by me and a bunch of other people here and in AE, local restrictions means that many of the hottest housing markets actually look something like this. Since it's almost always illegal or extremely difficult to build more housing, supply is very inelastic. That means that if demand increases, it manifests almost entirely in higher prices instead of more housing units.

So why are homes vacant and can we put homeless people in them?

So if housing markets in many cities are so hot, why are some homes sitting empty? And should we start randomly assigning homeless people to live in them?

Part of the problem comes when people look at a country as one homogenous market--it doesn't help that we have an old, abandoned home in rural Mississippi and a homeless person in New York. The places with the biggest issues with homelessness are actually those with the lowest vacancy rates. But none the less, the issue persists to some degree even if you look at individual cities so let's dig into this a bit more. A house can be vacant for many reasons--luckily the Census Bureau breaks it down for us.

Let's use LA metro area as a case study since it's a high-cost housing market that is perennially fucked. In total, there are a little over 300,000 vacant homes in 2021 (out of a total of nearly 5 million units). Of those, over 50% are just homes between residents (the previous residents have moved out, new residents have not yet moved in). Another 10% are locked up for repairs/renovations. About 15% are occasional/seasonal use, and the remainder fall to a variety of smaller categories (legal proceedings, condemned, extended absence, etc).

As you may have gleaned from those numbers, housing vacancies are a normal part of a healthy housing market that cannot be entirely avoided. Just as there is a natural (and healthy) rate of unemployment in labor markets, there is also a natural rate of vacancy in the housing market that arises due to a variety of frictions.

In fact, California's rental vacancy rate is near a historical low. If filling vacant homes was a solution to homelessness, California should be leading the nation, and not in the way they currently are. People move, and it's not always possible for the next residents to move in the same day. Houses need repairs, and it's not always ideal or even possible for residents to stay while that happens. That's why studies of vacancy taxes generally find they can push a few units back onto the market but it's a fairly small number in comparison to the overall housing market. A vacancy tax in France decreased the vacancy rate by 13% (meaning the rate was 5% when they estimate it would have been closer to 6% without the tax). If LA metro area could accomplish a similar feet, it would basically amount to a supply increase of less than 1%.

But let's say we created a dramatically more effective policy that reduces vacancies by 50%--maybe we ban renovations (you can suffer with your 80s-style cabinets forever), allow people to move just once every ten years, and ban second homes (which should free up a lot 8-bedroom mega-mansions for the multi-millionaires looking for an upgrade). Would that solve homelessness?

No, and I would go as far as to say it would barely even make a dent. If you think about LA as a closed economy (meaning it cannot interact with the outside world), then it seems natural that many of the available homes would be occupied by homeless residents. But since LA is an open economy, homeless people have to compete with residents of other cities that wish to move to LA alongside increased household formation within LA. To shamelessly steal phrasing from u/flavorless_beef, the housing market isn't just about the people that currently live in LA, it's about the people that want to live there but currently can't.

So it's incorrect to think that just because LA has enough housing to cover all current residents in a hypothetical world where housing market frictions don't exist that it has enough housing. In reality, LA should have enough homes for all the households that want to live there (regardless of whether they currently do) and could afford to do so at the equilibrium that would occur if supply restrictions were removed (with some additional units vacant due to the aforementioned frictions).

Yes, more housing supply can help reduce homelessness

Now it is true that increasing housing supply will reduce costs, and lower housing costs reduce homelessness (ungated version here). The issue is that pushing vacant homes back onto the market can't produce a large supply increase in the places where we need it. Luckily, loosening local restrictions can.

To put some numbers to it, one recent paper estimates that in the absence of supply constraints, LA county (not quite the same as LA metro area but whatever) would see a 44% increase in housing supply. Even the most optimistic vacancy policy imaginable would cover just a small fraction of that. Regardless of whether you buy that specific number, it's clear that vacant homes aren't going to provide a solution to high housing costs or homelessness.

How much difference could a better regulatory environment make for LA in reducing costs? Glaeser & Gyourko (2018) estimated that back in 2013, prices were roughly double the cost of marginal construction. Since then, houses have more than doubled in price. Building costs have come up as well, but likely not by the same magnitude. None the less, the price of a house could likely be cut in half at minimum if restrictions were sufficiently loose. Even smaller improvements at the margin are worth pursuing though.

To be clear, fixing housing markets cannot entirely solve the problem of homelessness. Housing costs can only go so low even in a loosely regulated market if demand is high--in a market like LA, the marginal cost of construction essentially acts as a long-run minimum. Even if housing costs were reduced by two-thirds, some homeless people would still be unable to afford it. To make further progress would require other policies--social programs, housing subsidies, etc. But improving the housing market can make major strides, and it's likely the closest thing to a free lunch that we're going to find in this area.

In conclusion...

• Yes, we do need more housing (especially in high-demand locations) and yes, it will help alleviate homelessness.
• Stop comparing the number of homeless people to the number of vacant homes, it doesn't mean what you think it does.