In the late nineteenth century, self-taught geologist Patillo Higgins concluded that a salt dome in Beaumont contained oil. Geological experts scoffed at Higgins’ claim and publicly urged investors to avoid him. When Spindletop erupted as the world’s first “gusher” in January 1901, Higgins proved the experts wrong. In helping to launch the Texas oil industry, Higgins provides a valuable lesson for dealing with the affordable housing crisis.
Fundamentally, the affordable housing crisis is an issue of supply. The demand for affordable housing far exceeds the supply. The unprecedented production of Spindletop caused the supply of oil to far exceed the demand, and as a result, the price of oil plummeted to three cents per barrel by the summer of 1901. If we truly want to address the affordable housing crisis, then we must unleash a “gusher” of housing construction and rehabilitation.
To unleash a housing gusher, we must first identify why the supply of affordable housing cannot keep pace with the demand. In a free market, when demand exceeds supply, prices and profits rise. And the rising profits attract more capital investment to increase production. As the supply increases, prices drop until the market clears. But this is not happening in the affordable housing market. Indeed, we are seeing the exact opposite. Prices and profits are rising, but supply is not increasing. Why?
The answer is: It is very difficult, and sometimes impossible, for housing producers to profitably build affordable housing. A primary cause is zoning, preservation ordinances, and a host of other land-use regulations that arbitrarily reduce the land available for housing. This makes the land that is available for housing much more expensive, and the higher land cost is reflected in the cost of housing. In addition, the delays and expenses of securing government approval to build new housing are ultimately reflected in the cost of housing. Studies have found these regulations can add more than 40 percent to housing prices.
Texas is the energy capital of the world because bold and innovative individuals like Patillo Higgins have been willing and able to take calculated risks to produce a product that is in high demand. But energy producers in Texas have not been shackled with the level of controls and restrictions that housing producers have long faced. If we want to see innovation in producing affordable housing, then we must remove the barriers that have been imposed on housing producers. If we want to see a gusher in affordable housing, then we must free the housing producers.