How Market-rate Housing Can Increase Affordability

Housing Matters By Alexandra Goldman, column originally appearing in the Taos News.

The housing crisis is felt most acutely by low and moderate income families.  When possible, we want to address these families’ needs directly by creating housing that they can afford.  Many are working on it, it is possible, and it is very expensive.  

So, we need to use every tool available to help us move us towards greater housing affordability. 

One of these tools is building more housing at every level, including the higher-end.  In fact, a 2024 study from the Federal Reserve Bank of Minneapolis showed that, in their housing market, for every unit of market-rate housing built, 0.6 units of affordable housing are made available.  This is truly incredible! Let developers build luxury housing on their dime, and for every 5 homes they build, the city gets 3 affordable homes essentially for free!

How does this work? First of all, higher-end housing is relatively easy to create because it can be sold for at least whatever it costs to build, significantly reducing the challenges of funding the project.  As we’ve discussed in previous columns, the Town and County’s land use codes (and land use codes around the country) also make it fairly easy to build higher-end, single family homes. 

 The housing market is interconnected.  A wealthy person looking for a home in Taos (or a second home, but more on that later) is probably looking for something newer and nicer.  However, if there is not enough housing supply and they can’t find something higher-end, they will move into a middle-income home.  They will move into the home you want to live in, except they will be able to pay more than you.  

For example, I’ve spoken with someone in Taos earning a six figure salary who was unable to find a suitable home. As a result, they were renting a casita, a home that absolutely could have been available to a more moderate income household if this person had found the housing they needed! 

When housing supply is limited, wealthier people will almost always come out on top because they can afford to pay whatever it takes. When housing supply is limited, it’s lower income households who lose. 

However if we build housing at every level, including higher end housing, wealthy people will live in those homes, and some will move out of their more middle-income homes into a new luxury home, freeing up their home for a middle-income family, and on it goes. 

This process is known in housing economics as "filtering" and has been observed and measured in actual markets across the country.  It is also sometimes called a housing ladder-  if there isn’t room on every rung, there is no place for people to move.   However, like all economic concepts, it requires considering some nuance.

One major issue with the efficacy of filtering in a market like Taos is second homes or vacation rentals: we don’t gain new units of housing if the supply is dominated by these uses. 

This column is all about what we can actually do to increase housing affordability. Can we limit the number of homes in Taos used as vacation or short term rentals? Yes and no.  The Town and County have taken steps to cap the number of short term rentals, which hopefully will ensure that more of our limited housing stock goes to people who actually live here. 

However, there is not much we can do right now about second homeowners.  The Town of Taos and Taos County cannot legally restrict them or tax them. The NM State Legislature has tried to figure out a way to tax second homeowners, but has found the technicalities of determining how to figure out what is a “second home” versus what is generational property, for example, to be prohibitively difficult.  Stay tuned: if they can crack that code, it might return to the State Legislature in future years. 

Above I also mentioned the impressive rates of filtering in Minneapolis, but the effect of filtering is not as robust in all markets.  For example in NYC it is closer to 0.2 affordable homes for every market-rate home built, which is not as dramatic but still has a real impact on housing affordability.  We don’t have data on what the filtering rates are in Taos, but the rates are likely to be closer to NYC’s due to the vacation rental/second housing demand. 

But the filtering process will work better in Taos the more we build.  That’s why we need to continue to advocate for removing zoning barriers and say “yes” to all types of housing in our community. 

Building higher income housing is not going to solve Taos’ housing affordability woes.  We need to prioritize creating and preserving the housing that lower and moderate income families in Taos can actually afford. However, while we work towards those goals, a slow but steady process, why not let the market shoulder some more of the load? Building housing at every level is one piece of the puzzle that can make Taos more affordable.