As irresistible as it is for some people to blame skyrocketing Knoxville housing costs on greed, homeowners and landlords are not the culprit – nor is the solution some naïve government mandated rent control or subsidy program. This problem took years to create, and it will take years to correct it.
Following the financial crisis of 2007, developers dramatically curtailed new home construction. We have a massive mismatch of housing supply and demand, and the only two things that can solve that problem are an increase in housing supply or a reduction of demand.
Based on population trends, Knoxville isn’t about to experience a demand reduction.
In 2007, building permits for new homes reached a peak that has not yet been matched, while Knox County population has increased 15%. This increase is almost twice the number of new dwelling units constructed over the same period.
After peaking at almost 4,300 new permits in 2007, new home construction in Knox County fell off a cliff, exceeding 2,000 new permits in only 2 of the next 8 years. In 2022, Knox County issued building permits for 4,191 new homes, the first time that figure exceeded 4,000 annual units in 16 years.
Unless a bunch of people move away from Knoxville, housing prices will ease only when 15 years of underbuilding is corrected.
One of the silliest suggestions is price controls. “We need a law to keep the greedy landlords from raising their rents!” Rent control proponents don’t understand either history or logic. Attempting to artificially cap the price of something reduces the quantity of that product that sellers are willing to supply – which exacerbates the underlying problem.
Not only do price and rent controls curtail new housing development, they tend to yield unforeseen negative outcomes. A prime example is the experience of San Francisco in 1995 when widespread rent controls were implemented, followed by an alarming 83% increase in evictions over the subsequent five years.
Imagine if Knoxville passed a law limiting the price of concert tickets to $20, thinking this would benefit local citizens. Rather than the same entertainment suddenly becoming much less expensive, you would see a massive reduction in the number of concerts coming to Knoxville. Instead of paying $100 to see ZZ Top at the Tennessee Theatre, fans would have to go to Nashville to see the band, where their costs would also include a hotel room, gas, and a day off from work. Price controls distort the natural allocation of resources and discourage investment, which inevitably reduces supply.
What seems so obvious with concert tickets should be similarly obvious with respect to housing.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.