Four main urban centers—New York, Los Angeles, Boston and San Francisco—share two important characteristics: They’re centers of new economic opportunity, and they permit new housing at rates much lower than their successful peers. Call them closed-access cities.
. . .The prudent path toward a stable housing market is more construction, more lending and more homeownership. Housing restrictions make economic growth painful by overinflating the price it takes to access the gains. Until they are reformed, many Americans will be stuck in the hopeless circumstance of running from booming regions rather than toward them.
You know Erdmann’s views from reading his comments on this blog and from reading Idiosyncratic Whisk. But the essay excerpted above appeared in the Wall Street Journal.
Kevin’s book, Shut Out, is available. Ironically, the Mercatus Center’s publisher is charging $34 for you to read the book on Kindle, and more for the print version. Talk about shut out!
I continue to think this is as much a feature as a bug. High rents drive out undesirables, which increase the value of real estate, thus driving even higher rents.
Let me phrase a practical question for you, and then ask how you would solve it. When I was house hunting here in the Baltimore area I noticed some really nice houses in a place around Hunt Valley. They were beautiful houses, but seemed underpriced. Upon further investigation I found out they had a weird school districting map, one which coupled them with a group of affordable apartment buildings. The rentals predictably house people with lower per capita income, stick out like a sore thumb on a crime map, and are more diverse. Free/discount lunch went from 1% to 50% from 1990 to 2018, with predictable effects on school performance and environment.
If you went to these people that invested their whole lives in these nice houses in this good school district, and told them that building affordable housing was going to destroy their homes (the house I was looking at in particular had lost a lot of value) and leave one unable to send their kid to school safely what kind of reaction could you expect from them? The person who watches my kid for daycare has to drive her kids a long distance to a private school she strains to afford because she knows she can’t send her kids to the public school. What do you say to that person? Have you not caused them harm when you bring in the riff raff? Who compensates them?
Until there are answers to these questions, I expect that resistance will continue. All of this YIMBY talk to me usually just amounts to very wealthy people finding a way to shove the undesirables out of their neighborhoods and into less politically powerful middle class neighborhoods. That’s what happened in Baltimore and Baltimore County.
The big question is which property features are protected against which kinds of externalities. There’s no one correct way to answer the question, which depends on all kinds of social, cultural, legal, and political factors.
People buy a piece of real estate trying to optimize for certain features they care about, subject to their budget constraint. And many of those features depend on what other people are doing nearby, so on the broadly conceived ‘environment’ in the neighborhood of that property. Some part of the value of bargain was the expectation that certain of those environmental features would stay the same or be predictable, and that they would have certain legal and political opportunities to forestall any activities that would harm those interests without permission or compensation.
The point I’ve tried to make here before is that ‘restrictive zoning’ and ‘closed access’ are the ways many jurisdictions have chosen to allow people to protect a legitimate interest in the stability of certain important property features through a particular kind of political process. If one doesn’t like that process, it would be more constructive and productive to propose adequate substitutes instead of calling for complete abolition.
Much of the discussion regarding liberalizing zoning rules and easing building regulations seeks to benefit some parties at the expense of incumbents without compensation, which feels like an unfair and involuntary zero-sum political transfer and redistribution accomplished via domination instead of persuasion. So it’s no mystery at all why incumbent property owners would organize politically to prevent that.
I see your point but the problem is that it’s overshooting. There are lots of well-behaved, intelligent people but they’re also being shut out by economic forces selecting for 130+ IQ.
Alternative link to WSJ article: https://outline.com/SqSxVX
Right, just a little too rich: about twice the cost of most of the new books on my wish list. Makes one wonder what goes in to picking such a price point.
It’s really a shame too. Based on his blogging and comments here, I have my own critique of what I understand Erdmann’s thesis to be. However, I’ll certainly keep an open mind until I can see the best version of the arguments and all the underlying data in one plane. (At least, I hope all the data is accessible to readers without academic accounts or special subscriptions).
So I was planning to get the book when it came out to do a review. But at $40, I’ll just wait until a used or otherwise cheaper version is available.
So yeah, the irony is that I want to get into Erdmann’s Los Angeles, but I’ll end up buying and reading someone else’s Phoenix instead, until the Shut Out bubble pops.
Enter this code on the Rowman & Littlefield site for a 30% discount: 4S18MERC30
https://rowman.com/ISBN/9781538122143/Shut-Out-How-a-Housing-Shortage-Caused-the-Great-Recession-and-Crippled-Our-Economy
The third party sellers at Amazon reflect this discount. I wish they just priced it at $28 and made it simple.
PS.
Congratulations on the publishing of your book, I know you put a ton of effort into it.
Thanks baconbacon.
There are plenty of successful, growing urban centers besides those four. Here’s a list of the fastest growers since 2010:
https://www.usatoday.com/story/money/economy/2018/05/26/fastest-growing-and-shrinking-us-cities/34813515/
And last year:
https://www.forbes.com/sites/samanthasharf/2018/02/28/full-list-americas-fastest-growing-cities-2018/#47c631a67feb
NYC, Boston, LA, and SF do not appear in either list (nor do any cities near those). I don’t think the chances of them sorting out their housing regulation/cost problems are very high and I don’t really care. Opportunities will continue to shift elsewhere.
New York, Los Angeles, Boston and San Francisco
Comparing these cities to other US cities outside of Seattle and Miami, is there is not a lot of ‘brown’ here that can easily be built on. (In area with brown we are seeing building here.) And the issue I am hearing on the housing market is a simple one in which current homeowners are not selling either. So housing deregulation is important but I still see this dropping more than 10% because:
1) You need current homeowners & landowners to sell. And falling prices tends to control current homeowner supply. (Probably not a lot here but it does have an effect.)
2) Investors are not going to build if land prices drop more than 10%.
Increased home-ownership leads to less stable, not more stable, housing prices. Home-ownership functionally doubles a persons costs for local economic decline (and doubles the benefits for economic expansion), rather than smoothing it amplifies local trends. Homeowners in Detroit saw their livelihoods and major sources of savings wiped out together and homeowners in SF saw both double. The historical correlation between wealth and howne-ownership ran the other direction, it requires wealth and good decision making to own a home and that was the driver for the correlation, not home purchasing driving wealth.
It’s surprising how much debate there is about housing as an investment that completely ignores the issue of price, or alternatively, yield.
The Closed Access cities add a political risk to the equation, which makes the question of ownership there different. But, in other cities, where prices aren’t far from replacement value, the main question for a potential homebuyer, the main question is how long they will be staying in the property. Is it long enough to amortize the significant transaction costs? If it is, then it is highly likely that they should own, and local real estate prices will reflect a reasonable return on investment.
It is true that there are diversification issues with homeownership. But, the question is whether the yield on investment is high enough to counter that. The tendency to ignore rental value completely is so strong that I’ve even seen Nobel Prize winners talk about housing investments as if the analysis begins and ends at capital gains. Except for the peculiar case of Closed Access where some lucky owners captured monopoly rents for themselves, capital gains are the least important part of the return on homeownership.
You are taking an unknown and presenting it as a known which screws up the calculation. There are relatively few employment opportunities (tenured professors, federal employees) where you can predict your long term track. Even staying with the same employer for an extended period doesn’t mean you are working at the same location. On Monday my wife will be at the 3rd different office building in 6 years with the same company, one of the other options they were considering would have added 20 mins to her commute making the fixed location of our house a liability. Same employer, same general geographic area, and it would have been a 10% increase in total hours worked+commuted to stay in our current house. Thats twice we have faced that potential in 6 years, plus two other job changes (and one industry change) in the past 10, plus 3 kids from zero. Just staying in the current house that we bought 9 years ago with no kids and not sure how many kids we would have ‘required’ a premium to put a small addition on to make us comfortable with the size going forward with a larger family.
Furthermore if you are encouraging more construction you should expect (or at least hope for) more dynamism in the labor market, more new neighborhoods and more shifts in living decisions. You want more flexibility, not less, under those circumstances. 10 million more people in all the wealthiest cities in the US is going to mean up to 10 million fewer people in the other areas. Having those people as homeowners is going to hamper their mobility, decrease the value of homes for those who remain and in general work in the opposite direction that you want new construction to bring.
I think there is a misconception about housing values in closed access cities. The high prices are driven by a combination of very high local levels of home renovation investment and very high local renovation costs more than appreciation. You often can’t sell for replacement costs in closed access cities.
Cost of home renovation wouldn’t show up in indicies like Case-Shiller as they are based on same home sales. Unrenovated homes would sell for far less and keep prices from rising swiftly, unless you argue that virtually all homes are renovated just prior to selling.
Increased homeownership rates also hinder new construction. One homeowner can prevent their entire block from becoming a high rise, and with local zoning one homeowner can often prevent multiple other blocks from development. Homeownership is highly conservative and generally opposed to dynamism, outside of a small rate of speculation you buy a home hoping the area changes very little in your time there.
The highly speculative and leveraged nature of home ownership is quite a turnoff. However, one is faced with inevitable facts:
1) People planning to stay any amount of time like the customization and control that comes with ownership.
2) Past five years the financial benefit really starts to add up big time (leaving aside equity fluctuations).
3) Owners are people that can save a 20% downpayment, and people that can save a 20% downpayment are a different class of people. The kind you want as neighboors.
At the basic level land and house ownership has always been the center of the American Dream. Any literature about the American history from early colonial to early 1930, the goal for most average American was to own a piece of land to farm. And anybody who traces back their American Ancestry before 1930s, usually ends seeing lots of farmers and maybe teachers.
Beginning in the 1920s with the automobile, this dream moved from the farm to ‘Jackson crabgrass’ suburban reality. (with lots of variation over the years.)
While we move away from home-ownership ideology, long term it benefits the US to have the population looking for a piece of land of their own.
Which cities are the “successful peers” or “open-access cities” compared to New York, Los Angeles, Boston and San Francisco? The cities in Texas? Austin, Dallas?
While I’m not sure I’d go as far as asdf above, there is a question of causation. If the most successful cities are the closed-access cities, maybe closing access helps create the conditions for success.
Inland cities which are not yet too dense and have lots of free flat land to expand on without running into geographic constraints or legacy issues that get in the way. That describes a lot of the growing mid-tier cities. These cities have fewer zoning issues in part because they don’t have to change existing neighborhoods and there are fewer toes to step on when you do build (they war less dense to start with), they can just build on empty land.
It’s worth noting that the cities listed have some geographic hurdles and bottlenecks to overcome.
The closed access cities haven’t always been so — during its formative years, New York City was radically altered by tearing down and erecting new buildings in their places.
As for a list of successful, growing American cities that aren’t ‘closed access’? The list is quite a long one: Denver, Phoenix, Austin, Dallas-Ft Worth, Portland, Seattle, Charlotte, Orlando, Las Vegas, Salt Lake City, Indianapolis, Atlanta, Nashville, Boise. And that’s not exhaustive.
Paywalled article. Expensive book.
It’s weird how all of the well known conservative talking points are more expensive to access than the eccentric and more unique talking points. Unz Review is free.
There are no atheists in fox holes and there are no libertarians when neighborhood property zoning is under review.
There is a rather simple answer to the problems that Kevin Erdmann so excellently illuminates.
Free markets! End property zoning!
By the way, property zoning was only ruled constitutional by the Supreme Court, in a split vote, in 1926.