Joel Kotkin and Wendell Cox write,
They have entered an economy where the most rapid job growth for their generation has been in generally low-paying professions, such as leisure/hospitality and healthcare, while jobs in higher-paying fields such as information, finance, manufacturing and construction have declined for them. More than 20 percent of people 18 to 34 live in poverty, up from 14 percent in 1980.
The main point of the article is that California housing regulations are harmful to young adults. You can regard the consequent high house prices as a wealth transfer from the younger generation to their parents’ generation.
Instead of teaching teenagers more about STEM professions, maybe they would be better off if they spent some of that time learning how to read a map and rent a U-Haul.
They don’t want to leave home, and I wonder if living with parents nominally equates to “poverty.”
One “solution” i have is for infrastructure spending to be focused on enhancing “tier 2 & 3” cities. We need more tier 1 cities, and i don’t think they’ll ever change their views on zoning, etc. Create competition.
Think about what a best-case hyperloop would do. You could live in San Diego and work in Paris.
These authors are completely missing the big picture here. OK, we do need deregulate housing but is this going to change reality that much? It might make a monthly rent from $2,500 in San Francisco to $2,300 month. Or a house in Irvine from $700K to 625K. These are worthwhile goals but I really don’t drastic changes here. And somebody has to explain why housing builders would suddenly start building large amounts cheap housing which has lower profits? Even with deregulation, don’t the property owners have to sell? So there always be limited land 60 miles east of California coast and there limited amounts of land for sale at any one time.
And it is likely there will more jobs in leisure/hospitality and healthcare while less in construction anyway. (I leave behind Finance and Information as that might be just California) I bet in 2017, I bet commercial retail space stagnates or even drops the next 10 – 20 years even with healthcare increase.
What?
…imagine 2 manhattans, one with its current density and one with the density of SF. One of these has higher rents. It should be blindingly obvious which one.
Building skyscraper apartment buildings “sells.” In fact, if you take CG out of the equation you can think about partial evaluation of real estate as the discounted cash flow of the future income streams.
What earns you more money? 500 people paying 2000 a month? Or 5 3 bedroom houses which sell for $2 million each?
No, they’re not going to build slums. But increasing density from sf current level to Manhattan would have an enormous impact on rents.
My question is not right or wrong but the level of impact here. Will de-regulating house with true Yglesias ideas going to impact these cities that much? Does $2,500 go down to $2,400, $2,300 or $2,100 or $1,500? My point is you could get to $2,300 – $2,400 and have some but not huge impact. (In reality most good micro economics don’t have huge impact and take years to work.):
1) 500 people paying 2000 a month? Or 5 3 bedroom houses which sell for $2 million each? True however don’t the 5 different 3 bedroom houses all have to sell?
What if one doesn’t sell? This expensive and risky to buy.
2) Name another high density foreign city that is substantially than SF or NY (or Boston, LA)?
I know some economist have pointed out the housing/apartment cost of Tokyo has stagnated since 1994. But that is because their run-up was more dramatic in the 1980s and did not have downturns in the 1970s.
3) Is really a good idea to get everybody to move very crowded coastal cities?
People in less crowded areas tend to have larger families and the developed world really does need more births.
You missed one of the points I was making. I erroneously assumed you understood the nonsense financial jargon and valuation mechanics. I think you misconstrued my point due to my lack of clarity. Let me make it clearer, as in any misunderstanding the blame rests with the author.
I was using the example of the houses vs high rise to illustrate the point that skyscraper apartment buildings are many times more valuable than large multi million dollar homes. The way to view the value is discounted cash flow, discounted just means income in the future is discounted at the cost of capital. So, a $1 million dollar income stream a year can be worth more than $10 million, when it comes to real estate investments. This is not necessarily true in companies, but in real estate 99.99% of the cost is in the initial purchase of land and construction, which justifies the 10x valuation of earnings. However it essentially comes down to a gamble on the value of the land.
This means we have a market failure or a government policy failure. I’ve never found an example of the market failure in high rent costs, although I’m sure one exists. It is almost always a failure of zoning, height limits, nimbyism masquerading as environmentalism or “neighborhood preservation” etc.
I’m originally from the bay, and I can assure you that SF is not dense. The FiDi is. The tourist areas are. Much of the city is row houses. And the middle class is priced out, since most can’t afford > 2700 for a studio.
I do find it ironic that the people most concerned with inequality seem desperate to drive the middle class out of their areas.
Has nothing to do with politics, of course, and everything to do with people holding onto their endowments (inheriting houses in SF).
I live in NYC now, and much easier to find affordable 2 bedroom apartments in Manhattan. Affordable being maybe 3750-4500. And I can actually get around the city.
In general I do understand the financial jaragon but I believe it is a lot more expensive, risky and time length for builders than people are given credit. And I believe your plan means the project even with deregulation takes five years. And at this point there are high rises being built in NY, SF or LA that are going to the more expensive end of the market.
I bet a plan like yours would take 3 – 5 years with good bankers loans to reach the black.
And somebody has to explain why housing builders would suddenly start building large amounts cheap housing which has lower profits?
Because there’s a market for it? I mean, why does GM continue to make Chrevrolets when Cadillacs are so much more profitable? Shouldn’t they just make all Cadillacs, all the time?
My point is in more expensive cities builders do have limited land to buy. The areas are already crowded so they have to buy existing buildings and that takes a lot time, effort and risk. And with that time, effort and risk builders need higher profit margins and up until the last couple years, they were getting them.
And notice cheaper housing going up Utah where there is more open land to build.
Fair enough, but in a deregulated market, the time, effort and risk needed to redevelop what property is available is lower, thus developers should be willing to undertake more projects (ie, their risk is lower, and thus, so is their cost of capital). I mean, I take your point that San Francisco, surrounded as it is by water and mountains, is probably always going to be more expensive than, say, Indianapolis, but just how much more expensive does it have to be? Not nearly as much as it is now, I’d wager.
It’s funny. One common reaction I see to the urban housing cost problem is Collin’s reaction. Prices are just going to be high there. You can’t solve it with supply because you just can’t get enough supply to bring down prices.
Then, there is another common reaction, which is that excess money and credit are creating asset bubbles that are bound to collapse. This means we should make sure that we don’t encourage too much supply through credit and monetary channels.
These are two points of view that contradict each other.
I would say that these views, combined, represent a plurality of general opinion. In spite of contradicting one another in premise, they both basically argue against supply, either because it won’t help or because it will be part of some unsustainable bubble. Meanwhile, we muddle on with a broken housing market.
I’m a stagnation believer, but has anybody even tried to adjust the nominal consumption and required reserve wages downward to account for the new leisure options?
The story now is that kids don’t even want to get their driver’s licenses. I still think that also represents an example of legitimate stagnation (prior sustainable patterns are not as sustainable as we thought). But it shifts the paradigm somewhat.
A few people are saying the equivalent of, “go Midwest, young man.” California jurisdictions don’t seem to be too worried about that happening. Unfortunately I think they’re right.
I think they are playing with fire. They have advantages I’d tell them “you didn’t build that.” If we can figure out how to entice movement, the spiral could be swift. Unlikely, but possible.
The truth is that no one does. I’m one of the few people from my neighborhood to leave. And I went to NYC.
The people that leave are the ones that can’t afford to live in these areas. Tournament style economies in micro scale. People that want a chance to win, stay. If they lose they still make mid 100’s. Not great but combined with a woman that makes 90 you’re still solidly middle class.
The people they’re losing are 80k combined couples. Enough to have a good life in Texas, but not in NYC, Boston, or SF.
The 200k work doggedly their whole lives for a lifestyle no better then the 80k couple in Texas. They also have no children. Pretty miserable.
‘You can regard the consequent high house prices as a wealth transfer from the younger generation to their parents’ generation.’
You are making the GDP Factory mistake. If it were only a wealth transfer it wouldn’t be so bad.
By limiting density in productive areas, housing regulations are throttling productivity and output. Historically, there are lots of productive things for people to do when they live in rich areas. However, this is increasingly impossible as rents near rich/productive people are so high.