No, really, it’s about supply

Jim Russell, the urban geographer who writes at Pacific Standard magazine, has recently been doing a great series on non-intuitive growth patterns in American cities. One of the more interesting findings is that the traditional connection between income growth and population growth doesn’t necessarily hold for Rust Belt cities, where large-scale manufacturing jobs may still be declining, while a smaller number of high-skill jobs pull in upper-income people.

But in applying some of these ideas to housing markets, he misstates the results of a recent study about why housing prices are going up so quickly in so many places. Not just misstates, actually: he turns the paper’s conclusion on its head. This is what Russell writes:

Urban America is filling up…. To be a superstar metro, to “fill up,” means high incomes piling into a place with constrictions on construction. What a superstar metro doesn’t mean is strong population growth and demand for housing outstripping supply.

That last part, about demand outstripping supply, is actually exactly what the study says creates “superstar metros” where housing costs price out huge numbers of existing and would-be residents.

This is a photo of Joe Gyourko, one of the study’s authors, in front of a house, to remind you that the the study is about housing.

Here is what the paper says:

In places that are desirable but have low rates of new housing construction, families with high incomes or strong preferences for that location outbid lower willingness-to-pay families for scarce housing, driving up the price of the underlying land…. This process can continue as long as the growth in the income-weighted demand for a location exceeds the addition in supply. We label metropolitan areas and towns where demand exceeds supply and supply growth is limited, “superstars.”

I would rewrite this in non-economic language, but that last sentence is about as clear as I can get, I think.

Anyway, what’s particularly telling is that the authors provide a counterfactual:

By contrast, in municipalities where construction is easier, any family who wishes to live there – rich or poor – can buy in at the cost of constructing a new house and, instead of growth in house prices, the area exhibits growth in the quantity of houses.

If the problem weren’t related to “demand for housing outstripping supply,” new construction wouldn’t matter. But here the authors are telling us, very straightforwardly, that the solution is to “[grow] the quantity of houses.” In other words, allow supply to match demand.

Maybe what’s confusing is Jim’s equation of “strong population growth” with “strong demand for housing.” In a place where zoning allows new construction, those two things are the same. But where zoning makes building new homes illegal, you will, in fact, see prices go up without any increase in population. But that’s not because demand has stayed the same: it’s because there are literally no places to put the extra people. If a neighborhood has, say, 50 people for 50 apartments, and then all of a sudden 50 richer people come looking for an apartment in that neighborhood, they’ll offer the landlords more money and the original 50 people will probably have to leave. Population hasn’t changed, but demand has: there are now 100 people who’d like to live there, even though only 50 can.

Or, possibly, the issue is another report cited in the post, which makes a different but related point about the globalization of housing demand in a small number of cities. The idea, basically, is that as wealthy people in, say, China become more interested in buying fancy properties in New York, or Vancouver, or San Francisco, increasing housing supply becomes much less effective at lowering prices. That’s not because the supply and demand dynamic I just described has changed, though: it’s because demand has so wildly outstripped supply that building enough to meet it is pretty much hopeless.

The idea is that if the people who want to buy really fancy homes in your neighborhood are just coming from your region, or even your country, then there can’t be that many of them. In the example I gave above, you can probably build 50 more apartments and house everyone who wants to live there. But if you’ve got lots and lots of people coming from all over the world who really want to buy in a very specific place, then things can get out of hand. If instead of 50 richer people, 1,000 richer people showed up, you can imagine that it’s probably not possible to build 950 new homes in a place that used to only have 50.

But that’s only really an issue in a handful of places. In the vast majority of North American cities, there is not an endless stream of European or Chinese or American millionaires waiting to buy up every last property. The housing crisis that’s led to wildly growing income segregation everywhere from Chicago to Kansas City is, actually, about “demand outstripping supply.” And this paper is just the last in a long line of research supporting that conclusion.*

* It’s also worth pointing out that one of the paper’s authors, Joseph Gyourko, only a few years ago co-wrote an entire book with Ed Glaeser about how restrictions on housing supply are causing housing prices to rise out of control. Proving the opposite of Jim’s assertion has, in fact, been the thrust of much of his academic career.

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16 thoughts on “No, really, it’s about supply

  1. Well it’s supply, but the thing about Chicago is it’s neighborhood by neighborhood. The city isn’t “full” like San Francisco or Manhattan where there’s literally not the empty lots to build on. There’s plenty of cheap housing in Chicago, that’s near public transit, downtown and the lake. The problem is, it’s in black neighborhoods that were segregated and neglected by the city.
    The mostly white neighborhoods lack new housing supply, but the neighborhoods with people of color are no where near full. Chicago’s racist past caused the housing price escalation it because assured only certain neighborhoods were fit for middle class residents who want decent services and amenities.

    • Yeah, pretty much. And to a certain extent, convincing people who are not black that living in what are currently all-black neighborhoods might not be so bad would, effectively, add a huge amount of housing supply to what is now basically a separate market, as well as bring more amenities to those neighborhoods.

      • “If a neighborhood has, say, 50 people for 50 apartments, and then all of a sudden 50 richer people come looking for an apartment in that neighborhood, they’ll offer the landlords more money and the original 50 people will probably have to leave. Population hasn’t changed, but demand has: there are now 100 people who’d like to live there, even though only 50 can.”

        More accurately you have 100 houses for 240 people then a bunch of people with a lot of money come in. The 45 home-owning households walk away with some money, the 55 renters pay more or leave and what your left with in the end is 100 houses for 190 people – because one of the consequences of gentrification is an average household size shrinking faster than the national average. Fewer people in more houses.

        Just saying, it’s even more about supply than most people realize.

      • I don’t know about Chicago but I don’t think you need to convince a lot of white people to look at black neighborhoods when looking for a house. People buy where they qualify. Where black neighborhoods are middle-class to blue-collar and where those neighborhoods are near transit/a reasonable commute to downtown that’s exactly what’s happening in Philadelphia, DC, NYC, Jersey City, etc and there’s a lot of tension around it. Where middle class people (white or black) don’t want to go is to a neighborhood with a high rate of violent crime, poor transit and zero amenities – and in big swaths of Philly and Jersey City (and even parts of Brooklyn) that’s exactly what you get.

      • I don’t know much about Philadelphia, but in Chicago there really is a hurdle to get over to get white people to move to black neighborhoods, even if they’re attractive. Virtually all neighborhoods that have been gentrified (largely) by whites have been mostly Hispanic – that’s not the only factor, of course, but it’s definitely one of them. I’d definitely be interested in reading/hearing more about cross-city comparisons about what kind of neighborhoods are considered “safe” frontiers by the white middle class.

    • I mean, I guess I would start with schools: it’s my anecdotal experience, as well as that of a good number of teachers I know, that wealthier schools are better-resourced than others, although that’s a correlation, not a hard-and-fast rule. Beyond that, I don’t want to get super specific (or rather, I would like to remain super vague, I guess), because I don’t have any really solid evidence to back up shortage of particular services. Which maybe means that I’m wrong! I’m open to that. But I also think that basic political economy theory, otherwise known as common sense, suggests that middle- and upper-class people are more effective at getting their elected representatives to be responsive about their needs, even if their representatives are totally neutral themselves.

      • Interesing, in regards to 911 dispatch times. In terms of ERs, how many public adult trauma ERs are in the City?

      • In Chicago, if it’s true it’s again likely due to the fact that wealthier parts of the city call the alderman’s office frequently for things like this.

      • Even to the extent that’s true, it doesn’t change the fact that there’s a disparity. Nor does it address why certain groups of people are less likely to proactively ask for some services, which certainly has something to do with the history (and not-history) of their interaction with Chicago government. The fact that a disparity isn’t the result of intentional discrimination is not actually much of a defense, I don’t think.

  2. I don’t think the schools on the north side receive any more public funds than south side schools. Unless an alderman is able to land some money for a specific project. Many of the north side schools have parents who fund raise, but that is private resources.

    • I should add, that alderman can do that anywhere so if a south side neighborhood’s alderman doesn’t get money to a school, that is reflection of the alderman’s priorities, not the city.

  3. Does income growth and population growth follow for non-rust belt cities normally, either? It’d be interesting to see some data on that.

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