Thursday, December 15, 2016

Housing: Part 194 - The normalization of dysfunction

This Slate article is a good example of how the base cause of our economic and social malaise gets sort of baked into our policy choices.

The headline: "Rents Are Falling in New York City. Is This a Crash?"

Rents in New York City are leveling off at about 3 times the unencumbered cost of building a new unit.  New units are being built at a rate that would almost accommodate internally generated population growth.
Total permits topped 50,000—more than any year since the early 1960s.
Population growth of NYC in the decade of the 1960s - a whopping 1.5%.

This is the problem.  We need an economic coup.  There is a gate locked between Americans and opportunity at the outskirts of a half dozen metropolitan areas.  That gate needs to be crashed.  There is no winning move here that doesn't involve a "crash".  We either manage for stability, or we manage for opportunity and freedom of movement.  They are mutually exclusive.

But, as with so many issues, change is what scares us.  Progress is change.  This is the core problem with many attitudes about international trade - a lack of discernment between unuseful change and change from progress.  If you're against change, you may be against progress.  In fact, you're probably against progress.

So, Trump gets a popularity boost from negotiating with Carrier to keep a plant in the US.  This generated a good dose of bipartisan complaints about how this isn't actually helpful in the broad scheme of things.  Sometimes our broad prosperity demands that local producers lose - even when those local producers are workers.  Boy, there's an unpopular truth, huh!

Shouldn't it be so much easier to say that sometimes our broad prosperity demands that local real estate moguls lose?  I wonder if there will be a vocal bipartisan response to these concerns about crashing real estate?  More likely there will be a consensus in agreement that "Whoa Nelly, we need to slow this puppy down.  Next thing you know, 2 bedroom apartments in Manhattan will be going for $2,000 a month.  There be dragons!"

The asymmetry here is sort of funny.  Economists seem to be in pretty wide agreement that we shouldn't generally stand in the way of geographical shifts in manufacturing employment, but there is a healthy debate about how we can support vulnerable workers who endure dislocation because of it.

On the other hand, who is out there demanding that New York City should expand housing until rents decline by at least 50%? (This would actually be the best thing we could do to support those ailing workers, by the way!)  I don't see a lot of cheerleading for that dislocation.  And, maybe the best way to encourage that would be to throw massive subsidies and transfers at existing Closed Access real estate owners in exchange for opening up those cities to new residents.  How's that for a non-starter - let's let Donald Trump build thousands of units in New York City and send him millions of dollars in aid to make up for the losses on his existing buildings.  But, Donald doesn't have to worry.  Everyone wants stability.  We'll demand that NYC slows down their permit approvals enough to keep the rents flowing.  We wouldn't want a crash.


  1. Yep. +1 great post.

    I'm trying to organize a pro-housing constituency in NYC. The politics of this are really hard, for exactly the reason that you're citing here:
    1. Most people can't even imagine NYC without a housing shortage. Even in CA the politics are somewhat easier, because people can remember the time before a shortage.
    2. The land use political cartel is a big tent. The base of the cartel is still homeowners, but the franchise has been expanded. It now includes tenants with rent control, BMR lottery winners, construction labor, pension funds, and local nonprofits with Community Benefit agreements.
    3. People who can't break into the cartel generally get disenfranchised because they have to move away to the Sunbelt or to fringe of the metro.

    1. Sad to say, I think the only solution is a long, long-shot, something like a Supreme Court ruling that property zoning is unconstitutional. The Supremes voted in 1926, by a split vote, that property zoning was constitutional.

      Once property owners realized they could use city government to control competition, or homeowners realized hey could protect their preserves without paying to do so, the property zoning idea spread like wildfire.

      On a more-practical level, I have suggested the federal government bribe local governments to unzone land, at X dollars per acre, the X is a function of density. A dense area unzoned would be worth $40 million an acre, say.

      In turn, the local government could bribe nearby property owners. No one wants density in their own neighborhood. So the unzoned tenants and owners get a bribe of $100k each.

      In reality, I think there is no solution, except to buy land in restricted-access cities and spend a few years up-zoning it by bribing city officials and council members (this may involve giving money to worthy causes), and then making lots of money.

  2. Good post but what do you do about it?

    Is there enough publicly-land to build on even if you could somehow get past all the other barriers? Privately-owned land will just come with enormous asking prices (and/or extortion-type tactics).

    1. The reason that the price of private land is high is that the city is credibly committed to restricting future development. Even now, the price of the land is only a part of the expense. The market prices of the finished units are pushed up by development fees, taxes, prevaling wage contracts, etc. If a city committed to allowing future development, land prices would fall.

  3. My recollection from public policy economics class is that if, for example, the city charges a developer $30,000 per unit to build, the value of land will also fall approx. $30,000, so the cost to deliver units is basically unchanged. New units do impose costs on the owners of existing unit owners. So fees like this (by unit or by sq ft) should be high enough to persuade the existing unit owners to favor new development because the related revenue is holding down their own property taxes. Another idea is to only tax land value, not the value of improvements.
    As an aside, I live near Philly which took the opposite approach. They abate property taxes on new improvements. Of course this also increases the resistance of the neighbors.

    1. It seems that high taxes on existing property and low fees on new developments creates the best incentives and funds public spending. Keep in mind that the idea that price is highly sensitive to new development is itself a Closed Access phenomenon. In Open Access cities, price isn't that sensitive to development because prices never move that far from replacement costs to begin with. At a very local level, new development tends to raise prices, because of agglomeration effects, etc. So, in a truly Open Access environment, there isn't much resistance to building. Even Chicago is much different than the Closed Access cities. Think of places like the Mission District in San Francisco, where locals resist all building. In Chicago, residents are usually happy to be in up-and-coming neighborhoods.

  4. In this sentence, I think the causation may run the other way:

    The prices are sensitive to development and it's that development responds to very small changes in prices which keeps prices pretty close to replacement cost.