Thursday, December 24, 2015

Housing, A Series: Part 93 - Income, before and after rent

Here are a few graphs from the Zillow data sets that I have been playing around with.  These are for the largest 20 metro areas (MSAs).

First is median income, relative to the US median.  Second is median income after rent, relative to the US median.  We can see that Washington, DC is an outlier, and actually has been an outlier for some time.  The Washington, DC MSA has much higher income than any of the other large MSAs.  (If we expanded the list a bit, San Jose would be close.)  Washington is also different, in that incomes aren't eaten up by a bidding war for housing.  Suburban residential building is strong enough that the median household can find acceptable housing for a typical portion of their income.  They might need to make some compromises, in terms of size or location, relative to residents in open access cities like Houston or Dallas, but those compromises aren't so severe that average Washington residents have been driven to allowing their total housing expenditures to increase as a portion of their budgets.

That is not the case among many of the other MSAs.  For some cities, incomes before and after rent are similar, but for some cities, incomes after rent are significantly lower than gross incomes, relative to the rest of the country.

The next graph, below these, is a stark picture of the primary source of our 21st century malaise.

As % of Median US Income

As % of Median US Income after Rent

This next graph is an average of median incomes, before and after rent, in these cities (weighted by population).  We can see the surge in metropolitan incomes in the 1980s.  During that time, rents rose at the same rate as incomes, so income in these cities, before and after rent, exhibited similar behavior.  I think some of the problems these cities have with housing were already in play.  However, I think they were still in the sort of position that Washington, DC is in today (along with other marginally problematic cities like Seattle).  Workers moving to those cities in a bid for higher incomes had to reduce their real housing consumption in order to keep their housing budget within a comfortable range.  But, housing supply hadn't yet become so constrained that the median household needed to increase their housing budget just to maintain minimum acceptable housing.

This changed in the late 1990s.  After a period of moderating relative incomes, in the mid-1990s, relative incomes in these cities began to rise again.  But, now housing constraints had become so strong that the effect of households moving to these cities to tap into lucrative job markets was to force the median household to spend all of their marginal new wages, and more, on rent.

Here we can see signs of several of our economic problems.  We can see the sharp effect of the urban housing supply problem coincident with rising prices in the 2000s.  We can see rising income inequality, yet with the sense that the typical family can't get ahead.  And, putting these factors together, we can see how mistaking deprivation for monetary excess led us to invoke all the wrong attempted solutions, exacerbating the problem of rising costs.

That graph understates the effect, because there has been a divergence of outcomes between these cities over the past two decades, depending on their local housing policies.  In the next graph, I compare these same measures between what I call the Open Access cities and the Closed Access cities.  In the Open Access cities, where the Housing Starts portion of the housing boom took place, relative median incomes after rent are higher than relative incomes before rent.  Where housing starts were high, there was no unsustainable increase in housing expenditures.  Those housing starts mostly were facilitating the in-migration of households from the Closed Access cities - households which tended to skew to lower incomes.

In the Closed Access cities, where the Home Price portion of the housing boom took place, relative median incomes after rent have been low for many years, and beginning in the late 1990s, began to diverge from gross incomes even more.  Where housing constraints are severe, home prices were boosted by sharply rising rents.  The housing bust made this problem much worse.  Now it looks like cities representing around 15% of the country's population have incomes around 25% above average, but all of those above-average incomes are being eaten up by housing expenses.  (Even for owner-occupiers, this represents an opportunity cost of their capital.)


  1. Kevin, I really hope you get this message out somehow.

    I wonder why Krugman doesn't pick it up. Maybe he's already too invested in the "bubble" narrative to change?

    I wonder how the bubble-heads respond to the fact that the case-shiller index is within 10% of its 2006 peak. I guess we'll all "know" it's another bubble if it goes down again. It's so great, isn't it, that so many individuals are smarter than markets at knowing what the right price is. Odd, though, that they don't seem to find a way to profit from their insight. Why could that be?


      He kind of already has.

  2. Great post.

    Not only should the tight cities build more housing, but let developers build any kind they like. Developers will target upper income buyers and renters. Probably in upper income neighborhoods too.

    Send in the bulldozers!

  3. You aren't going to put massive high rises in earthquake prone San Francisco and Seattle, where a massive earthquake is predicted. Not going to happen. Setting up a few tiny house communities may be something to consider.

    1. Gary, I realize that this seems like a really good point, but it isn't. It could, hypothetically, be the problem. But it isn't what is preventing residential building expansion in any of these cities today. Not even close.

    2. Gary, downtown San Fransisco is full of high rises. Earthquakes have nothing to do with it.

    3. Gary, they're building a 61-story office building with 1.4 Million square feet of commercial office space. If they're willing to build 61 stories of commercial office space, I'm not really seeing the problem with building 6 story apartment buildings.

      But instead 2/3rds of the city is zoned for single-family housing.

      1.4 Million square feet means 14,000 jobs.
      14,000 jobs means 14,000 new houses that they need. (Average household size about 2.55, 130 Million workers out of 320 Million Americans. "A house for every job, and a job for ever house" is fairly accurate).

      Since they're not building 14,000 new houses...

    4. They don't want to ruin the city. That is easy to comprehend. You may get some projects through if you bribe officials with enough money. But face it, the city is crowded already.

    5. By the way, I have been in a 6.7 earthquake in Coalinga California in 1983. I was on a concrete slab and almost knocked off my feet. Players were sitting in a dugout and the pitcher's mound disappeared. There is no way SF could suffer a direct hit of a 6.7 without massive destruction. You don't want to be in a 61 floor building when that hits, and it is not far beyond speculation that SF could have another massive earthquake soon.

    6. OK.

      Then stop adding jobs or start adding functional commute transit.

      You CAN have a small town. You can't have a large city with the housing stock of a small town and near-bupkis for transit from the burbs.

      Or you'll destroy the US economy in the process.

  4. Kevin: nice treatment in Interfluidity.

    Years back I penned in editorial for the Los Angeles Business Journal that the areas around subway stops should basically be unzoned or even permitted only to extreme density. They are still building new subway stops in Los Angeles, and the land is cleared off before they build the stop.

    I think I disagree with the idea that only dense cities should unzoned. I am beginning to suspect something must be universal to be considered fair.

    No property zoning, and legalize pushcart vending everywhere and always.

    1. Thanks, Benjamin. I don't really disagree with you. It's just that the core, dense cities are such an obvious case. I concentrate on them because the counterargument is so indefensible. It's the low hanging fruit in our housing policy. Once you move away from them, reasonable arguments can be made for various positions. And, those are the places where we see the signature of very high incomes and high rents that point to significant sources of economic stress and underproduction. I tend to try to be generous to other POVs, until I conclude that they are objectively wrong, then I tend to sharpen my claws. So it probably seems like I disagree with you more than I do. I think all of your points on this matter are good points.

    2. To clarify, it seems like I disagree because I sharpen my claws about people who disagree with us on the dense cities, but I tend to allow other arguments regarding other areas to claim plausibility, even though your POV is similar to mine.

  5. It is sad to think what a nice place SoCal could be...I suspect in a free market we would see a wall of condos along the ocean, with balconies, built for prosperous middle-class occupants. The density would bring out interesting urban life, in the form of restaurants, bars, coffee houses, clubs, retail. Pushcart vendors with the best food in the world.

    Zoning has pushed the middle class in to the edge of the desert and away from the greatest resource.

    Well, we can hope for improvements in zoning, but as pointed out in Interfluidity, we're going up against the most powerful elements in any local political economy.

    1. Yep. Although, it's interesting how everyone looks at the few dysfunctional cities we have and bemoans how self-interested owners are a natural and unbeatable obstacle to the problem, which requires ignoring the 80% of the country where this isn't a problem. I mean, there are battles over local rules, etc., everywhere, but most cities have some functional outlet for some functional level of commercial and residential building. So, it seems clear to me that this isn't an unavoidable problem, and it's not a problem that hinges on local real estate interest groups.

      It could be that some level of density or size ends up creating a sort of scalar stress that pushes the local population toward imposing more control on private behaviors, so maybe there is some natural pattern, and progressive local politics that include housing development restrictions are a natural outcome of density and size. But, even there, it is not the landed insiders that are the problem, it is the political tendencies of the broader urban citizenry. (In fact, it seems to me that the high income and real estate-owning residents tend to be more supportive of open policies than renting and low income residents, although that is just my impression from social media, and could be wrong.)

      I happen to think in this issue, the policies are dysfunctional. An urban resident in one of these cities could say that we are not in a position to judge. But, even if they are correct that we can't be judges, at least it would help for them to realize how those policies are creating income inequality and economic stagnation. It's one thing to say we can't judge the problems their policies are creating, it's another thing for them to avoid the blame for those problems.

    2. A wall of condos? Seriously, Ben?

  6. Gary--

    Yes, and as high as the sky.

    In my youth, ordinary folk could live, buy and rent near the ocean. Sheesh, there were ceramics factories in Hermosa Beach!

    It was nobody's fault, but the world discovered L.A. has the best weather anywhere. It become crowded. (It helped that smog has been cut by 95%).

    The right answer is tons of new housing, going vertical. The middle class could live in condos near the water. Now they have to buy in Menifee (Inland Empire). Endure horrible commutes.

    Actually, I have come around to the position that "highest and best use" or free enterprise is the right approach, no land zoning. If that results in a wall of condos (as I suspect) then great. If not, then fine also. Maybe people would prefer to live on a sliver of land in Menifee, in 110 degree summer heat.

    However, I think the "highest and best use" default no-zoning must apply to all land, in every city or suburb. Maybe we would get huge growth in Connecticut, or Orange County CA, or other single-family detached suburbs. We would get a lot---buy a house, knock it down, and put up a five-story condo project a wealthy suburb. You will make lots of money, and serve lost of consumers.

    I think it was Bastiat who said it: Always choose what is best for the consumer.

    All in, I say.

    1. That isn't the answer. The freeways are useless now. What is needed is mass transit from places away from the coast if that is where the jobs are. You will remember that as the city grew, the Republican governors refused to improve the freeways. The rest of the world does not want to be like NYC. And besides, the earthquake risk in LA is very, very high. I see the point about affordability for the regular people. But the solution is not to totally wreck the city and coastal areas. I met my wife in Orange County in 1974. I have relatives who live in LA. Ban futures markets for rents. Perhaps Kevin could measure how much this speculation has caused rents in the "closed cities" to jump. I wrote this three years ago about the securitization of rents. It should be studied for impact.