Tuesday, April 12, 2016

Housing: Part 133 - Housing Costs and Population Patterns

It is heartening to see attention being given to the problem in housing among a wide-range of sources.  There seems to be a growing realization that housing constraints are a fundamental source of stress in our economy.  I am hoping that this sort of thinking seeps into the general consciousness enough that it will be a sort of step into the shallows that will allow readers to consider the downstream conclusions of my book - that the housing bubble a sign of deprivation, not excess, that our attempt to address it with monetary deprivation was ruinous, and that housing constraints are
creating complex obstacles to real economic growth while exacerbating income inequality.

Today, two articles crossed my path.  First, from Zillow. (HT: MY)

The article shows how restrictive zoning rules cause rents to rise.  It also shows how restrictive zoning rules cause household size to increase.
Land-Use Regulation_Rent-1

Here is a graph on rent inflation.  One thing I found interesting here is that Austin and San Antonio both have very high (bad) scores on land use regulation, since Texas is generally good on this issue.  One idea I have been thinking about is that it simply cannot be a coincidence that, universally, innovative new-economy firms around the developed world are locating in housing constrained cities.  There has to be something that is drawing them there, and this force must be strong, because otherwise, there would be some city, somewhere, that would incubate a tech or finance industry with low local costs, and immediately draw firms to the region.  These are industries that are highly dependent on human capital, and they universally locate where the cost of living is 25% or more above everywhere else.

These are industries with very high idiosyncratic risks.  Especially in the tech industry, the most prominent firms can go from IPO to industry leader to Trivial Pursuit question in a decade, yet they must frequently raise capital for development that will only lead to profits after a long incubation period.  I wonder if there is some sort of emergent phenomenon where firms can only attract capital in such a competitive environment if there is some natural competitive moat around their business sector, and housing constraints that limit the amount of highly skilled labor that would people their potential competition happen to serve that purpose.

I tend to see these housing constraints as a source of deprivation - that if a million new tech workers could move into Silicon Valley, we would be awash in new innovation.  But, maybe that is wrong.  Maybe the only way to get the internet is to create enough competitive barriers that the risks for new firms become manageable.  Maybe fewer firms would have made the forward looking investments that have built Silicon Valley over the past couple of decades if there was more competition.

And, isn't it interesting that the one city in Texas that seems to be able to start drawing a tech presence is Austin - a city that Wharton says has California style housing constraints?

The whole idea goes against my nature.  But, how else can we interpret this?

Here is another graph from the article, showing the change in adults per household since 2011.
Land-Use Regulation_doubling over time-4

Adults per household had been declining for many years.  I suspect that this has something to do with the population patterns I have found.  One of the interesting things about population and migration during the housing boom is that population in the Closed Access cities (San Francisco, LA, NYC, Boston) was generally declining (!) during the peak building years.  I have attributed this to international in-migration, which might have increased the number of persons living in those cities without increasing the residential population.  But, I suspect that a large part of the story is this.

As housing, in the aggregate, expanded, this would have allowed household size, in general, to decline, and on the margin, in cities where these sorts of compromises must be made, there was some relief which led some individuals to substitute comfort in Phoenix for opportunity in San Francisco.  When housing is expanding, maybe this behavior on the margin can outweigh the small maximum rate of increase these cities can provide in the housing stock.

The second article I saw today was from Pew (HT: NT) about how population growth is driven by housing constraints, and about how cost of housing is driving relocation decisions among young people.

I think that as the economic recovery lengthens, we will continue to see this pattern, where population shifts to low cost areas.  This will be the pattern of our economy until we fix this problem.  Housing constraints in our economic centers will put a lid on economic growth as recovery continues, home building in other parts of the country will begin to grow while rents and prices in the constrained cities will rise.  We will misinterpret this as a "bubble" caused by too much speculation and money.  We will bemoan the fact that the economy is broken, all the gains go to high incomes and asset bubbles, and we will suffocate it, leading to another recession.

How many times will we inflict this on ourselves before we stop blaming easy scapegoats and fix the problem.  I hope I can have some influence on that race.

1 comment:

  1. Great post. I hope that "highest and best use" and no zoning become law. And plenty of financing.

    But I am not holding my breath.

    It behooves property owners (and their lenders) to keep supply scarce. Free markets leads to competition.

    Owners in single-family detached housing districts do not want 50-story condo towers next door.

    Maybe it is the same old story: people like free enterprise---for other people.