Here is the distribution of incomes, before and after rent expense, both for Closed Access cities and for zip codes everywhere else. This includes 1670 Closed Access zip codes, (Closed Access cities here are NYC, LA, Boston, San Francisco, San Diego, and San Jose.) and 14,154 other zip codes.
Non-Closed Access cities are a veritable worker's paradise. In the Closed Access cities, we can see both the very fat distribution of incomes far above the median and the fat distribution of incomes after rent far below the median. Although it would be difficult or impossible to measure, the incomes far above the median reflect a combination of (1) incomes due to selection bias where highly skilled workers are drawn to the lucrative labor markets of the Closed Access cities and (2) excess income that those highly skilled workers collect because Closed Access housing policies limit competition in their fields.
Here, we can see how far up the income scale the housing constraint problem reaches. For zip codes with roughly double the median income, discretionary shifts in housing consumption allow them to retain, proportionately, their incomes after housing expenses. We can see here how, given the ability, households revert to a stable level of housing expenses.
|Closed Access = Red|
Highly skilled workers at the top of the income distribution move into Closed Access cities, increasing both their incomes both before and after rent. Because housing is constrained, households at lower income levels must move. This happens passively, as housing expenses ratchet up, eventually causing enough distress to force a household into the Open Access part of the country. You can see here how sharp the difference between Closed Access and Open Access markets is. When households make this geographic shift, they lower their gross incomes but they raise their discretionary incomes after rent. This compositional shift makes it look like the middle incomes aren't growing as much as upper incomes. This doesn't affect the lowest quintile, though, because there can be no downward shift out of that quintile.
Here is a graph of the relative change, in real dollars, of incomes, by quintile. (The top quintile is divided into deciles.) This is from the Survey of Consumer Finances.
The next two graphs show the change in zip code incomes, arranged by beginning income levels. The first is for St. Louis - a typical non-Closed city. The other is for LA, a typical Closed Access city.
From 1998 to 2006, a 1 point increase in mean zip code income (an increase of 172%) in the open access cities correlated to an additional total nominal income growth of about 3% over the entire period. This is roughly the difference between the top limit of the lowest quintile zip code and the bottom limit of the highest quintile zip code. Compare this to the difference in real household incomes in the previous graph, which shows the lowest and highest groups rising by about 20% more over the same period, compared to the middle quintiles. This hollowing out doesn't show up anywhere in an individual city.
Let's compare a typical low income zip code in St. Louis with one in Los Angeles. Here I will use log incomes of 10.5 and 11.5, which correspond to $36,316 and $98,716, as starting incomes for a typical zip code. This table shows how those zip codes fared. Both neighborhoods in LA fared better than in St. Louis before rent expense. But, the high income zip code fared much better. And, remember, in the high income neighborhoods, housing expenses are much less of a drag.
This is where some statistical analysis of the housing boom gets into trouble. Migration is the story here. The composition of households and their movement between cities is the story. So, if we're trying to be good, objective statisticians here, we would normalize all of the city data, to get rid of local effects. Then, if we ran a regression of local incomes and local home prices, we would find that the zip codes with low and declining incomes would correlate with zip codes that had the highest increases in home prices. This would appear to confirm that the housing boom was created by an explosion of credit to low income households.
But this gets it entirely wrong, because the story was edited out of the regression by those standard statistical procedures. All of those zip codes that supposedly had declining incomes and rising home prices are from Closed Access cities. They only look like they had declining incomes because their rising incomes were adjusted out of the data. In-migration was causing incomes to rise throughout the Closed Access cities. The low income neighborhoods that had rising home prices actually had high income growth, but it was growth mostly coming from a migration pattern where low income households were moving away and high income households were moving in and bidding up houses.
The pattern of low income neighborhoods with falling incomes and excessively rising home prices doesn't show up outside the Closed Access cities. In all the Closed Access cities, there is a sharp pattern where income growth was weighted to high income zip codes and home price growth was weighted to low income zip codes. I have included the St. Louis and Los Angeles graphs here to give an example. This is how all the Closed Access cities look. And, the other cities typically look like St. Louis. Even Las Vegas and Phoenix look like St. Louis, except of course home prices across the board rose at a much higher pace than they did in St. Louis. Here, I'll throw in the Phoenix graph, just because you, understandably, probably don't believe me.
As in St. Louis, there is little difference between home price appreciation in low and high income zip codes during the boom - any difference amounts to about 5% or less. Maybe credit expansion increased home prices in low income zip codes outside the Closed Access cities by 5% relative to income growth. What we do see, however, in most cities, whether open or closed, is a collapse in home prices that is weighted toward low income zip codes. We did that to them. There is no getting around it. The persistent drop in home equity has been targeted on low income zip codes, because the housing bust was imposed through constraints on mortgage credit. We're socking it to them coming and going. And, it has nothing to do with wages or negotiating power. First we refused to build houses, then we refused to fund them. We've been patting each other on the back for 10 years about how those low income rubes were being led like lemmings into homes above their means and how we put a stop to it and how the bankers did this to us and how they need to pay. It never happened. First policy makers in Closed Access cities created a systematic high cost refugee crisis, then, because we blamed creditors for the housing problem instead of supply constraints, we pulled the rug out from under households that depended on credit access to fund reasonable housing consumption (households that were going so far as to pick up and move cities, by the millions, in order to maintain reasonable housing consumption levels), and we continue to clamp down on the mortgage industry so that a decade later those households can't fund reasonable housing transactions and they are sitting on properties that are significantly undervalued with much less equity than they rightly should have. And those that don't own homes have sharply rising rents because the housing shortage has been exacerbated. We did it to them. It's on us. Do we have the honesty and integrity to fix it? Can a country fix a decade long error that it has been this emotionally committed to?