Just this week, Paul Krugman, Princeton economist, New York Times opinion columnist, Nobel Prize winner and a famously liberal opinion maker, chose team supply side in the affordable housing debate. Here, he talks about the inflection point that New York and other cities passed some 15 years ago, when affluent whites formed a critical mass in the Big Apple and impacted housing affordability. He worries about the impact on the rest of the city’s residents:
“(W)hat about all the people, surely a large majority, who are being priced out of America’s urban revival? Does it have to be that way?
The answer, surely, is no, at least not to the extent we’re seeing now. Rising demand for urban living by the elite could be met largely by increasing supply. There’s still room to build, even in New York, especially upward. Yet while there is something of a building boom in the city, it’s far smaller than the soaring prices warrant, mainly because land use restrictions are in the way.”
Conservative urbanist and demographer Wendell Cox has touted this point of view for some time, and in this piece seems to relish the developing consensus on the matter, as the Chair of the White House Council of Economic Advisors arrives at the same conclusion:
(White House economist Jason) Furman starts with the fundamentals: “Basic economic theory predicts—and many empirical studies confirm—that housing markets in which supply cannot keep up with demand will see housing prices rise.”
Furman cites research by Christopher Mayer of the University of Pennsylvania and C. Tsuriel Somerville of the University of British Columbia who “conclude that land use regulation and levels of new housing construction are inversely correlated, with the ability of housing supply to expand to meet greater demand being much lower in the most heavily regulated metro areas.”
Others arriving at this position include Harvard economist Edward Glaeser, one of the earliest developers of the idea, and economist and writer Matt Yglesias.
When great minds, across the political spectrum, start to agree on something, they must be right, right?
I’ve always questioned orthodoxy, and even as the best minds in urbanism and economics converge on a supply solution to addressing housing affordability, I remain skeptical. Why? Mostly because there are multiple housing markets within cities, even more within metro areas, and a potential solution for one housing market segment may have disastrous impacts on others.
This is a matter of demand.
Relaxing zoning will help the cities where the demand for housing is the greatest. Relaxing zoning in suburbs will add units to places that have artificially suppressed supply, particularly within metro areas that have a strong housing demand. However, I fail to see how it helps cities and metros that don’t have the red-hot housing demand of New York, or the Bay Area, or other areas.
Relaxing zoning in cities or metro areas with a lower housing demand, which is the case for much of the Rust Belt and many low density Sun Belt cities, in my opinion would lead to a concentration of new housing development in the most in-demand neighborhoods within them, at the exclusion of other neighborhoods and suburbs. It would serve the affluent, it would be clustered, and would potentially decrease affordability and further increase inequality.
I brought this point up in a post last August, when I looked at rates of residential density and housing vacancy for the 25 largest cities in the U.S. Using 2010 Census data, I saw that I was able to form quadrants of density and vacancy for the 25 cities. The quadrants look like this:
In 2010, the density/vacancy averages for the 25 largest cities was 6,269 persons per square mile, and 11.2% vacant units within them. If you plot the cities in a graph, it looks like this:
As one would expect, New York, San Francisco, Boston, Los Angeles and Seattle, which could be called America’s gentrification pioneers, are firmly in the high density/low vacancy quadrant. Even after the fallout resulting from the Great Recession, each had housing vacancy rates under 10 percent. I’d imagine in the five years since the numbers have dropped even more. Relatedly, Austin and San Jose are in the low density/low vacancy quadrant. They’re joined by cities like San Diego, Denver, Charlotte and Nashville.
If we use housing vacancy rates as an indicator, these are the in-demand cities, and increasing supply is an appropriate response. In cities that are already high density, doing so may be problematic as residents reach their limits on what is possible and acceptable in their cities. In the low density cities, one could reason that there is space to add the needed units.
But let’s look at the group of cities that are in the high housing vacancy category, making them presumably low demand cities. Chicago, Philadelphia and Washington, DC fall into the high density/high vacancy camp, while Houston, Dallas, Memphis, Indianapolis, Jacksonville and Detroit are among those in the low density/high vacancy camp. One could argue that the Chicago-Philly-DC arrangement could be a best case scenario for the low density cities like Houston and Indianapolis, but anyone who knows anything about how gentrification has proceeded in our nation’s large cities would know that issues of bifurcation, where not all residents of the city are recipients of the benefits of emerging affluence, are probably strongest in those three.
These cities are the low demand cities and increasing supply might create some complications. Most, if not all, of the cities have some type of gentrification activity taking place already. Any relaxation of zoning regulation in these cities would be a signal to developers to build new housing for those at the high end of the income spectrum, and at the exclusion of the middle or working classes. In fact, I envision the growth of affluent enclaves within cities, should zoning be relaxed. Little construction would occur outside of the enclave, and there would be little incentive for public investment there as well — leading to an accelerated downward cycle for already troubled neighborhoods.
Cities must address their demand issues before acting to address supply. In my opinion, there are many young and affluent potential city residents who are attracted to a small sliver of a given city, and neglect other parts of the city that have many of the characteristics they seek. However, their laser focus on the most in-demand neighborhoods artificially raises prices within those hotspots, and leads to the erroneous conclusion that housing is more scarce, and therefore more costly, than it really is. High vacancy rates in low demand cities suggest this is the case.
In all, supply side urbanists and economists must not neglect the demand side of the equation. A more nuanced approach should be applied to land use regulation, both within and beyond city boundaries.