Affordable Housing is a Supply Problem

Ed Glaeser writes,

If demand alone drove prices, then we should expect to see places that have high costs also have high levels of construction.

The reverse is true. Places that are expensive don’t build a lot and places that build a lot aren’t expensive. San Francisco and urban Honolulu have the highest ratios of prices to construction costs in our data, and these areas permitted little housing between 2000 and 2013. In our sample, Las Vegas was the biggest builder and it emerged from the crisis with home values far below construction costs.

Pointer from Tyler Cowen.

Glaeser also writes,

No locality considers the impact that their local rules may induce more building elsewhere.

This suggests a new maxim: Environmentalists impose negative externalities. If construction harms the environment, then diverting construction elsewhere harms someone else’s environment. Along the same lines, when we regulate fossil fuels in the U.S., we probably shift production to other countries which have a higher intensity of fossil fuel use than we do.

8 thoughts on “Affordable Housing is a Supply Problem

  1. That has always been their intention. They know that the only way to live in a clean neighbourhood is to increase the fixed costs of settling into their neighbourhoods relative to other places’ costs. Their neighbourhoods are Buchanan’s clubs with very high fixed costs.

  2. “Places that are expensive don’t build a lot and places that build a lot aren’t expensive.”

    That seems tautologically true. The only way a big gap can open up between housing prices and construction costs is if new construction is limited (otherwise more builders would enter the market and drive down prices). And, conversely, building is easy in Las Vegas, so housing prices never rose much above the cost of land+construction, and therefore it didn’t take much of a downturn to turn the ratio negative.

      • The population of Las Vegas was exploding then as well; it was the fastest growing city in the country at the time; its population doubled in about 20 years, so demand actually managed to keep pace with and even outpace supply. Additionally, the city’s economy is mostly tourism, an industry which intensely follows the business cycle.

        Contrast it with less exceptional cities like those on the west coast or northeast that had little population growth, limited building, and skyrocketing housing prices during the boom and a big fall during the bust, or with a score other cities in the southwest and south with decent but stable population growth, considerable building, and much more moderate price increases and declines during the boom and bust, respectively.

        If you were to correlate building with the magnitude of price changes during the boom and crisis across cities in the US, you will find a negative correlation.

        • I was responding to this.

          ” so housing prices never rose much above the cost of land+construction, and therefore it didn’t take much of a downturn to turn the ratio negative.”

  3. Why blame environmentalism?

    What is the incentive for a municipality that has demand for new housing? Adding citizens adds revenues, but also incurs marginal costs and impacts the desirability of the honeypot, the schools. Is it really all that surprising that municipalities are pursuing new housing starts (and trying to fill existing stock) to attract high margin citizens while trying to avoid attracting negative margin citizens?

    There are no economic incentives for municipalities to add affordable housing. The federal government and the states will have to offset the incentives or this will never change.

  4. FWIW, the DC Metro is expensive and there seems to be plenty of building going on lately, though obviously not as much as in Las Vegas at the peak of the bubble. (I wonder if they came to regret allowing so much construction.)

    Anyway, who says it’s only demand that drives prices? That’s like saying it’s only supply that drives prices. Of course it’s both supply and demand. The question is the relative importance of each. Obviously building restrictions matter. But so does whatever makes certain places ‘more productive’? I’m betting there are plenty of cheap places that have lots of building restrictions, but it doesn’t matter, because people don’t want to live there because there are not enough good jobs.

    As an aside, I don’t particularly like this rhetorical device, that makes it seem there is something magic in the dirt of certain geographic locations that makes them ‘more productive’, as opposed to having a lock on certain lucrative industries and pricing out people who have jobs that earn lower incomes.

    The question is why, in places with those building restrictions and sky-high prices, do people put up with whatever is the cause of those prices, and not just move themselves and their businesses to Detroit, where each household could save thousands of dollars per month on rent or mortgages?

    Clearly they don’t feel they have any better options. And that’s more of a ‘demand side’ explanation.

    • “The question is why, in places with those building restrictions and sky-high prices, do people put up with whatever is the cause of those prices, and not just move themselves and their businesses to Detroit…”
      Imagine you’re a software developer in Detroit who specializes in C++; but, there aren’t too many jobs available for software developers in Detroit, so you will probably have to get a job that isn’t a perfect match for you, like developing software in Java. Since Java isn’t what you’re best at, you won’t get paid as much (and probably won’t like work as much). Similarly, for the employer looking for a Java software developer in Detroit, there’s a fairly small pool of qualified applicants, so they will likely have to settle for an employee that’s not a good match, like our hypothetical programmer specializing in C++.

      IOW, both the employer and the prospective employee have a strong incentive to move to Silicon valley, where the programmer will have a much easier time finding work in his specific area and the employer a much easier time finding an employee who does precisely what they want due to the greater volume of both firms and prospective employees in the software business. Therefore, once the city or region has established an advantage in this market, it becomes self-perpetuating; and the amount of money to be gained by employees and employers from better matches in the labor market continues to grow relative to other regions, and the city and state government can get away with more and more impositions. Of course, sooner or later the government is liable to overplay its hand and overestimate the durability of its unique advantage in its favored industry (a la Detroit).

Comments are closed.