High housing prices are also rapidly remaking America’s regional geography. Even areas with strong economies but ultra-high prices are not attracting new domestic migrants. One reason is soaring rents: According to Zillow, for workers between 22 and 34, rent costs claim upwards of 45 percent of income in Los Angeles, San Francisco, New York, and Miami compared to less than 30 percent of income in cities like Dallas and Houston. The costs of purchasing a house are even more lopsided: In Los Angeles and the Bay Area, a monthly mortgage takes, on average, close to 40 percent of income, compared to 15 percent nationally.
Read the whole thing. Nearly every paragraph has something I could have excerpted.
Ryan Avent, Matt Yglesias, and Matt Rognlie have already each made a point that a lot of wealth disparities in the U.S. economy can be traced to the real estate market. Avent and Yglesias have made zoning regulations an issue.
I have instead focused on what I call the four forces: New Commanding Heights of health care and education; bifurcated family patterns; globalization; and the Internet. Maybe real estate regulation is a fifth force?
My question would be how much real estate regulation has changed over the past fifty years. If zoning regulation has only gradually changed, then it would not be a fifth force.
In places like the San Francisco Bay Area, zoning changes have been dramatic. Before the 1970s, zoning was typically Euclidean – limited to segregating industrial uses from residential ones. After the 1979s, almost every city adopted controls designed to restrict growth. As an example, Palo Alto instituted minimum parking requirements, maximum square footage limits, and height limits. These limits have become increasingly stringent over time. Most buildings in Palo Alto’s downtown would be illegal to build today, either because they are too tall, have too much square footage, or not enough parking.
Note that this impacts both commercial and residential building, as multi-family residences have typically only been allowed in or immediately adjacent to commercial districts.
Similar tightening of zoning requirements have occurred throughout the Bay Area. It is also now one of the least affordable markets in the world.
Not sure what the answer to your question is, but it certainly seems as though patterns in real estate development have changed a lot over that time period. Less walkable neighborhoods, bigger lots, fewer through-ways, and more segregation of commercial and residential use development. I have to think a good part of that was driven by regulation.
Either way, I think it’s an important to ask how much of that change was driven by consumer preferences. If people generally want their neighborhoods ordered in a certain way, e.g., with nice, quiet, residential streets where the kids can ride bikes without fear of getting pancaked by a Mack truck, then Yglesias and Avent are probably spitting in the wind.
That said, it seems like the trend is reversing a bit, anyway, with a move more toward mixed use developments like this place in the B-W corridor, for example: http://www.konterra.com/home.asp
Part of the appeal of those kinds of places, though, I think is that the class segregation is even sharper than in other neighborhoods, because not only do you live there, but you shop there, too, so I wouldn’t necessarily view this as a win for the egalitarianism that people like Yglesias are pining for.
Has zoning regulation changed dramatically or have key cities simply become more productive, thus creating higher incomes and therefore demand to live there? If the latter, is it possible that the exclusionary nature of cities such as SF & NYC is part of what makes them so productive (everyone you rub elbows with is highly productive)? If so, we have a problem on our hands.
Also, how do land prices factor into thinking? Zoning can increase the cost to build but I would think land prices have a far greater impact…and they will move with demand.
I don’t know about the other cities mentioned, but for San Francisco in particular, it feels like two populations live there. The people who have made it in the tech sector can afford multi-million dollar homes and (I presume) they want to regulate the real estate market so that they live among their own kind. They feel like kings of the world, and they want their city to be a giant palace. They get a lot of sympathy in the government due to being tech mogols rather than, say, rail tycoons, so that might explain why they get to push the zoning rules so far.
The people who have not made it are desperate and in many cases outright homeless. In many cases, I imagine that people in this category expect to join the other category eventually, so they think it’s reasonable to pay a large fraction of their *current* income. For comparison, think about a college student working part-time at a grocery story and living the quality of life that their parents live.
Meanwhile, lots of what I would consider ordinary people–people at neither of the above extremes–are simply moving outside of San Francisco. Not that I’m any expert on the topic, but a curious aspect of urban policy is that people really do pick their city to some extent. That’s especially true for the super-cities that are major economic centers.
I find it amusing that by limiting the supply of housing, progressive cities have done what the racist pre-civil rights segregationist South could never do, all while signaling their virtue.
To Butler’s point, it’s pretty common for zoning changes over the last fifty years to have had the dual purpose of limiting growth and consolidating white flight. See Kim-Mai Cutler on the Bay Area in particular: http://techcrunch.com/2015/01/10/east-of-palo-altos-eden/
I’m not sure I understand the idea that high real estate prices in selected cities are a significant source of wealthy disparity in the US. First, let’s look at the rough populations of those major cities cited:
NYC 8.5 mil
Miami .4 mil
SF .9 mil
Los Angeles 4.0 mil
Total: 13.8 mil
The current population of the US is about 325 million. You could probably add a few more locales to the above list; however, on the other hand, not everyone in LA lives in expensive housing.
Also, I wonder what it matters to wealth disparity if wealthy people pay other wealthy people large amounts of money for housing? Does this really create a lot of disparity at the top? Or, is it just an indication of how wealthy persons prioritize their expenditures? If people in the tech and finance industries choose to spend their money on housing rather than other things, does that mean the high cost of housing has made them wealthy or is it that they are in the tech, finance, health care industries, etc. which tend to be clustered in these locations? There seems to be some confusion here over correlation and causation.
Or, is it the idea that the wealthy are extracting exorbitant rents from the less wealthy in these markets?
In this case I think metro area populations are probably more helpful than city-limit populations.
Using metro area populations, we get:
NYC = 20 MM
LA = 13 MM
SF/SJ = 9 MM
DC = 6 MM
MIA = 5 MM
BOS = 5 MM
SEA = 4 MM
——-
Total = 62 MM
Granted, not everyone in those areas lives in expensive homes, but clearly at least 1% of the US is living in super-expensive residential areas, just in those metro areas.
That seems disingenuous. Wouldn’t overly restrictive zoning in city areas have the effect of pushing people out (to lax zoning in the periphery and cheaper housing!!). So, I don’t really find that more helpful to include them if the objective is to explain the high cost of housing as the cause of wealth disparity. In fact, one could as plausibly argue that it is *lax zoning* in the periphery that has caused urban sprawl, or a combination of strict zoning in centers and lax zoning in the periphery.
If those advocating more liberal zoning in city centres get their wish, who will become more wealthy from that? Poor real estate developers? Poor landlords? Poor owners of capital who finance them? Who will become less wealthy? Existing suburbanites?
Also, likely the most important reason people find city centers attractive places to live now is precisely because wealthy people have made them so. They forget that if everyone else moves in, it no longer has the attraction it once had. This has been played out in many formerly exclusive tourist destinations that are now not very desirable. I can’t blame ordinary people from making the mistake that the same place they strive for will be the same place after they and everyone else move in; but, I find it surprising that supposedly sophisticated economists miss this point. It was not lost on Oscar Wilde “Each man kills the thing he loves”.
Have you been to SF recently? There’s no (useful) periphery left. BART’s getting a Tracy extension, which they wouldn’t be doing if Tracy, an 80 minute drive without traffic, wasn’t part of the periphery already.
I’m in tech. My bosses (all 4 of them) live in Gilroy and commute 90 minutes each way to Palo Alto every morning. Why?
Because literally everything between SF and Morgan Hill is “full”. (IE: They’re adding 40K jobs and 7K houses to Mountain View, a city with 35K houses).
I know they say that it’s the techies taking over SF, but I know 2 people who live in SF, and 1 of them bought years ago. These days, the techies either live in Fremont and have 70+ minute commutes over Dumbarton or live in Sunnyvale and have near-hour commutes on the train/shuttle. Until it’s time to buy something and they go all the way down to Gilroy because it’s kind of vaguely sort of affordable.
“I’m not sure I understand the idea that high real estate prices in selected cities are a significant source of wealthy disparity in the US.”
I suspect that the wealth disparities have more to do with depressed real-estate values in areas where minorities tend to live than they do with restrictive zoning. That is, it’s not that restrictive zoning is making a large number of white American homeowners rich so much as the dismal performance of housing markets in minority neighborhoods of Chicago, Detroit, St Louis, Cleveland, etc which has wiped out a lot real-estate wealth in those places. In many of these areas, populations have been declining for decades and demand is so low that houses are literally not worth fixing or maintaining and are being abandoned in large numbers.
From the OP: “My question would be how much real estate regulation has changed over the past fifty years.”
Ed Glaeser has studied this stuff a lot, and seems to think real estate regulation has changed a lot. E.g., from
http://economistsview.typepad.com/economistsview/2006/03/before_edward_g.html
“Glaeser has come to believe that changes in zoning regulations may be the most important transformation in the American real-estate market since the mass acceptance of the automobile.”
I don’t see housing regulation as being a fifth force here:
1) It is all local decisions so it only effects 20% of population. Also even some deregulation will mean enough new entrants would bring the price back up.
2) Outside of DC the really expensive cities LA, SF, Miami and NY really do have land limitations being built next to a large body of water.
3) Talk to any Real Estate agent in these cities. They are getting the richest migration from the globe.
I believe the best economics research into this topic has been conducted by Ed Glaeser and Joe Gyourko. For example, see https://www.newyorkfed.org/medialibrary/media/research/epr/03v09n2/0306glae.pdf. Their basic conclusion is that housing is affordable — or at least priced pretty close to its marginal cost — outside of DC, NY, SF, LA (and maybe a couple of other places). In those areas, which happen to be both the most productive cities in America and also the most visible to the media and academic elites, zoning restrictions (rather than land scarcity) seem to explain most of why housing is so over-priced.
Unfortunately I don’t know the answer to your question about the intertemporal aspects of zoning regulations. But I’d recommend asking Glaeser, Gyourko, or Charles Nathanson at Northwestern.
Here’s a history of zoning in Los Angeles:
http://dh101.humanities.ucla.edu/DH101Fall12Lab3/archive/files/6f25f28dc353909147454ee30c6ef581.pdf
A few speculations on my part:
– FDR’s FHA originated in the early New Deal when the reigning paradigm was the Mussoliniesque view that the problem with the economy was too much production leading to falling prices. Although FDR’s NRA got shot down by the Supreme Court in 1935, that view proved enduringly popular regarding housing, in part because the externalities of housing are high relative to other products.
Whittemore notes in his history of L.A. zoning: “Suburbanites were evidently demanding that their neighbours lived at least as well as they did.” My neighbors, for example, are mostly considerably more prosperous than I am, and I benefit from living amidst genteel households in terms of peace and quiet, attractive yards, and property values.
– Whittemore is discreet about how deftly homeowners in the nicer parts of Los Angeles such as Los Feliz took on the rhetoric of the nascent environmental movement at the beginning of the 1970s. (Or perhaps the environmental movement, which originated more than anywhere else in Santa Barbara in January 1969 was really a front for homeowners to keep up their property values.)
The basic model for the trajectory of housing regulation over the decades is something I worked out in a paper when I was at UCLA’s MBA school in 1981:
— Early in the development of a place that is mostly farmland, for example, Los Angeles in the early 1900s, homeowners tend to vote for policies favoring more density because more density makes affordable desirable amenities like electrification, sewer hook-ups, paved roads, stores, nearby schools, and restaurants.
— Later, the returns from increased density diminish due to traffic, noise, smog, loss of privacy, crime, school overcrowding, riots, and so forth, so homeowners vote to limit further increases in density. This causes home prices to increase as demand outruns supply. The ideological rhetoric justifying this changes over the years (e.g., environmentalism from 1969 onward), but the policies are pretty consistent.
It’s possible that eventually a new political phase will be reached as homeowners become outnumbered in the voting booth by renters, but 35 years after I came up with this model, it’s still working pretty well to explain things.
That sounds about right. But, are the concerns about “increased density…due to traffic, noise, smog, loss of privacy, crime, school overcrowding, riots, and so forth…” not legitimate concerns? True, couching these concerns as “environmental concerns” might be politically expedient; but, that does not render the valid concerns invalid.
I always find these arguments confused. Has regulation increased prices through limiting supply or decreased prices from what they would be by limiting development? Is regulation unpopular due to those prices or popular because of them? Because they limit change and development or because they produce conducive environments? Should we be concerned population and price is in equilibrium, concerned more people aren’t leaving expensive areas for areas with lower housing costs, or concerned more people can’t afford to live in expensive areas which then wouldn’t be as expensive? Should we want people to pay less for housing or be pleased they can afford so much and save so much as the reason housing is expensive is it is an investment rather than consumption? Should our complaint be they are making too much money on an investment of limited value or not making enough?
We could find an entirely new residential migration being created if HUD continues to have its way with mandating Section 8 type housing in upper-scale localities, a la Westchester County NY and Dubuque IA, should they avail themselves of HUD grant money.
http://www.powerlineblog.com/archives/2016/01/dubuque-isnt-liking-affh-and-neither-will-the-rest-of-america.php
I’m not sure what deciding factors determine whether or not something is a force or not, but I’m not sure that changes in regulation really inform whether or not there is something new going on.
Like any floor or ceiling – availability and/or prices are really only impacted if the market starts brushing up against the boundary condition.