Housing Is About Supply and Demand

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Rob Pitingolo’s response to The Gated City has now been posted at Greater Greater Washington under the headline, “Housing is more than supply and demand”. I actually think this headline is a little unfair to Rob, who is not in fact arguing that housing is more than supply and demand. Rather, he’s arguing that housing is not a commodity. That is, homes aren’t all perfect substitutes for each other:

There are many unique types and styles of housing, some of which are more desirable than others. When demand for housing rises in a neighborhood, rents will rise, regardless of the type or quality of the housing. A neighborhood might have century-old rowhouses, 1970s apartments, and brand new luxury buildings. If demand is rising in that neighborhood, rents for all types of these units will rise.

But what if a neighborhood doesn’t have any vacant land sitting around waiting to be developed? How do you increase the supply of housing when there’s no place to build new housing? Basically, you have to knock something down and replace it with higher density housing.

Let’s imagine that a developer is proposing to level some not-so-great ’60s-style townhouses in an urban neighborhood. In their place, the developer is going to build a multi-level apartment complex with a gym, pool on the roof, and ground-floor retail. Perhaps the developer is going to knock down 10 low-quality units and replace them with 50 high-quality units, for a net-gain of 40 housing units.

Even though the number of housing units in the neighborhood goes up, it’s virtually guaranteed that the market rents for those new units are going to be higher than the rents for the old units. So the folks who might have been able to afford one of the ’60s-style townhouses no longer can afford a luxury-apartment in the neighborhood.

This is a good point. Supply matters, but not all housing types are perfect substitutes. If you tear down cheap, low-quality housing to build lots of high-quality housing, then the cost of housing across the metro area as a whole may fall (or grow more slowly) along with the cost of high-quality housing. But you’ve reduced the supply of low-quality housing. Residents displaced from cheap housing who can’t afford the lower cost of high-quality housing may find themselves in a pickle. The solution, however, is not to restrict development (and to be clear, Rob isn’t necessarily suggesting that it is).

There are two key things to remember. The first is that the more development a metro area approves, the less development pressure there will be on any given piece of land. If most of the city is zoned to accommodate tall buildings, then a lot of new demand for the city will flow to those new buildings, placing less cost pressure on the land atop which sit low-quality units. Consider Brookland, in Washington. The land around the Metro station is mostly empty, and local residents are fighting “dense” developments on that land, by which we mean buildings up to 6 stories tall. But residence in the District on metro-accessible land is in very high demand. The less of that demand is accommodated by new, high-quality buildings on empty land, the more will be shifted toward the older homes in the neighborhoods around the station.

The second thing to remember is that when I say I want looser housing regulations, I mean it. I’m bothered by rules that prevent owners from subdividing existing houses — an important means through which affordable housing can be provided. I wish it were easier to convert outbuildings, basements, and similar structures into housing. I wish people weren’t anxious to keep urban industrial land zoned for industrial uses in the misguided view that industry will be coming back to central cities. I’m not just interested in making the supply of high-quality housing more flexible. I want that flexibility to extend across housing types.

Rob is right; lower-income residents might well oppose new development out of a fear that it will mean replacing old, affordable homes with new, unaffordable ones. Those residents are mostly the victim of efforts to make it hard to build everywhere. And if those concerned about the poor succeed in blocking redevelopment of older homes, they’re not stopping displacement — oh, no. They’re simply shifting it elsewhere, to places where the poor aren’t quite as good at finding advocates for their interests.

Comments

  1. Giles says:
    September 22, 2011 at 10:53 am

    This is again somewhat orthogonal to your main point, which i largely agree with, but… Do you think all zoning outside of the CBDs should be mixed use residential with high levels of density? I agree that big cities like NYC are not going to see the level of manufacturing they once had any time soon, if ever again–NYC has lost over 50% of its manufacturing employment over the last ten years alone–but preserving areas (preferably far away from public transit) for non-residential uses is also extremely important. For instance, light manufacturing is becoming more important to lucrative highly exportable industries like fashion design, engineering and architecture. Without the zoning to protect light manufacturing in the garment district, for example, a whole lot of industry insiders say the NYC fashion sector would become a whole lot less innovative and entrepreneurial. And yet there is a real trade off here. The zoning is important because building owners in the garment district understandably want the higher rents that would come from conversions to residential and office spaces. My view is that zoning can be usefully evoked to protect resources that are important to the city as a whole, even if it means less profits for property owners. But i also agree that city planners and politicians often get these trade offs wrong.

  2. David Schultz says:
    September 23, 2011 at 10:13 pm

    Great book Ryan! I found it to be an amazing read. I’m wondering why you didn’t mention low interest rate policies and monetary inflation as a major cause of overpriced real estate and the growing gap between rich and poor. Are you letting Krugman convince you that isn’t true? Also, since I am an engineer who is heavily soured on the U.S. economy, and frustrated with the defense-oriented research bias here, where do you suggest I look for relevant statistics on global cities?

  3. rg says:
    September 28, 2011 at 6:05 pm

    My soccer game was at Trinity College last weekend, which meant I got off the Metro at Brookland for the first time in a long time. As I walked past the fenced off, block-sized patch of weeds fronted by an old, suburban-style Pizza Hut across the tracks from a gargantuan surface parking lot and catty corner from a row of uninviting 1- and 2-story commercial buildings, it occurred to me that you were perhaps too kind to the Brookland NIMBYs in your book. In their case, new development will improve the neighborhood and increase their property values and they are therefore not behaving rationally.

    I get your overall point that some NIMBYs are acting reasonably insofar as creating additional urban housing would lower the cost of all urban housing and therefore the value of their homes and they are thus being reasonable (especially those for whom the value of one’s home is paramount to all other considerations). It is a strong argument when looking at the macro picture of an entire city or metropolitan area.

    But in a micro sense, NIMBYISM is utterly unreasonable if a NIMBY’s concern is limited to the value of his or her home. In the case of Brookland, the status quo probably dampens the value of nearby homes. Replacing that vacant lot and the others nearby would probably increase the value of nearby homes considerably.

    Similarly, I live 1.5 blocks from Reservation 13 next to the Stadium-Armory Metro Station. I am certain that replacing the current surface parking lots that occupy most of Reservation 13 with 6 city blocks of mixed-use, high-density development would significantly increase the value of my house.

    But I quibble. I loved the book; read it in one sitting. And I particularly love that Wendell Cox’s critique of your book made him look foolish on a relatively large stage!

  4. rg says:
    September 28, 2011 at 6:14 pm

    I should add that I do not think it is particularly rational to make the value of your home paramount to all other considerations! You can’t fault people for caring about that. I certainly care about it. But I also care about other things. And I certainly do not want to benefit from an increasing home value that comes at the expense of low-income households or new entrants to the market.

  5. Alex B. says:
    September 29, 2011 at 10:57 am

    rg,

    I think NIMBYism is more of an inherent small-c conservatism and fear of change and the unknown. It’s definitely emotional instead of rational. You often see rationally incoherent objections to projects (arguing, for example, that a project will simultaneously hurt property values but will also displace residents due to property tax increases from rising property values).

  6. Mixner says:
    September 30, 2011 at 11:35 pm

    I’d love to see your evidence that NIMBYism is “definitely emotional instead of rational.” And by irrational, I mean that it is pervasively or systematically inconsistent with the interests of the NIMBYites. It’s always possible to find isolated examples of people who are clearly acting against their own stated interests, of course. But that doesn’t mean NIMBYism in general is irrational.

    Part of the problem, I think, is that you’re judging these people based on your view of their interests rather than their own view of their interests. Just because someone else values peace and quiet, or privacy, or abundant parking space, or whatever it may be, more highly than you do, and hence is more likely than you are to oppose development projects that threaten those aspects of his community, doesn’t mean he’s being irrational.