I’d be looking at growing metro areas in the Midwest where rents are rising enough to justify new rental neighborhoods. Actually, maybe not just the Midwest. That’s where the growth is going to be everywhere. But the Midwest and smaller cities in the sunbelt are probably currently the most overlooked regions.
The effect of the mortgage crackdown on housing production has been generally ignored. Rent inflation has been highest and declines in construction the deepest in cities where housing had been formerly affordable. So the economics for new rentals and pent up demand for new units have been building in cities that aren’t generally associated with high demand.
I discuss it here frequently. Currently, Cincinnati is the only Ohio city that I track on monthly updates for founding subscribers. Development will depend on a lot of pesky local details, but here’s the basic regional picture. A sharp drop in housing production has been followed by high rent inflation across the region.
Thank you Kevin. Do you offer any consulting services? Please send me an email if you would be interested in helping us decide where to build. I love reading your newsletter and would love to talk more.
Thanks Kevin. I am a developer based in Cleveland. We are currently involved in industrial/ storage development, but sounds like it may be time to consider getting into multifamily/ BTR.
This is well worth reading. But it is an example of the nearly exclusive focus of these discussions on the supply side.
If we want to address the difficult behavioral dynamics of housing choices, maybe we have to face the realities of inequality head on and make sure everyone has a decent income. That would not magically end the behavioral issues, but it would make a massive positive change.
Of course at any given time, everyone would be better off with more income. But our peculiar problem is supply.
Low income leads to poor conditions. The main problem for families living in tenements was low income. Today the problem is blocked supply.
Rents in poor neighborhoods across the U.S. have risen 30-40% more than rents in rich neighborhoods over the past decade. Over the past 20-30 years millions of families have been forced to move away from a handful of cities whose notable shared characteristic is they permit far fewer new homes than other cities.
If the problem was that incomes were stagnant in neighborhoods with low average incomes, homes in those neighborhoods wouldn’t have rents and prices rising 5-10% per year.
Supplies are indeed restricted, but there is no necessary connection between rising rents and rising incomes. Households frequently become more rent-burdened without an increase in income while staying in place. Households can, as you indicate, be displaced when they can't make the rent.
But is there a direct connection between limited supply and behavioral issues? Maybe. Or would behavioral issues persist if more units become available at the lower end via filtering? I have no general conclusion about this, but IMO, having a better income is more likely to result in more civil behavior than being able to rent a dump.
Families aren’t displaced from NYC/LA because of high rents. They are displaced because there aren’t homes. Rising rents is the process through which the inadequate number of homes are distributed. No amount of income equality is going to increase the number of families that live in the LA region next year.
"Put more bluntly, there are households that nobody wants as neighbors."
This is a social choice though.
We don't have to have a dysfunctional underclass. We didn't in the 1950s. If you decide to go Bukele, you can cut crime 90% overnight for instance.
Everyone loves zoning laws in Japan or Singapore. But Japan and Singapore are fairly homogeneous and don't allow a dysfunctional underclass.
And such underclass behavior extends beyond explicit criminality. It means discipline in schools, clean streets, good manners, etc.
Is your neighborhood the kind where they lock up everything at the CVS? Does the Chick-Fil-A leave the sauces out for you to get or do they hide them behind the counter and make you ask because the ghetto families will take them home for personal use? Do people make a mess of the public restrooms to the point you have to lock them up or not?
You say you don't want to filter, but anything other than "get underclass behavior under control" means that zoning is going to happen. And I'll be blunt, there are going to be uncomfortable class and race angles to all this you are going to have to confront.
The Fair Housing Act wasn't brave good people forcing integration. It basically declared that if you didn't want to be a victim of black crime you needed to move out to the burbs and form an HOA that found a way to discriminate based on race without calling it race. Segregation in the north is worse now than before the 1960s.
Bravery would be say taking on the teachers union to get school vouchers so that zoning wasn't a default way to get "good schools". But that is difficult and unpopular and Republican and requires doing politics. It isn't rhetorically easy like blaming white middle class homeowners for being racist.
Home prices have risen the most in neighborhoods with the worst amenities, the worst schools, etc. So, among other clear problems, your comment doesn’t sit well with the facts.
Your comment is that people use zoning to keep out the riff raff.
My comment is that its unreasonable to force people to live near the riff raff.
So if you want to get rid of zoning, you need to address the poor behavior of the riff raff so people don't mind living near them so much. If you don't, zoning reform is dead on arrival, and you're not really serious about it.
It's not hard to find two neighborhoods in all our major cities that are right next to each other, but one has crime and bad schools and one doesn't and the house price difference is enormous.
But the price difference has declined significantly, not worsened.
As for your other points, I always try to make clear that the motivation to avoid neighborhood socioeconomic decline has reasonable motivations to an extent. The problem is that our regulations aren’t fair or effective.
It’s sort of an ends of the political horseshoe thing. Supposedly we can’t improve practical regulations until we have achieved social nirvana. The left says we have to eliminate all inequality from the top down. The right says we need to whip the underclass into shape.
In the meantime, the regulatory regime is so out of whack that worst neighborhoods have been accumulating the most land rents. It’s unsustainable.
That doesn't match anything I've ever seen. Over my lifetime, "good neighborhoods" price increases have vastly outpaced "bad neighborhoods" price increases. And neighborhoods that went from good to bad saw price drops. That's the overall trend of the last fifty years. Maybe your right about post 2008 in some places, but its small potatoes compared to the bigger lesson that underclass dysfunction is the main problem with real estate.
What I've observed is that you take a nice neighborhood. Then you build a few apartments. Add a light rail or bus service. At first some middle class blacks move in. Then their cousins that aren't as nice. Then somewhere around 20% black in the school district everyone freaks out and its 80% black in a decade. Formerly stunning houses fall into disrepair and blight. Everyone does everything they can to make sure their school district lines don't get redrawn to include the now blighted neighborhood. This happened in the cities decades ago, then the inner suburbs, now even some outer suburbs.
The kind of "middle to lower middle class but well behaved" neighborhoods that used to be in cities just have a hard time surviving. There was a white trash neighborhood near me that fit that bill. 5/10 elementary school on Zillow. Crime rate not that bad. People sometimes had a fight outside a bar but they weren't sticking people up. The kind of people that did stuff like this to keep the neighborhood white enough that the school didn't become 1/10.
Eventually though the city taxes got way higher, the city services got way worse, crime would still spillover from the neighboring black neighborhood and the cops would do nothing, and there was a new corrupt black mayor thrown in jail every four years. You couldn't go to any of the middle or high schools because the zoning lines were too big* and included the ghetto. At some point enough people dropped out that the neighborhood either merged with the ghetto or became yuppie gentrification fodder for the childless, depending on which side of the neighborhood it was.
*the nicest neighborhood in the city, with the 9/10 K-8 public and private high schools for afterward, naturally had the most stringent zoning and voted 90% D.
Yes. You describe an extreme version of the worries that zoning was meant to address, and not all of them are irrational.
The problem is that zoning didn’t fix the problem it was meant to address and it prevented the development of useful urban neighborhood forms.
Also, take 2 neighborhoods on an amenity scale from 3 to 10. Where there isn’t enough housing the 10 scale neighborhood sells for similar price/income than it always has. The 3 scale neighborhood is inflated, in some cities triple or quadruple 20th century price norms.
Maybe there are more neighborhoods rated 3 or 1 than there used to be. That’s not the topic of my work. And zoning and mortgage restrictions probably make that problem worse.
So how do we get out of this situation?
If you were a real estate developer today, where/ what would you start building?
I’d be looking at growing metro areas in the Midwest where rents are rising enough to justify new rental neighborhoods. Actually, maybe not just the Midwest. That’s where the growth is going to be everywhere. But the Midwest and smaller cities in the sunbelt are probably currently the most overlooked regions.
Overlooked in terms of new development?
The effect of the mortgage crackdown on housing production has been generally ignored. Rent inflation has been highest and declines in construction the deepest in cities where housing had been formerly affordable. So the economics for new rentals and pent up demand for new units have been building in cities that aren’t generally associated with high demand.
Do you have any data that shows this?
I discuss it here frequently. Currently, Cincinnati is the only Ohio city that I track on monthly updates for founding subscribers. Development will depend on a lot of pesky local details, but here’s the basic regional picture. A sharp drop in housing production has been followed by high rent inflation across the region.
https://fred.stlouisfed.org/graph/?g=1Jiz7
Thank you Kevin. Do you offer any consulting services? Please send me an email if you would be interested in helping us decide where to build. I love reading your newsletter and would love to talk more.
aamsdell@amsdellcompanies.com
Thanks Kevin. I am a developer based in Cleveland. We are currently involved in industrial/ storage development, but sounds like it may be time to consider getting into multifamily/ BTR.
In general, I am bullish on homebuilders positioned for growth.
This is well worth reading. But it is an example of the nearly exclusive focus of these discussions on the supply side.
If we want to address the difficult behavioral dynamics of housing choices, maybe we have to face the realities of inequality head on and make sure everyone has a decent income. That would not magically end the behavioral issues, but it would make a massive positive change.
Of course at any given time, everyone would be better off with more income. But our peculiar problem is supply.
Low income leads to poor conditions. The main problem for families living in tenements was low income. Today the problem is blocked supply.
Rents in poor neighborhoods across the U.S. have risen 30-40% more than rents in rich neighborhoods over the past decade. Over the past 20-30 years millions of families have been forced to move away from a handful of cities whose notable shared characteristic is they permit far fewer new homes than other cities.
If the problem was that incomes were stagnant in neighborhoods with low average incomes, homes in those neighborhoods wouldn’t have rents and prices rising 5-10% per year.
Supplies are indeed restricted, but there is no necessary connection between rising rents and rising incomes. Households frequently become more rent-burdened without an increase in income while staying in place. Households can, as you indicate, be displaced when they can't make the rent.
But is there a direct connection between limited supply and behavioral issues? Maybe. Or would behavioral issues persist if more units become available at the lower end via filtering? I have no general conclusion about this, but IMO, having a better income is more likely to result in more civil behavior than being able to rent a dump.
Families aren’t displaced from NYC/LA because of high rents. They are displaced because there aren’t homes. Rising rents is the process through which the inadequate number of homes are distributed. No amount of income equality is going to increase the number of families that live in the LA region next year.
"Put more bluntly, there are households that nobody wants as neighbors."
This is a social choice though.
We don't have to have a dysfunctional underclass. We didn't in the 1950s. If you decide to go Bukele, you can cut crime 90% overnight for instance.
Everyone loves zoning laws in Japan or Singapore. But Japan and Singapore are fairly homogeneous and don't allow a dysfunctional underclass.
And such underclass behavior extends beyond explicit criminality. It means discipline in schools, clean streets, good manners, etc.
Is your neighborhood the kind where they lock up everything at the CVS? Does the Chick-Fil-A leave the sauces out for you to get or do they hide them behind the counter and make you ask because the ghetto families will take them home for personal use? Do people make a mess of the public restrooms to the point you have to lock them up or not?
You say you don't want to filter, but anything other than "get underclass behavior under control" means that zoning is going to happen. And I'll be blunt, there are going to be uncomfortable class and race angles to all this you are going to have to confront.
The Fair Housing Act wasn't brave good people forcing integration. It basically declared that if you didn't want to be a victim of black crime you needed to move out to the burbs and form an HOA that found a way to discriminate based on race without calling it race. Segregation in the north is worse now than before the 1960s.
Bravery would be say taking on the teachers union to get school vouchers so that zoning wasn't a default way to get "good schools". But that is difficult and unpopular and Republican and requires doing politics. It isn't rhetorically easy like blaming white middle class homeowners for being racist.
Home prices have risen the most in neighborhoods with the worst amenities, the worst schools, etc. So, among other clear problems, your comment doesn’t sit well with the facts.
Your comment is that people use zoning to keep out the riff raff.
My comment is that its unreasonable to force people to live near the riff raff.
So if you want to get rid of zoning, you need to address the poor behavior of the riff raff so people don't mind living near them so much. If you don't, zoning reform is dead on arrival, and you're not really serious about it.
It's not hard to find two neighborhoods in all our major cities that are right next to each other, but one has crime and bad schools and one doesn't and the house price difference is enormous.
But the price difference has declined significantly, not worsened.
As for your other points, I always try to make clear that the motivation to avoid neighborhood socioeconomic decline has reasonable motivations to an extent. The problem is that our regulations aren’t fair or effective.
It’s sort of an ends of the political horseshoe thing. Supposedly we can’t improve practical regulations until we have achieved social nirvana. The left says we have to eliminate all inequality from the top down. The right says we need to whip the underclass into shape.
In the meantime, the regulatory regime is so out of whack that worst neighborhoods have been accumulating the most land rents. It’s unsustainable.
That doesn't match anything I've ever seen. Over my lifetime, "good neighborhoods" price increases have vastly outpaced "bad neighborhoods" price increases. And neighborhoods that went from good to bad saw price drops. That's the overall trend of the last fifty years. Maybe your right about post 2008 in some places, but its small potatoes compared to the bigger lesson that underclass dysfunction is the main problem with real estate.
What I've observed is that you take a nice neighborhood. Then you build a few apartments. Add a light rail or bus service. At first some middle class blacks move in. Then their cousins that aren't as nice. Then somewhere around 20% black in the school district everyone freaks out and its 80% black in a decade. Formerly stunning houses fall into disrepair and blight. Everyone does everything they can to make sure their school district lines don't get redrawn to include the now blighted neighborhood. This happened in the cities decades ago, then the inner suburbs, now even some outer suburbs.
The kind of "middle to lower middle class but well behaved" neighborhoods that used to be in cities just have a hard time surviving. There was a white trash neighborhood near me that fit that bill. 5/10 elementary school on Zillow. Crime rate not that bad. People sometimes had a fight outside a bar but they weren't sticking people up. The kind of people that did stuff like this to keep the neighborhood white enough that the school didn't become 1/10.
https://upload.wikimedia.org/wikipedia/en/c/c9/Soiling_of_Old_Glory.jpg
Eventually though the city taxes got way higher, the city services got way worse, crime would still spillover from the neighboring black neighborhood and the cops would do nothing, and there was a new corrupt black mayor thrown in jail every four years. You couldn't go to any of the middle or high schools because the zoning lines were too big* and included the ghetto. At some point enough people dropped out that the neighborhood either merged with the ghetto or became yuppie gentrification fodder for the childless, depending on which side of the neighborhood it was.
*the nicest neighborhood in the city, with the 9/10 K-8 public and private high schools for afterward, naturally had the most stringent zoning and voted 90% D.
Yes. You describe an extreme version of the worries that zoning was meant to address, and not all of them are irrational.
The problem is that zoning didn’t fix the problem it was meant to address and it prevented the development of useful urban neighborhood forms.
Also, take 2 neighborhoods on an amenity scale from 3 to 10. Where there isn’t enough housing the 10 scale neighborhood sells for similar price/income than it always has. The 3 scale neighborhood is inflated, in some cities triple or quadruple 20th century price norms.
Maybe there are more neighborhoods rated 3 or 1 than there used to be. That’s not the topic of my work. And zoning and mortgage restrictions probably make that problem worse.
Really great stuff, you're very underrated.
Such lucid and elegant reasoning. Glad to have found it.
You should submit a slightly condensed version of this to the AZ Capitol Times. Our state policymakers need to see this