I just happened again upon a fantastic post from earlier this year from Ned Resnikoff titled, “YIMBYs are Proving the Fatalists Wrong: A response to Steve Randy Waldman”
> Austin has grown more than 2% annually. It didn’t get expensive.
I’m from Austin, and I would argue this is not true. Austin got a lot more expensive over the last 15 years, especially during COVID, relative to its historic price levels.
Austin itself, for a long time, was somewhat resistant to housing (at least by Texas standards).
But the suburbs around Austin do allow lots of housing to be built, and they’ve been able to soak up the waves of demand - even the COVID wave - eventually.
I guess Austin is more of a support of your other point, that building lots of supply won’t crash the market, it will flatten it out and allow price/income to reach healthier levels over time.
Every city has gotten more expensive since 2008 because of the mortgage crackdown. And, how much that affected a city was mostly out of its control. Partly, prices in Austin have risen along with its rising incomes, so it depends on how much an individual's income rose along with it. Although, my model says that on a price/income basis, low tier Austin has done better than just about any other city over the last decade or 2.
In the Closed Access cities, when incomes rise, the housing costs rise even more. So, even if growth can create some pain for some, they are doing better than other cities with similar growth potential.
That's one reason the mortgage crackdown is really frustrating. It has created cost and production problems that are unrelated to local land use obstructions, and so skeptics can say, "See City X does what the YIMBYs want, and it doesn't make any difference."
Another great post, KE. A frame I find useful for poking at Waldman's "Futility Thesis 2" (that builders left to their own devices will throttle supply anyway): generic market structure analysis.
As is the case for the vast majority of products in modern economies, the market for housing is Monopolostic Competition. So: many existing suppliers (and relatively low barriers to new entry) offering similar but differentiated products to buyers. Vectors of differentiation provide the individual firm a bit of pricing power but only a bit.
Left to their own devices, the hallmarks of this sort of market is fierce competition between sellers and abundant choice (in both quantity & quality) for buyers. Holding together the kind of cartel necessary to throttle supply in this sort of market is a mathematical impossibility: too many actors to coordinate and the rewards for defection are far too great.
I'd say that the complicated part is just the analysis of what is happening. My view of how to fix it is very simple: Mortgage standards as they were in the late 1990s and urban land use how it was when we used to build cities. The politics are difficult, but the answers aren't anything novel. For thousands of years, cottages became single-family neighborhoods, became multi-plexes, became apartments, and then with elevators, became towers. Most of those forms are just illegal now in almost every location where they would happen. I don't know how to get people to agree to build cities again, but the question of how its done is easy enough.
My focus is mostly on documenting the damage, and using this knowledge to make investments. The political part is for others. That might be frustrating, since that's the hard part. I write where I think I add value.
In general, people are going to want to solve these problems by engineering the system we have to try to remove a problem at a time. I'm not sure that can work. With mortgages, for instance, I'm not sure we can get back to a functional market by going line by line through the current underwriting regulations and fixing it. So, I'm a bit pessimistic on progress. On the other hand, markets can deal with a lot of garbage. So, for instance, I am very optimistic on homebuilding because the build-to-rent single-family market is springing from nothing to finally create new homes in the only legal way that still remains available on the margin. That will do a lot to get us back to some level of housing abundance. There will be a fight to ban it though. Until it is banned, it should change the trendline so things stop getting worse, at least.
Thanks for the reference. I will read your article.
I am hardly the expert on housing that you are, but I have seven articles on the topic. They are in reverse chronological order here, so I would start reading at the bottom.
1) Interesting comments on suburbs and desegregated "whiteness"!
2) I think my work pushes back against the homevoter theory. First, I think the motivation is more about status quo bias and preventing change as a resident, less than as an owner. Second, as a matter of outcomes, NIMBYism makes prices go up the most in the worst neighborhoods, not the neighborhoods protecting their character.
3) I disagree about density and affordability. Where the costs of density are binding, it leads to smaller units more than higher spending on housing.
4) I think fair and relatively high property taxes are close enough to a LVT. We could do them a lot better.
5) Interesting idea on the homesteading thing. I think just letting marginal families get mortgages again is a prerequisite for doing anything like that.
6) I totally agree that single-family homes in the suburbs (homeowners preferably, rentals until mortgage access is returned to old norms) is an important part of the solution.
2) I did not mention homevoter theory, so I am not sure what you mean.
3) I use cost per square foot, so smaller units increase cost per square foot. When cost per square foot is the metric and affordability is the ratio of median income/median house price, there is a strong correlation between unaffordability and density.
I don't see how marginal families will be able to get mortgages in the middle of dense cities where land is artificially expensive due to land use regulations. If that ends or is at least reduced, they will be able to afford mortgages on the outskirts of metro areas where land is cheap or in entirely new cities.
2) "homevoter theory" is just shorthand for the idea that homeowners in particular have NIMBY motivations for financial reasons.
3) I think we have a very peculiar issue in the US right now that housing costs/income are very high. That is caused by 1 very peculiar thing - a clampdown on housing that has such acute effects on rents that households resist countering it by reducing their consumption of housing. Under all other contexts, households have a very strong preference for living in homes that sell for 3-4x their incomes, and they sort into the housing stock in a way that makes that happen - whether that is a condo on Park Avenue, a McMansion in the Dallas suburbs, or a sod house on the prairie. Given time, nominal housing demand is very strongly tied to income.
I don't think our affordability issues right now have anything to do with density or agglomeration economies. I think economists have been a total failure on that topic. Low interest rates, loose lending, etc. All of these are falsities. They are all plausible reasons for moderate changes in home prices, and they have all been overestimated to explain the extremely high costs that have come from our supply problem.
The reason home prices are elevated is politics. The reason density has become correlated with high costs is because dense places have more people, which means they have more NIMBYs.
That line: "...a ruinous competition to build..." sums up nearly all the misconceptions about the conditions prior to the Great Recession and a large part of the malaise we're suffering through now. A ruinous competition to grow food, make steel, and provide clean water to hundreds of millions of people is a fundamental principle of modern society.
The Club of Rome cultists who cheer the decline in the U.S. fertility rate are at least more consistent in their ideology than racist Boomers who oppose upzoning and immigration. That these two groups are united in opposition to reform of land-use regulation is one of the strangest political marriages in America. My only consolation is that this voting bloc is older and dying.
A minor nitpick:
> Austin has grown more than 2% annually. It didn’t get expensive.
I’m from Austin, and I would argue this is not true. Austin got a lot more expensive over the last 15 years, especially during COVID, relative to its historic price levels.
Austin itself, for a long time, was somewhat resistant to housing (at least by Texas standards).
But the suburbs around Austin do allow lots of housing to be built, and they’ve been able to soak up the waves of demand - even the COVID wave - eventually.
I guess Austin is more of a support of your other point, that building lots of supply won’t crash the market, it will flatten it out and allow price/income to reach healthier levels over time.
Well, I am being a bit rhetorically sloppy there.
Every city has gotten more expensive since 2008 because of the mortgage crackdown. And, how much that affected a city was mostly out of its control. Partly, prices in Austin have risen along with its rising incomes, so it depends on how much an individual's income rose along with it. Although, my model says that on a price/income basis, low tier Austin has done better than just about any other city over the last decade or 2.
In the Closed Access cities, when incomes rise, the housing costs rise even more. So, even if growth can create some pain for some, they are doing better than other cities with similar growth potential.
That's one reason the mortgage crackdown is really frustrating. It has created cost and production problems that are unrelated to local land use obstructions, and so skeptics can say, "See City X does what the YIMBYs want, and it doesn't make any difference."
Another great post, KE. A frame I find useful for poking at Waldman's "Futility Thesis 2" (that builders left to their own devices will throttle supply anyway): generic market structure analysis.
As is the case for the vast majority of products in modern economies, the market for housing is Monopolostic Competition. So: many existing suppliers (and relatively low barriers to new entry) offering similar but differentiated products to buyers. Vectors of differentiation provide the individual firm a bit of pricing power but only a bit.
Left to their own devices, the hallmarks of this sort of market is fierce competition between sellers and abundant choice (in both quantity & quality) for buyers. Holding together the kind of cartel necessary to throttle supply in this sort of market is a mathematical impossibility: too many actors to coordinate and the rewards for defection are far too great.
Thank you Stacy. Excellent points.
The more I sit on it, the more Waldman’s case, after you declutter it from the details, just seems like a very simple bit of circular reasoning.
The market won’t produce nice things cheaply.
How do you know?
Because nice cities are expensive.
How do you know the other cities aren’t nice?
Because nice things are expensive and they aren’t expensive.
As a new subscriber, I find it a little hard to understand your overall view of housing and how to create affordable housing.
Do you have an introductory article that explains this?
Maybe this post?
https://kevinerdmann.substack.com/p/our-cantilever-housing-market
I'd say that the complicated part is just the analysis of what is happening. My view of how to fix it is very simple: Mortgage standards as they were in the late 1990s and urban land use how it was when we used to build cities. The politics are difficult, but the answers aren't anything novel. For thousands of years, cottages became single-family neighborhoods, became multi-plexes, became apartments, and then with elevators, became towers. Most of those forms are just illegal now in almost every location where they would happen. I don't know how to get people to agree to build cities again, but the question of how its done is easy enough.
My focus is mostly on documenting the damage, and using this knowledge to make investments. The political part is for others. That might be frustrating, since that's the hard part. I write where I think I add value.
In general, people are going to want to solve these problems by engineering the system we have to try to remove a problem at a time. I'm not sure that can work. With mortgages, for instance, I'm not sure we can get back to a functional market by going line by line through the current underwriting regulations and fixing it. So, I'm a bit pessimistic on progress. On the other hand, markets can deal with a lot of garbage. So, for instance, I am very optimistic on homebuilding because the build-to-rent single-family market is springing from nothing to finally create new homes in the only legal way that still remains available on the margin. That will do a lot to get us back to some level of housing abundance. There will be a fight to ban it though. Until it is banned, it should change the trendline so things stop getting worse, at least.
Thanks for the reference. I will read your article.
I am hardly the expert on housing that you are, but I have seven articles on the topic. They are in reverse chronological order here, so I would start reading at the bottom.
Feel free to leave comments.
https://frompovertytoprogress.substack.com/t/housing
1) Interesting comments on suburbs and desegregated "whiteness"!
2) I think my work pushes back against the homevoter theory. First, I think the motivation is more about status quo bias and preventing change as a resident, less than as an owner. Second, as a matter of outcomes, NIMBYism makes prices go up the most in the worst neighborhoods, not the neighborhoods protecting their character.
3) I disagree about density and affordability. Where the costs of density are binding, it leads to smaller units more than higher spending on housing.
4) I think fair and relatively high property taxes are close enough to a LVT. We could do them a lot better.
5) Interesting idea on the homesteading thing. I think just letting marginal families get mortgages again is a prerequisite for doing anything like that.
6) I totally agree that single-family homes in the suburbs (homeowners preferably, rentals until mortgage access is returned to old norms) is an important part of the solution.
Great stuff!
Thanks for the follow-up:
My response:
2) I did not mention homevoter theory, so I am not sure what you mean.
3) I use cost per square foot, so smaller units increase cost per square foot. When cost per square foot is the metric and affordability is the ratio of median income/median house price, there is a strong correlation between unaffordability and density.
I don't see how marginal families will be able to get mortgages in the middle of dense cities where land is artificially expensive due to land use regulations. If that ends or is at least reduced, they will be able to afford mortgages on the outskirts of metro areas where land is cheap or in entirely new cities.
2) "homevoter theory" is just shorthand for the idea that homeowners in particular have NIMBY motivations for financial reasons.
3) I think we have a very peculiar issue in the US right now that housing costs/income are very high. That is caused by 1 very peculiar thing - a clampdown on housing that has such acute effects on rents that households resist countering it by reducing their consumption of housing. Under all other contexts, households have a very strong preference for living in homes that sell for 3-4x their incomes, and they sort into the housing stock in a way that makes that happen - whether that is a condo on Park Avenue, a McMansion in the Dallas suburbs, or a sod house on the prairie. Given time, nominal housing demand is very strongly tied to income.
I don't think our affordability issues right now have anything to do with density or agglomeration economies. I think economists have been a total failure on that topic. Low interest rates, loose lending, etc. All of these are falsities. They are all plausible reasons for moderate changes in home prices, and they have all been overestimated to explain the extremely high costs that have come from our supply problem.
The reason home prices are elevated is politics. The reason density has become correlated with high costs is because dense places have more people, which means they have more NIMBYs.
Oh, and I agree with your last point. The mortgage crackdown mostly killed homebuilding in suburbs and smaller cities.
That line: "...a ruinous competition to build..." sums up nearly all the misconceptions about the conditions prior to the Great Recession and a large part of the malaise we're suffering through now. A ruinous competition to grow food, make steel, and provide clean water to hundreds of millions of people is a fundamental principle of modern society.
The Club of Rome cultists who cheer the decline in the U.S. fertility rate are at least more consistent in their ideology than racist Boomers who oppose upzoning and immigration. That these two groups are united in opposition to reform of land-use regulation is one of the strangest political marriages in America. My only consolation is that this voting bloc is older and dying.