I don't think it adds up to as much as it seems like it could. Demographics move slowly. I'm sure there are some compositional issues, like there were probably more new apartments in the 70s because of the number of young adults. But it doesn't amount to much more than a squiggle in the macro data. That's really why I ended up on this topic. All those factors are swamped by the consequences of supply constraints.
Also, the way housing demand works, when supply is ample, consumption tends to settle at a stable % of GDP. So, I'm sure those issues make a big difference to idiosyncratic decisions industry folks are making about the details in new homes. But, at the macro level, tell me what GDP is in any given year, and I can probably give you a better guess at what total rental expenditures were than I could if you gave me 100 details about age demographics, marriage, kids, etc.
New household formation was a formidable driver of housing demand after about 1970 in most markets I’m familiar with. Those drivers may be hidden in macro level analyses.
Looking at LA/OC/IE, there simply wasn’t enough land to meet housing demand without increasingly longer commute times, sometimes up to 2+ hours each way. Housing policy had nothing to do with the supply limitations unless SFR detached zoning at 6-12 du/acre is viewed as the policy constraint.
CA changed that a few years back by allowing at least one additional SFR unit on every platted SFR zoned lot, statewide. Even so, the SFR detached land use pattern won’t change for at least a hundred years (and not everyone can afford or is willing to add a unit), except in a few very dense urban areas where assemblages of SFR lots coupled with high density MFR/condo development approvals can be obtained, and those will not meet lower cost tiers of demand.
If you look at Pasadena/Glendale from that perspective, it’s taken about 125 years to go from SFR detached to high density residential uses, but the housing costs are astronomical compared to the demand needs.
I’ve been a big proponent for massive mixed use projects (office, hotel, retail and housing) similar to the ones started in the 40’s and 50’s by Met Life (Park Santiago in Santa Ana, Park La Brea in LA, Park Newport in Newport, and Park Merced in SF). Most did not do well from the 70’s on because housing demand wanted SFR detached units which resulted in a massive move away from urban areas.
Anaheim is the only City in SoCal that has approved a massive land use change in favor of high density mixed use developments in its Platinum Triangle former industrial area. Until Anaheim Stadium is reused for the massive office/hotel/retail portion, Platinum Triangle will not reach its full potential, and the housing supply increase will not meet the lower price tier demand needs.
DTLA started a trend reversal in the late 90’s with office to MFR/condo/mixed use conversions and later with new high rise MFR/condo/mixed use development from 2008 forward but COVID monkey wrenched office occupancies and it’s still recovering. Again, however, the housing side occupancy costs are astronomical relative to demand.
Given these proven realities, what sort of macro level housing policies can alleviate the need for affordable housing in micro level dense urban areas? The next questions are when, and where.
Two possibilities for the apt on a SFR zoned lot: it’s either legal non conforming and may or may not be salable, or it’s a development opportunity where the price is supported under an existing zoning ordinance or the developer purchase is subject to an acceptable zoning change. If the lot cost works in the development economic pro forma it works. If not, the seller comes down or it’s off to the next deal. Done this many times.
Pricing at the margin always implies a completed transaction. A borrower hammered by mortgage denial is stuck. The mortgage crackdown penalized the wrong parties, IMO. All of the companies in the securitized mortgage sequence should have been penalized for their aggressive behavior, not all borrowers. Losing the RMBS/CMBS capital pool decimated everyone.
New traditional development died in 2008 for many reasons including the fact there were no lender capital sources and few developers had enough cash and a huge amount of development failures. The lenders were fighting to survive. The major all cash non bank pools like Blackrock, et al, were primarily focused on high IRR deals from bottom feeding, including loan to own deals. The opportunity to pick up otherwise strong developments at 20-50% of cost were simply too attractive. Until all of the “failed project” overhang worked its way through the workout pipeline new development deals were virtually impossible. Cash was king!
At one time accelerated depreciation was offered as an incentive to induce new residential development, primarily MFR, but, many players abused it and it was pulled.
All of these market trends you’re listing are well downstream of the mortgage crackdown. The horse was out of the barn by the time this stuff was happening.
Trying to see the world from your perspective and have run into some challenges. Hope you can help.
Land use regs were binding and enforced well before 1980 wherever they were enacted. They have progressively gotten worse since they were enacted everywhere because of the litigious nature of land use perspectives (government policy, action, skewness, or the lack thereof, vs NIMBY, YIMBY and all of the other factions you and others point out).
“Overzealous mortgage regulations” have nothing to do with land use regulations. They exist in separate legal spheres. But, mortgage rules can and do result in market pricing and demand impacts at the margin and become included in the macro figures.
Families “move” to wherever housing is available but jobs didn’t. This was and remains true for new locally generated new housing formations and for new entrants into any given region. Thus, the choice of where to “live” is dictated by economics, not lifestyles. Covid changed that paradigm with remote work and decimated former job center building occupancies. This land use vs. lifestyle challenge is still in process.
It’s not clear what “closed access” cities means in this context because new housing has been built wherever a profitable opportunity for a developer exists. In most urban instances that translates to high housing costs. So, does “closed” mean areas where new development results in high housing costs?
Does “sustainable” housing mean “affordable” housing in all contexts? Cities, counties, states and federal authorities don’t control affordability anywhere, unless they provide some sort of economic support or incentives to specific areas or projects that encourages its construction and continued affordable use. Thus, it’s not clear how any city could return to building “sustainable” housing after the 2008 meltdown except by retrospective inference based on data trends.
I’m interested in seeing your policy thoughts that addresses these issues. It’s very clear something is needed to increase affordable housing availability everywhere.
1) By binding, I mean they affected population trends and aggregate real estate values. You can really see the shift in LA. Between the 1970s and 1990, they downzoned so that there was no growth capacity, new construction dropped sharply, and prices started rising sharply in the 1990s. Before that, zoning affected how cities developed, but there tended to be substitute housing within each metro area that families could use.
2) The change in mortgage access in 2008 wasn't marginal at all. It was a major shock and it eliminated annual construction of about 500,000 new single family homes.
3) It's a myth that the expensive cities have an unusually large number of jobs. But it is true that Covid & wfh have pushed those cities into negative population trends, which is the only way for demand to get under their housing supply.
4) Closed access specifically means NYC, LA, SF, Boston, and San Diego. They produce less housing, generally, than any other major metro area.
5) Sustainable means producing enough housing so that rents don't rise in a regressive way in order to create new units from regional displacement rather than new construction.
1. Unverified research (at this point) into LA Metro housing demand, the supply constraints from LA City downzoning, and a lack of available land appears to have pushed around 60-70% of the LA Metro Area’s annualized housing demand to the adjacent OC and IE Metro Areas. My gut tells me that a high percentage of the LA Metro area demand came from new family formation rather than from in migration. (Will see if I can confirm that.) That said, the pressure on LA Metro Area home values would be tremendous and inflationary but simultaneously tempered by the perceived differential in OC/IE home pricing/value received/commute time costs. More to follow on this aspect.
2. By marginal pricing I’m referring to the instantaneous price and value determination made at the marginal instant that any economic deal is cut. Every economic transaction and chemical reaction has such an inflection point, or margin.
3. I agree with the myth that expensive cities have an unusually large number of jobs. But, by their very nature they have jobs while other areas don’t. That will change over long time frames as jobs migrate closer to where people live, particularly as a result of Covid.
4. “Closed” access areas may be a misnomer given that they can be accessed with enough money. Perhaps “Economically Limited” or Limited” access is more descriptive (and may add optical support to your case).
5. Sustainable is an overused term today, but I see your intent. Not sure just now what an alternative single descriptive word should or could be, but self supporting, self sustaining and internally sustaining comes to mind.
Finally, all of the timeframes we’ve been discussing include giant growth elements from new family formation demographics.
I need to go, but, here’s a spur of the moment thought that may make no sense after thinking more about it: As the various demographic python pigs become less growth impactful absolutely, could there be an opportunity to reduce average housing costs significantly by adding new marginally lower priced units in local markets? The driver would necessarily be policy driven and supported because negative value growth would not be an economic incentive liked by developers or existing owners.
On #2, there is no marginal price for an apartment on a lot zoned for single family. There is no marginal price for a potential borrower who can't get a mortgage because of arbitrary denials from regulatory rules.
After the mortgage crackdown, low tier markets dropped to 20-50% below the equilibrium value that had been triggering new construction on the margin for a century. The new home market was kicked far into disequilibrium, and it took 15 years until the price of existing homes got back into a range where marginal demand could induce economic construction.
Affordability doesn't and won't come from the condition of new units. Build expensive new units, or cheap, or whatever. Build castles. If you build enough of them, the housing that becomes affordable is the old housing that was mid- or high-tier 2 or 3 generations ago. Depreciation is the main source of affordable housing.
From the 1980s to 2008, they were binding in the closed access cities but not elsewhere.
After 2008 overzealous mortgage regulations made urban land use regulations binding everywhere.
Before 2008, homes were built, but families had to shift away from the closed access cities to move to where they were built. After 2008, they weren’t built. Macro-level housing expansion gets us back toward 2008. But it probably makes LA worse off, not better off. But most cities would return to building sustainable housing.
Thanks Kevin. Since I'm a kid with a hammer and everything that looks like a nail to me is local zoning the divergence documented in Figure 2 fits perfectly with my worldview. However, I doubt anyone in the 1960's would have made the connection between land use regulations and the persistent housing shortage and price mismatches that would accumulate over the next five decades.
Buildings aren't like refrigerators, or smartphones, or oil. Even under the best of conditions, like modern China, planning and construction takes more time. Usually, when they're completed they're an asset, and you can do all sorts of fun things with them as financial collateral, etc....but they wear out and are always resource intensive. And, when you don't have enough of them you can't do double shifts at the factory and pop a few million units in shipping containers to address an area of demand.
Hi Kevin,
How does the absolute demand for new housing units from the Boomers that began in the 1968-1970 timeframe figure into these analyses?
I don't think it adds up to as much as it seems like it could. Demographics move slowly. I'm sure there are some compositional issues, like there were probably more new apartments in the 70s because of the number of young adults. But it doesn't amount to much more than a squiggle in the macro data. That's really why I ended up on this topic. All those factors are swamped by the consequences of supply constraints.
Also, the way housing demand works, when supply is ample, consumption tends to settle at a stable % of GDP. So, I'm sure those issues make a big difference to idiosyncratic decisions industry folks are making about the details in new homes. But, at the macro level, tell me what GDP is in any given year, and I can probably give you a better guess at what total rental expenditures were than I could if you gave me 100 details about age demographics, marriage, kids, etc.
New household formation was a formidable driver of housing demand after about 1970 in most markets I’m familiar with. Those drivers may be hidden in macro level analyses.
Looking at LA/OC/IE, there simply wasn’t enough land to meet housing demand without increasingly longer commute times, sometimes up to 2+ hours each way. Housing policy had nothing to do with the supply limitations unless SFR detached zoning at 6-12 du/acre is viewed as the policy constraint.
CA changed that a few years back by allowing at least one additional SFR unit on every platted SFR zoned lot, statewide. Even so, the SFR detached land use pattern won’t change for at least a hundred years (and not everyone can afford or is willing to add a unit), except in a few very dense urban areas where assemblages of SFR lots coupled with high density MFR/condo development approvals can be obtained, and those will not meet lower cost tiers of demand.
If you look at Pasadena/Glendale from that perspective, it’s taken about 125 years to go from SFR detached to high density residential uses, but the housing costs are astronomical compared to the demand needs.
I’ve been a big proponent for massive mixed use projects (office, hotel, retail and housing) similar to the ones started in the 40’s and 50’s by Met Life (Park Santiago in Santa Ana, Park La Brea in LA, Park Newport in Newport, and Park Merced in SF). Most did not do well from the 70’s on because housing demand wanted SFR detached units which resulted in a massive move away from urban areas.
Anaheim is the only City in SoCal that has approved a massive land use change in favor of high density mixed use developments in its Platinum Triangle former industrial area. Until Anaheim Stadium is reused for the massive office/hotel/retail portion, Platinum Triangle will not reach its full potential, and the housing supply increase will not meet the lower price tier demand needs.
DTLA started a trend reversal in the late 90’s with office to MFR/condo/mixed use conversions and later with new high rise MFR/condo/mixed use development from 2008 forward but COVID monkey wrenched office occupancies and it’s still recovering. Again, however, the housing side occupancy costs are astronomical relative to demand.
Given these proven realities, what sort of macro level housing policies can alleviate the need for affordable housing in micro level dense urban areas? The next questions are when, and where.
Two possibilities for the apt on a SFR zoned lot: it’s either legal non conforming and may or may not be salable, or it’s a development opportunity where the price is supported under an existing zoning ordinance or the developer purchase is subject to an acceptable zoning change. If the lot cost works in the development economic pro forma it works. If not, the seller comes down or it’s off to the next deal. Done this many times.
Pricing at the margin always implies a completed transaction. A borrower hammered by mortgage denial is stuck. The mortgage crackdown penalized the wrong parties, IMO. All of the companies in the securitized mortgage sequence should have been penalized for their aggressive behavior, not all borrowers. Losing the RMBS/CMBS capital pool decimated everyone.
New traditional development died in 2008 for many reasons including the fact there were no lender capital sources and few developers had enough cash and a huge amount of development failures. The lenders were fighting to survive. The major all cash non bank pools like Blackrock, et al, were primarily focused on high IRR deals from bottom feeding, including loan to own deals. The opportunity to pick up otherwise strong developments at 20-50% of cost were simply too attractive. Until all of the “failed project” overhang worked its way through the workout pipeline new development deals were virtually impossible. Cash was king!
At one time accelerated depreciation was offered as an incentive to induce new residential development, primarily MFR, but, many players abused it and it was pulled.
More later. Gig starts in five min.
All of these market trends you’re listing are well downstream of the mortgage crackdown. The horse was out of the barn by the time this stuff was happening.
Trying to see the world from your perspective and have run into some challenges. Hope you can help.
Land use regs were binding and enforced well before 1980 wherever they were enacted. They have progressively gotten worse since they were enacted everywhere because of the litigious nature of land use perspectives (government policy, action, skewness, or the lack thereof, vs NIMBY, YIMBY and all of the other factions you and others point out).
“Overzealous mortgage regulations” have nothing to do with land use regulations. They exist in separate legal spheres. But, mortgage rules can and do result in market pricing and demand impacts at the margin and become included in the macro figures.
Families “move” to wherever housing is available but jobs didn’t. This was and remains true for new locally generated new housing formations and for new entrants into any given region. Thus, the choice of where to “live” is dictated by economics, not lifestyles. Covid changed that paradigm with remote work and decimated former job center building occupancies. This land use vs. lifestyle challenge is still in process.
It’s not clear what “closed access” cities means in this context because new housing has been built wherever a profitable opportunity for a developer exists. In most urban instances that translates to high housing costs. So, does “closed” mean areas where new development results in high housing costs?
Does “sustainable” housing mean “affordable” housing in all contexts? Cities, counties, states and federal authorities don’t control affordability anywhere, unless they provide some sort of economic support or incentives to specific areas or projects that encourages its construction and continued affordable use. Thus, it’s not clear how any city could return to building “sustainable” housing after the 2008 meltdown except by retrospective inference based on data trends.
I’m interested in seeing your policy thoughts that addresses these issues. It’s very clear something is needed to increase affordable housing availability everywhere.
I'll go by paragraph:
1) By binding, I mean they affected population trends and aggregate real estate values. You can really see the shift in LA. Between the 1970s and 1990, they downzoned so that there was no growth capacity, new construction dropped sharply, and prices started rising sharply in the 1990s. Before that, zoning affected how cities developed, but there tended to be substitute housing within each metro area that families could use.
2) The change in mortgage access in 2008 wasn't marginal at all. It was a major shock and it eliminated annual construction of about 500,000 new single family homes.
3) It's a myth that the expensive cities have an unusually large number of jobs. But it is true that Covid & wfh have pushed those cities into negative population trends, which is the only way for demand to get under their housing supply.
4) Closed access specifically means NYC, LA, SF, Boston, and San Diego. They produce less housing, generally, than any other major metro area.
5) Sustainable means producing enough housing so that rents don't rise in a regressive way in order to create new units from regional displacement rather than new construction.
Thanks…
Responding by the numbers.
1. Unverified research (at this point) into LA Metro housing demand, the supply constraints from LA City downzoning, and a lack of available land appears to have pushed around 60-70% of the LA Metro Area’s annualized housing demand to the adjacent OC and IE Metro Areas. My gut tells me that a high percentage of the LA Metro area demand came from new family formation rather than from in migration. (Will see if I can confirm that.) That said, the pressure on LA Metro Area home values would be tremendous and inflationary but simultaneously tempered by the perceived differential in OC/IE home pricing/value received/commute time costs. More to follow on this aspect.
2. By marginal pricing I’m referring to the instantaneous price and value determination made at the marginal instant that any economic deal is cut. Every economic transaction and chemical reaction has such an inflection point, or margin.
3. I agree with the myth that expensive cities have an unusually large number of jobs. But, by their very nature they have jobs while other areas don’t. That will change over long time frames as jobs migrate closer to where people live, particularly as a result of Covid.
4. “Closed” access areas may be a misnomer given that they can be accessed with enough money. Perhaps “Economically Limited” or Limited” access is more descriptive (and may add optical support to your case).
5. Sustainable is an overused term today, but I see your intent. Not sure just now what an alternative single descriptive word should or could be, but self supporting, self sustaining and internally sustaining comes to mind.
Finally, all of the timeframes we’ve been discussing include giant growth elements from new family formation demographics.
I need to go, but, here’s a spur of the moment thought that may make no sense after thinking more about it: As the various demographic python pigs become less growth impactful absolutely, could there be an opportunity to reduce average housing costs significantly by adding new marginally lower priced units in local markets? The driver would necessarily be policy driven and supported because negative value growth would not be an economic incentive liked by developers or existing owners.
On #2, there is no marginal price for an apartment on a lot zoned for single family. There is no marginal price for a potential borrower who can't get a mortgage because of arbitrary denials from regulatory rules.
After the mortgage crackdown, low tier markets dropped to 20-50% below the equilibrium value that had been triggering new construction on the margin for a century. The new home market was kicked far into disequilibrium, and it took 15 years until the price of existing homes got back into a range where marginal demand could induce economic construction.
Affordability doesn't and won't come from the condition of new units. Build expensive new units, or cheap, or whatever. Build castles. If you build enough of them, the housing that becomes affordable is the old housing that was mid- or high-tier 2 or 3 generations ago. Depreciation is the main source of affordable housing.
Before 1980, land use regs weren’t binding.
From the 1980s to 2008, they were binding in the closed access cities but not elsewhere.
After 2008 overzealous mortgage regulations made urban land use regulations binding everywhere.
Before 2008, homes were built, but families had to shift away from the closed access cities to move to where they were built. After 2008, they weren’t built. Macro-level housing expansion gets us back toward 2008. But it probably makes LA worse off, not better off. But most cities would return to building sustainable housing.
Great series.
Thanks Kevin. Since I'm a kid with a hammer and everything that looks like a nail to me is local zoning the divergence documented in Figure 2 fits perfectly with my worldview. However, I doubt anyone in the 1960's would have made the connection between land use regulations and the persistent housing shortage and price mismatches that would accumulate over the next five decades.
Buildings aren't like refrigerators, or smartphones, or oil. Even under the best of conditions, like modern China, planning and construction takes more time. Usually, when they're completed they're an asset, and you can do all sorts of fun things with them as financial collateral, etc....but they wear out and are always resource intensive. And, when you don't have enough of them you can't do double shifts at the factory and pop a few million units in shipping containers to address an area of demand.