I occasionally get my ire up about someone posting a chart of mortgage affordability, where they will usually use market mortgage rates, median household income and some estimate of the typical home price over time, and they will claim that there isn’t even an affordability problem.
@Kevin: So, one thing that Derek Thompson has been on about lately is this idea of a "unicontext". And while it doesn't strictly translate to the housing field, I do believe it has a strong analytical relationship to your work.
To wit, what I appreciate about your work, despite our various occasional minor quibbles, is that you are able to tie MULTIPLE sources of information together into a coherent narrative. Whereas, your detractors/opponents (such as Aziz Sunderji) absolutely LOVE to yank a bunch of disparate data points out of their own contexts and then pretend that they disprove your entire framework.
Obviously, I see the "unicontextual" approach as FAR more valid. Each market is going to do different things based on its local conditions, and each market movement over different timescales doesn't necessarily HAVE to be ENTIRELY explained by ONE cause. Rather, it's a multitude of causes - the mortgage crackdown since 2008, pandemic swings + postpandemic inflation, long term suburbanization against the context of the pre-suburban levels of urbanization, the unfortunate impact of Euclidean zoning and the patchwork mess of dozens of other regulatory systems (like fire codes banning single-stair), and the limits of local geography on sprawl and exurbanization - each interacting differently.
It's how we end up with the vastly diverse array of [1] a deeply housing-constrained NYC at the center of a megalopolis of suburbs larger than any other in the country, able to continue sprawling well past the magic 1-hour commute limit, [2] a Kalamazoo that (as you've described) has plenty of room for further sprawl, [3a] a St. Louis (in my experience) that hit its 1-hour commute limit with a city center devastated by white flight [3b] vs. a Chicago (also my experience) that replaced STL as the premiere midwestern urban center despite also suffering white flight, and [4] an LA that only exploded in the suburban era and thus is devastatingly sluggish to densify itself on a fully-suburbanized plain surrounded by mountains.
All of those things can be explained by the same context. But it takes a discerning mind to be able to parse it all out without just declaring, "See, there's cheap housing in the flyover cities, therefore it's all just a dEmAnD MiSmAtCh!1".
I think another way to put it is that the supply curve for housing in any given city or neighborhood is shaped like a tangent curve - vertical on the left size and right side and flat in the middle. Any analysis of housing costs is, necessarily, an analysis of a market that is at one of those vertical parts of the curve, and, as you say, there are any number of reasons that a local market could be on either the left end or the right end, and when the public or the academy isn't aware of some of those reasons, they apply the other reasons to utter confusion. LA hits the right vertical side of the supply curve at 3 new homes per capitax1,000. That caused so much displacement in 2005 that Phoenix hit its vertical supply curve at 15 new homes per capitax1,000. Then we bombed the mortgage market with regulations and Phoenix hit the left vertical end of its supply curve in 2008.
I'm finishing a paper right now that deals with this problem. There's an entire literature on the effect of investors on home prices and almost none of it even attempts to understand that context.
And in the ancient history pre-1980 we were averaging more housing starts per capita with 30 year rates that were consistently above 7%. Back in those days bankers spent less effort issuing more mortgages to a broad spectrum of household incomes.
What people didn't realize at the time is that punitive zoning regulations were impacting construction starts in many urban core areas. Builders simply responded by snapping up larger lots in surrounding towns and finding eager buyers who were excited to live in the bucolic suburban paradises that lacked sidewalks and sewer systems. (I'm mainly describing a lot of the Northeast, but this played out in Midwestern urban areas as well)
Interest rates today are much lower than they were when I was a young, aspiring, first-time homebuyer. Why are construction costs so high? We have an incredible number of rundown vacant homes in urban areas. So the issue to me is not necessarily a shortage of supply; it is a public safety crisis. What are your thoughts on these questions?
Is there any data to support that? I think what you have going on, at least where I live in Chicago, is some degree of gentrification. In addition, in our blue state, property taxes are going through the roof, which is driving a lot of the current residents out, and yet the Democrats talk about affordability as an issue which they, in fact, are exacerbating, at least in our state of Illinois, which is a mess.
My hypothesis is that what we have here is not necessarily an interest rate problem or even an affordability problem, but rather a public safety problem that makes way too much of our housing stock undesirable to potential buyers.
Another question, though, why do you think that it costs more now, if it does, to build houses than it did, say, 70 years ago?
Illinois faces a severe shortage of over 140,000 homes, driven by a lack of new construction, restrictive local zoning rules, and rising costs. To catch up with demand, the state needs to build 227,000 new units over the next five years. Construction in Illinois is expensive due to high labor rates driven by a strong union presence & a lack of skilled labor, restrictive local zoning rules, lengthy municipal permitting processes, high property and material taxes, and rising regional material expenses like concrete. Housing products move with the market. Seventy years ago, much of the home buying market, roughly 30%, was utilizing GI loans & FHA loans, today that number is 12-17%. So the buyer has changed & along with that, so has the product. Those GI Loan buyers were looking to buy less expensive starter homes because that is what the program intended, so starter homes is what got built. Baby boomers account for 42% of all home buyers today, making them the largest generational group in the housing market and they are not looking to buy starter homes. They are looking at more expensive specialty products & often second homes. First-time buyers have dropped to a record low of 21% of the total market. This portion of the market is vastly underserved & makes up a large portion of the housing need. The public safety problem is misunderstood. Those homes in what you call undesirable locations were housing for the 30% of the population working in manufacturing seventy years ago. Now, manufacturing accounts for only 10% of employment, replaced by a service- and tech-oriented economy. Workers in those industries do not want to live in the locations you are talking about because they are nowhere near service & tech oriented employment. Convenience to work and commute times are the first deciding factor in the choice of housing location. Neighborhood quality and safety are what informs choices after proximity to employment has been ascertained.
I would push back on the argument that workers don’t want to live in what we now consider underinvested areas.
I grew up in a neighborhood named South Shore in Chicago. My father was a banker and he lived right next to what is now the Metra commuter rail station— he could get downtown to what is now Chase in 20 minutes. It was right on the lake. We had the biggest beach in Chicago and people loved it.
Now it’s called Terrortown because there’s been a complete breakdown of public safety; what were once thriving retail areas are now block after block of vacant storefronts; it’s no longer a place where people with choices want to live except for some gentrifiers and Urban Pioneers as they call them— that housing stock is just wasted. There are a lot of apartments. It was very affordable, otherwise, I wouldn’t have been living there as a kid.
So I think you’ve got an incredibly wasted asset there that is just a sort of a paradise lost and is an undiscovered treasure actually.
In that case I’m hoping the Obama center will revitalize it because I think folks will live up in the ritzy part of town will come down there and say I could buy the same thing for $.10 on dollar, but there’s a huge anti-gentrification movement of course because the theory is the rent is too damn high and if these gentrifiers come in, it’s going to go higher, but that’s how you restore the tax base and that’s how you restore the city to solvency.
The problem I track isn’t construction costs. Higher construction costs would have generally led to smaller homes over time. The housing cost problem that I track is due to a supply shortage which creates a premium across each metro area that applies relatively uniformly to each housing unit. The worse the shortage, the higher the premium. It’s the land that is inflated.
I think you’re right that better public safety would reduce the resistance families have to either trading down to worse neighborhoods or to allowing low socioeconomic housing types in their neighborhoods.
@Kevin: So, one thing that Derek Thompson has been on about lately is this idea of a "unicontext". And while it doesn't strictly translate to the housing field, I do believe it has a strong analytical relationship to your work.
To wit, what I appreciate about your work, despite our various occasional minor quibbles, is that you are able to tie MULTIPLE sources of information together into a coherent narrative. Whereas, your detractors/opponents (such as Aziz Sunderji) absolutely LOVE to yank a bunch of disparate data points out of their own contexts and then pretend that they disprove your entire framework.
Obviously, I see the "unicontextual" approach as FAR more valid. Each market is going to do different things based on its local conditions, and each market movement over different timescales doesn't necessarily HAVE to be ENTIRELY explained by ONE cause. Rather, it's a multitude of causes - the mortgage crackdown since 2008, pandemic swings + postpandemic inflation, long term suburbanization against the context of the pre-suburban levels of urbanization, the unfortunate impact of Euclidean zoning and the patchwork mess of dozens of other regulatory systems (like fire codes banning single-stair), and the limits of local geography on sprawl and exurbanization - each interacting differently.
It's how we end up with the vastly diverse array of [1] a deeply housing-constrained NYC at the center of a megalopolis of suburbs larger than any other in the country, able to continue sprawling well past the magic 1-hour commute limit, [2] a Kalamazoo that (as you've described) has plenty of room for further sprawl, [3a] a St. Louis (in my experience) that hit its 1-hour commute limit with a city center devastated by white flight [3b] vs. a Chicago (also my experience) that replaced STL as the premiere midwestern urban center despite also suffering white flight, and [4] an LA that only exploded in the suburban era and thus is devastatingly sluggish to densify itself on a fully-suburbanized plain surrounded by mountains.
All of those things can be explained by the same context. But it takes a discerning mind to be able to parse it all out without just declaring, "See, there's cheap housing in the flyover cities, therefore it's all just a dEmAnD MiSmAtCh!1".
Very well put, and thanks for the kind words.
I think another way to put it is that the supply curve for housing in any given city or neighborhood is shaped like a tangent curve - vertical on the left size and right side and flat in the middle. Any analysis of housing costs is, necessarily, an analysis of a market that is at one of those vertical parts of the curve, and, as you say, there are any number of reasons that a local market could be on either the left end or the right end, and when the public or the academy isn't aware of some of those reasons, they apply the other reasons to utter confusion. LA hits the right vertical side of the supply curve at 3 new homes per capitax1,000. That caused so much displacement in 2005 that Phoenix hit its vertical supply curve at 15 new homes per capitax1,000. Then we bombed the mortgage market with regulations and Phoenix hit the left vertical end of its supply curve in 2008.
I'm finishing a paper right now that deals with this problem. There's an entire literature on the effect of investors on home prices and almost none of it even attempts to understand that context.
And in the ancient history pre-1980 we were averaging more housing starts per capita with 30 year rates that were consistently above 7%. Back in those days bankers spent less effort issuing more mortgages to a broad spectrum of household incomes.
What people didn't realize at the time is that punitive zoning regulations were impacting construction starts in many urban core areas. Builders simply responded by snapping up larger lots in surrounding towns and finding eager buyers who were excited to live in the bucolic suburban paradises that lacked sidewalks and sewer systems. (I'm mainly describing a lot of the Northeast, but this played out in Midwestern urban areas as well)
Public safety is always a problem and should always be addressed, regardless of housing prices. And it would help.
Building a lot more houses would help even more (99% by letting the free market build houses wherever it wants).
A happy nation has labor shortages and abundant housing.
The opposite approach...see the US....
Well said
Interest rates today are much lower than they were when I was a young, aspiring, first-time homebuyer. Why are construction costs so high? We have an incredible number of rundown vacant homes in urban areas. So the issue to me is not necessarily a shortage of supply; it is a public safety crisis. What are your thoughts on these questions?
The prices of homes in poor run down neighborhoods with high crime, etc. have gone up the most. Because there is a shortage.
Is there any data to support that? I think what you have going on, at least where I live in Chicago, is some degree of gentrification. In addition, in our blue state, property taxes are going through the roof, which is driving a lot of the current residents out, and yet the Democrats talk about affordability as an issue which they, in fact, are exacerbating, at least in our state of Illinois, which is a mess.
https://fred.stlouisfed.org/graph/?g=1XQba
Thanks.
My hypothesis is that what we have here is not necessarily an interest rate problem or even an affordability problem, but rather a public safety problem that makes way too much of our housing stock undesirable to potential buyers.
Another question, though, why do you think that it costs more now, if it does, to build houses than it did, say, 70 years ago?
Illinois faces a severe shortage of over 140,000 homes, driven by a lack of new construction, restrictive local zoning rules, and rising costs. To catch up with demand, the state needs to build 227,000 new units over the next five years. Construction in Illinois is expensive due to high labor rates driven by a strong union presence & a lack of skilled labor, restrictive local zoning rules, lengthy municipal permitting processes, high property and material taxes, and rising regional material expenses like concrete. Housing products move with the market. Seventy years ago, much of the home buying market, roughly 30%, was utilizing GI loans & FHA loans, today that number is 12-17%. So the buyer has changed & along with that, so has the product. Those GI Loan buyers were looking to buy less expensive starter homes because that is what the program intended, so starter homes is what got built. Baby boomers account for 42% of all home buyers today, making them the largest generational group in the housing market and they are not looking to buy starter homes. They are looking at more expensive specialty products & often second homes. First-time buyers have dropped to a record low of 21% of the total market. This portion of the market is vastly underserved & makes up a large portion of the housing need. The public safety problem is misunderstood. Those homes in what you call undesirable locations were housing for the 30% of the population working in manufacturing seventy years ago. Now, manufacturing accounts for only 10% of employment, replaced by a service- and tech-oriented economy. Workers in those industries do not want to live in the locations you are talking about because they are nowhere near service & tech oriented employment. Convenience to work and commute times are the first deciding factor in the choice of housing location. Neighborhood quality and safety are what informs choices after proximity to employment has been ascertained.
I would push back on the argument that workers don’t want to live in what we now consider underinvested areas.
I grew up in a neighborhood named South Shore in Chicago. My father was a banker and he lived right next to what is now the Metra commuter rail station— he could get downtown to what is now Chase in 20 minutes. It was right on the lake. We had the biggest beach in Chicago and people loved it.
Now it’s called Terrortown because there’s been a complete breakdown of public safety; what were once thriving retail areas are now block after block of vacant storefronts; it’s no longer a place where people with choices want to live except for some gentrifiers and Urban Pioneers as they call them— that housing stock is just wasted. There are a lot of apartments. It was very affordable, otherwise, I wouldn’t have been living there as a kid.
So I think you’ve got an incredibly wasted asset there that is just a sort of a paradise lost and is an undiscovered treasure actually.
In that case I’m hoping the Obama center will revitalize it because I think folks will live up in the ritzy part of town will come down there and say I could buy the same thing for $.10 on dollar, but there’s a huge anti-gentrification movement of course because the theory is the rent is too damn high and if these gentrifiers come in, it’s going to go higher, but that’s how you restore the tax base and that’s how you restore the city to solvency.
The problem I track isn’t construction costs. Higher construction costs would have generally led to smaller homes over time. The housing cost problem that I track is due to a supply shortage which creates a premium across each metro area that applies relatively uniformly to each housing unit. The worse the shortage, the higher the premium. It’s the land that is inflated.
Interesting. Does the data show that land price increases in desirable areas have outpaced inflation?
Interesting. Does the data show that land price increases in desirable areas have outpaced inflation?
I think you’re right that better public safety would reduce the resistance families have to either trading down to worse neighborhoods or to allowing low socioeconomic housing types in their neighborhoods.