October 2024 Erdmann Housing Tracker Update

Zillow continues to estimate moderately rising rents, with prices rising roughly in the same proportion to rents as they had before Covid. Rents continue to be explained by inadequate supply and prices continue to be explained almost entirely by rents.

Nothing to see here. Move along. Trade against those who see things. The boring expansion continues, but still a bit light on the “expansion” part.

Figure 1

This month, I’ll discuss density, city size, and housing costs. The post-2008 mortgage crackdown cratered entry-level single-family homebuilding everywhere. At this blog, I focus a lot on development of very large cities and limits to urban infill building. But, there are many cities where that isn’t particularly relevant. A while back I wrote about Kalamazoo, Michigan. It’s a case in point. Kalamazoo isn’t really at a size where the American political obstructions to city building matter that much. The entire urban area is just a few miles across. It isn’t anywhere close to a size where a city would naturally start infilling with blocks of rowhouses, or where compromises like commute time are relevant to home buying decisions.

Single family detached homes naturally dominate construction there, and so the mortgage crackdown had a significant effect on housing supply.

One theme I return to a lot is that many large metro areas have the same regulatory problems as the expensive closed access cities. They effectively made traditional city-building illegal. And single-family homes in the exurbs was a band-aid over that problem in most cities until we ripped the band aid off in 2008 in the mortgage moral panic. So, in the years since 2008, few cities have been able to keep building exurban single-family neighborhoods at a scale that could meet demand, and it was already illegal in those cities to build the type of infill construction at a scale that could fill the gap.

But, none of that is relevant in cities like Kalamazoo. They might have made in-fill illegal, so that maybe it would eventually become binding. But, it’s just a city that’s in an earlier stage of development. The mortgage crackdown just collapsed the one form of housing that naturally dominates there. There’s not much of an urban land use policy issue. There’s just decades of normalcy, then a mortgage moral panic and its aftermath.

Figure 2 shows the typical home price in the metro areas for which Zillow has data going back to 2000 among the 937 largest. They are arranged ordinally, from the smallest at the left to the largest at the right. This highlights costs related to density and agglomeration value vs. costs of supply obstruction. Larger cities really are more expensive, and more productive. But, that’s not the issue of our time. The outlier cities that are much more expensive than the average are expensive because they block housing. (Of the labelled cities, Seattle is the closest one to being an exception, in that much of its outlier status is probably mostly attributable to high incomes related to productivity. Though, it could also certainly permit more building.)

Figure 2

Figure 3 shows the levels of the left end and right end of that regression line at 4 points in time. The 2000s boom was a boom in large cities. I frequently argue here that this wasn’t an increase in agglomeration value. That’s a spurious correlation. It just happens that the cities which obstructed new housing the most with local land use rules were the largest cities.

Figure 3

But, my point here is that that debate hasn’t been relevant since 2008. From 2006 to 2024, homes in big cities have gotten cheaper and homes in small cities have gotten more expensive. (Past prices are adjusted for comparison. Instead of using an inflation adjustment, I have adjusted past home prices in proportion to changing US per capita income.)

The mortgage crackdown distorted prices. Rents provide a more direct view at housing supply and housing costs, but detailed estimates for rents are harder to come by. Zillow has rent data since 2015. Figure 4 shows the typical rent in the small city and the large city in 2016, 2020, and today (again, adjusted in proportion to incomes). Rents have risen nearly 30% more than average US incomes in the small city while they have been relatively flat in the big city.

Figure 4

I must admit that I am a bit surprised that all of that shift is a post-Covid shift. The Erdmann Housing Tracker data suggests more of the opposite - that housing costs were increasing in the years leading up to Covid and have levelled off somewhat since.

But, with that caveat, the broader point is that the post-2008 inflation in housing costs has been due to mortgage suppression, which spread the housing shortage to smaller cities. Smaller cities have been getting more expensive since then, not big cities.

Before 2008, there was a potential agglomeration story, which I would argue against. Since then, there isn’t an argument. It’s supply. And, it’s a really dumb supply problem. It’s metro areas 5 miles in diameter, surrounded by farmland.

The rest of this month’s update is below the fold, for subscribers. There are updated tracker numbers for the 3 home price components of the tracker: supply, cyclical, and credit components. I also have some additional discussion of the value of urban density and the trends post-Covid.