I get that areas are gentrifying. I'm just having a hard time getting from increased zoning to the new units constructed in those areas will be affordable at the income levels of the existing residents. Hopefully the articles will close that loop.
Austin is a perfect example. This is from census data.
Austin, Texas Change from 2019-2022
Total Households 48,602
Less than $10,000 -2,030
$10,000 to $14,999 1,625
$15,000 to $24,999 -6,615
$25,000 to $34,999 -4,538
$35,000 to $49,999 -4,595
$50,000 to $74,999 6,790
$75,000 to $99,999 7,451
$100,000 to $149,999 6,935
$150,000 to $199,999 12,579
$200,000 or more 31,821
Median income (dollars) $14,002
Mean income (dollars) $21,480
Several years ago Austin allowed accessory dwelling units in what were traditionally lower income areas. The goal was affordable housing which wasn't defined. I've been watching those for several years. Builders are buying houses in those areas, razing the structure, building a larger unit on the front, and a smaller unit in the back which is always the largest unit allowable given setbacks, drainage, etc. Both units are selling for roughly $600+/Ft. The front units are generally about 1400 feet and rear about 1000. Is the rear unit less expensive? Yes, but it is not affordable for the existing lower income residents. It is affordable the additional high-income households.
If you were a builder and given these demographics, what priced house would you build? What would be the safest and most profitable? The builder could have built smaller, less expensive units.
Sorry to be repetitive, but I get stuck on zoning is only housing potential and whether that gets converted to actual housing and its price and form entails many other things.
Today we own several zoned, very expensive multifamily tracts in a very hot area of Austin. We are sitting on them due to construction costs, interest rates, the general economy, and tech layoffs.
Generally, it is the old depreciated homes that become affordable (and have become much less affordable where cities have blocked new housing). Filtering is the whole deal. New units aren't what will be affordable. Units built 30 years ago are what will become affordable.
That's the tricky part. In any given year, new homes are 1% of the market. Whether they are affordable or not is almost irrelevant to "housing affordability". The problem is the family living in a 50 year old apartment who's rent has doubled. Their rising rent has nothing to do with how much it cost to build that building. And, it really doesn't even have much to do with how much it costs to build new homes today.
Basically, in the 20th century, with an abundance of homebuilding, the American working class got spoiled by living in old depreciated homes that had already earned the cost of constructing them.
Now we've lost that because it has become so hard to build new housing in so many places that the owners of the old homes can jack up the rents. It's purely economic rents. Of course, this affects the price of land, and so it affects the cost of new construction.
I'm as stunned by house prices as anyone, and I'm positive I don't know all the reasons behind it. I'm really thinking out loud here. It just sounds too simple to blame zoning and leave it at that.
Zoning isn't housing supply. Neither is a 2X4, labor, sheetrock, equity or a construction loan. All of those are only potential supply. After 40 years in residential development, I'm pretty sure zoned land is just a piece of the puzzle to convert those potentials into actual supply, maybe not the most important piece.
When someone says Austin or any other city is unaffordable I keep thinking houses are selling and apartments are renting. Unaffordable units do not sell or rent. Someone bought that $600,000 shack, razed it, and built a $2 million house. It happened which indicates it was affordable. It also happens a lot which indicates there's a market for $2 million houses on single family lots. Maybe it's just the market like a Bentley or a Rolls. Do I wish they were cheaper? Sure, and Bentley wishes they could get more.
I also wonder if using median income to measure affordability in high growth tech cities misses what's going on demographically because it compares past incomes and past purchasing power against current transactions. The longer tenured residents with lower incomes hold back the median income. And, house prices are measured by the most current sale which is usually to higher income residents and are more expensive. Over time demographic change makes the housing appear more affordable. The median income increases as longer tenured residents move.
Crazy stat - Austin is more affordable today than 4 years ago. The median income went up $14,000. :)
Another stat from Austin. The average teacher here makes $57,000. The average tech worker makes $157,000. My gut wonders if this has a bigger impact on the dynamics of housing than zoning.
It's complicated. It can't just be zoning and getting more supply at the right price is a Rubik's Cube.
I would encourage you to read the 4 papers under the "Research" link at the top of the substack. Zoning is the elephant in the room. There are other things in the room. You're discussing a lot of those things, and a couple things which may or may not be in the room.
The most expensive cities aren't the cities with a lot of rich people moving in. They are the cities with a lot of poor people moving out. Those are the cities that are politically obstructing new units so that new homes are few. In those cities, it isn't the high end neighborhoods that are getting more expensive. It is the low-end neighborhoods (that people are moving out of) that are getting more expensive. They are getting more expensive because their rents have been rising.
Things like input prices and construction productivity could never possibly lead to price/income ratios in the teens. Those things would lead to smaller homes. The only reason people live in homes worth 12x their incomes is because they have self-selected to have extortionary costs to avoid being displaced. Anyone who refused has left those cities - millions, maybe tens of millions at this point.
Austin is not a good example of this phenomenon. Austin does pretty well. And, yes, median incomes and costs are rising there. But, regarding "housing affordability" as a topic, rising incomes in Austin is really squeezed in around the corner firmly behind the elephant.
In Austin over the 4-year period of 2019 thru 2022 there were 48,000 additional households. 91% of the additional make over $150,000. 65% of the additional make over $200,000. That buying power with low interest rates surely impacts housing costs. It can't just be NIMBYism and zoning.
Austin did have a cyclical boom over the past few years. One thing I caution about here is to make a distinction between cyclical and secular trends. Here's a post on it.
There are going to be cycles + or - 15% or so up and down over time in housing markets, nationally. Locally, such as recently in Austin, that can be more like + or - 30%. But, those net out to nothing over the long term, and they are relatively close to neutral now. But, the supply problem has basically doubled prices over the course of 25 years. So, those cycles are happening on an upward trend line.
The error you want to avoid is seeing a cycle that is 15% overvalued, then 45%, then 75%, etc., and interpreting that as increasingly bad cyclical bubbles. It is actually a sign that cycles are irrelevant. They have always and will always be here. And the reason they look worse than they should is purely due to the supply problem.
Another way to think about it is that before the GFC, about 6% of Texas homes were vacant for rent or sale. Now it's closer to 3%. Just think how much easier it would have been for those 48,000 households to move in without disruption if Austin still had that 3% of the housing stock sitting empty, waiting for them. Not only have we removed occupied units from the stock of housing, creating a bidding war for what's left, we have removed the slack that would normally calm those cyclical booms.
So, the prices offered in that Austin bidding war aren't impacted by incomes?
And, the prices of the additional supply developers provide in Austin isn't impacted by the income and makeup of the additional households?
"Another way to think about it is that" over that 4-year period there were an extra 7,800 households looking for housing annually making over $200,000. The median income at the start of that period was $75,000, and at the end, $89,000. There were 10,800 annually that make over $150,000.
It's real demand with real income to back it up.
Seems like the ceiling on the bidding was impacted dramatically by the ability to bid much higher.
Seems like city booms are demand driven and supply takes a while to catch up. Not sure the catch up is mainly attributable to zoning or NIMBYs.
Interesting stuff. BTW - been in residential development for over 40 years.
The model I use is based on price/income, and just a simple model: Cyclical demand booms tend to push price/income up for all households, which then reverse as the demand normalizes. Supply obstructions tend to push price/income up for poor households, and it will only reverse with deregulated land use.
The recent boom in Austin peaked at about 20% price/income levels above neutral, across the city. Certainly, high incomes of newcomers was part of the price pressure. That has reverted back to about 5% above neutral.
Supply constraints that have accumulated over the past 15 years have caused the average home in Austin to be about 50% overvalued (because rents are higher, not because of short-term bidding wars). For a neighborhood with $50k incomes, prices are double what they would be in a properly supplied market. In a neighborhood with $150k incomes, it's more like 25%.
In the Texas cities, the supply component wasn't much of a factor because they could build entry level single-fam homes in the exurbs to make up for the typical delays American cities create for infill and multi-fam. The mortgage crack down pulled the band-aid off, so the Texas cities started the slow grind of regressive rent inflation along with the rest of the country. Either mortgage deregulation or urban land deregulation would fix most of that for Texas - preferably both, which will be necessary in the long run.
It can take a few decades for zoning regulations to kill a metro housing market. Based on median prices, Austin is sort of where metro Boston was in 2005. During that period people were generally amazed by house price appreciation and attributing it to many factors except for supply constraints caused by zoning regulations that had been slowly killing new house construction. Policy responses during and since the Great Recession have done essentially nothing to help with supply---and as Kevin has demonstrated with his research, made it even worse for lower and middle income home buyers.
If desirable neighborhoods in and around Austin reach the point where teardowns are regularly getting sold for over $700k in bidding wars then you'll know that land regulations have killed the market.
I promise I'll read them.
I get that areas are gentrifying. I'm just having a hard time getting from increased zoning to the new units constructed in those areas will be affordable at the income levels of the existing residents. Hopefully the articles will close that loop.
Austin is a perfect example. This is from census data.
Austin, Texas Change from 2019-2022
Total Households 48,602
Less than $10,000 -2,030
$10,000 to $14,999 1,625
$15,000 to $24,999 -6,615
$25,000 to $34,999 -4,538
$35,000 to $49,999 -4,595
$50,000 to $74,999 6,790
$75,000 to $99,999 7,451
$100,000 to $149,999 6,935
$150,000 to $199,999 12,579
$200,000 or more 31,821
Median income (dollars) $14,002
Mean income (dollars) $21,480
Several years ago Austin allowed accessory dwelling units in what were traditionally lower income areas. The goal was affordable housing which wasn't defined. I've been watching those for several years. Builders are buying houses in those areas, razing the structure, building a larger unit on the front, and a smaller unit in the back which is always the largest unit allowable given setbacks, drainage, etc. Both units are selling for roughly $600+/Ft. The front units are generally about 1400 feet and rear about 1000. Is the rear unit less expensive? Yes, but it is not affordable for the existing lower income residents. It is affordable the additional high-income households.
If you were a builder and given these demographics, what priced house would you build? What would be the safest and most profitable? The builder could have built smaller, less expensive units.
Sorry to be repetitive, but I get stuck on zoning is only housing potential and whether that gets converted to actual housing and its price and form entails many other things.
Today we own several zoned, very expensive multifamily tracts in a very hot area of Austin. We are sitting on them due to construction costs, interest rates, the general economy, and tech layoffs.
I hope I'm not making crazy.
Generally, it is the old depreciated homes that become affordable (and have become much less affordable where cities have blocked new housing). Filtering is the whole deal. New units aren't what will be affordable. Units built 30 years ago are what will become affordable.
That's the tricky part. In any given year, new homes are 1% of the market. Whether they are affordable or not is almost irrelevant to "housing affordability". The problem is the family living in a 50 year old apartment who's rent has doubled. Their rising rent has nothing to do with how much it cost to build that building. And, it really doesn't even have much to do with how much it costs to build new homes today.
Basically, in the 20th century, with an abundance of homebuilding, the American working class got spoiled by living in old depreciated homes that had already earned the cost of constructing them.
Now we've lost that because it has become so hard to build new housing in so many places that the owners of the old homes can jack up the rents. It's purely economic rents. Of course, this affects the price of land, and so it affects the cost of new construction.
I'm as stunned by house prices as anyone, and I'm positive I don't know all the reasons behind it. I'm really thinking out loud here. It just sounds too simple to blame zoning and leave it at that.
Zoning isn't housing supply. Neither is a 2X4, labor, sheetrock, equity or a construction loan. All of those are only potential supply. After 40 years in residential development, I'm pretty sure zoned land is just a piece of the puzzle to convert those potentials into actual supply, maybe not the most important piece.
When someone says Austin or any other city is unaffordable I keep thinking houses are selling and apartments are renting. Unaffordable units do not sell or rent. Someone bought that $600,000 shack, razed it, and built a $2 million house. It happened which indicates it was affordable. It also happens a lot which indicates there's a market for $2 million houses on single family lots. Maybe it's just the market like a Bentley or a Rolls. Do I wish they were cheaper? Sure, and Bentley wishes they could get more.
I also wonder if using median income to measure affordability in high growth tech cities misses what's going on demographically because it compares past incomes and past purchasing power against current transactions. The longer tenured residents with lower incomes hold back the median income. And, house prices are measured by the most current sale which is usually to higher income residents and are more expensive. Over time demographic change makes the housing appear more affordable. The median income increases as longer tenured residents move.
Crazy stat - Austin is more affordable today than 4 years ago. The median income went up $14,000. :)
Another stat from Austin. The average teacher here makes $57,000. The average tech worker makes $157,000. My gut wonders if this has a bigger impact on the dynamics of housing than zoning.
It's complicated. It can't just be zoning and getting more supply at the right price is a Rubik's Cube.
This is a really interesting subject.
I would encourage you to read the 4 papers under the "Research" link at the top of the substack. Zoning is the elephant in the room. There are other things in the room. You're discussing a lot of those things, and a couple things which may or may not be in the room.
The most expensive cities aren't the cities with a lot of rich people moving in. They are the cities with a lot of poor people moving out. Those are the cities that are politically obstructing new units so that new homes are few. In those cities, it isn't the high end neighborhoods that are getting more expensive. It is the low-end neighborhoods (that people are moving out of) that are getting more expensive. They are getting more expensive because their rents have been rising.
Things like input prices and construction productivity could never possibly lead to price/income ratios in the teens. Those things would lead to smaller homes. The only reason people live in homes worth 12x their incomes is because they have self-selected to have extortionary costs to avoid being displaced. Anyone who refused has left those cities - millions, maybe tens of millions at this point.
Austin is not a good example of this phenomenon. Austin does pretty well. And, yes, median incomes and costs are rising there. But, regarding "housing affordability" as a topic, rising incomes in Austin is really squeezed in around the corner firmly behind the elephant.
In Austin over the 4-year period of 2019 thru 2022 there were 48,000 additional households. 91% of the additional make over $150,000. 65% of the additional make over $200,000. That buying power with low interest rates surely impacts housing costs. It can't just be NIMBYism and zoning.
Austin did have a cyclical boom over the past few years. One thing I caution about here is to make a distinction between cyclical and secular trends. Here's a post on it.
https://kevinerdmann.substack.com/p/comparing-housing-cycles-since-the
There are going to be cycles + or - 15% or so up and down over time in housing markets, nationally. Locally, such as recently in Austin, that can be more like + or - 30%. But, those net out to nothing over the long term, and they are relatively close to neutral now. But, the supply problem has basically doubled prices over the course of 25 years. So, those cycles are happening on an upward trend line.
The error you want to avoid is seeing a cycle that is 15% overvalued, then 45%, then 75%, etc., and interpreting that as increasingly bad cyclical bubbles. It is actually a sign that cycles are irrelevant. They have always and will always be here. And the reason they look worse than they should is purely due to the supply problem.
Another way to think about it is that before the GFC, about 6% of Texas homes were vacant for rent or sale. Now it's closer to 3%. Just think how much easier it would have been for those 48,000 households to move in without disruption if Austin still had that 3% of the housing stock sitting empty, waiting for them. Not only have we removed occupied units from the stock of housing, creating a bidding war for what's left, we have removed the slack that would normally calm those cyclical booms.
I'll read the article in the link. Thanks.
So, the prices offered in that Austin bidding war aren't impacted by incomes?
And, the prices of the additional supply developers provide in Austin isn't impacted by the income and makeup of the additional households?
"Another way to think about it is that" over that 4-year period there were an extra 7,800 households looking for housing annually making over $200,000. The median income at the start of that period was $75,000, and at the end, $89,000. There were 10,800 annually that make over $150,000.
It's real demand with real income to back it up.
Seems like the ceiling on the bidding was impacted dramatically by the ability to bid much higher.
Seems like city booms are demand driven and supply takes a while to catch up. Not sure the catch up is mainly attributable to zoning or NIMBYs.
Interesting stuff. BTW - been in residential development for over 40 years.
Yeah. I think you're point is true.
The model I use is based on price/income, and just a simple model: Cyclical demand booms tend to push price/income up for all households, which then reverse as the demand normalizes. Supply obstructions tend to push price/income up for poor households, and it will only reverse with deregulated land use.
The recent boom in Austin peaked at about 20% price/income levels above neutral, across the city. Certainly, high incomes of newcomers was part of the price pressure. That has reverted back to about 5% above neutral.
Supply constraints that have accumulated over the past 15 years have caused the average home in Austin to be about 50% overvalued (because rents are higher, not because of short-term bidding wars). For a neighborhood with $50k incomes, prices are double what they would be in a properly supplied market. In a neighborhood with $150k incomes, it's more like 25%.
In the Texas cities, the supply component wasn't much of a factor because they could build entry level single-fam homes in the exurbs to make up for the typical delays American cities create for infill and multi-fam. The mortgage crack down pulled the band-aid off, so the Texas cities started the slow grind of regressive rent inflation along with the rest of the country. Either mortgage deregulation or urban land deregulation would fix most of that for Texas - preferably both, which will be necessary in the long run.
It can take a few decades for zoning regulations to kill a metro housing market. Based on median prices, Austin is sort of where metro Boston was in 2005. During that period people were generally amazed by house price appreciation and attributing it to many factors except for supply constraints caused by zoning regulations that had been slowly killing new house construction. Policy responses during and since the Great Recession have done essentially nothing to help with supply---and as Kevin has demonstrated with his research, made it even worse for lower and middle income home buyers.
If desirable neighborhoods in and around Austin reach the point where teardowns are regularly getting sold for over $700k in bidding wars then you'll know that land regulations have killed the market.