YIMBYism will not create housing losses!
I can’t decide if I’m being pedantic here, or if this is basically the whole point. You decide.
I’m going to push back against YIMBY triumphalism here. I think we need to be careful to only say things that are correct. And, in the case of the effect of supply on home prices, I think the correct thing is actually much better and more politically palatable than the wrong things that I will be attempting to correct.
(I deleted a paragraph here that probably added confusion. I will just note that citing this post to claim that I don’t think more supply can lower costs would be disingenuous if any NIMBY writers are tempted to.)
Here’s the tl;dr: Supply is a long-term, slow twitch factor. The problem of inadequate supply takes years or decades to become catastrophic and it will take years or decades to fully reverse. Any sharp, short-term changes in housing rents or prices have nothing to do with supply conditions.
You shouldn’t act like they do. You shouldn’t predicate the success of YIMBY solutions on short-term trends. You should never, ever cite a double-digit drop in rents or prices as a result of more supply. It was not.
The closest thing we have to a full-court YIMBY win is Auckland, New Zealand. The results clearly confirm that loosening supply restrictions boosts new home construction and lowers rents. You could argue that construction has risen by as much as double the pre-reform level. Very roughly speaking, the Auckland housing stock may have switched from expanding by about 1% annually to about 2% annually.
Let’s say a 1% increase in the housing stock could lower rents by 2%. After a decade of more active construction in Auckland, rents appear to be 10% to 15% below the pre-reform trend. That’s a big win. After a decade. That’s what success looks like.
I have previously pushed back against triumphalism in Minneapolis. Increasingly, I am seeing triumphalism about Austin, and as hard as it is, it is important not to do it. First, because it’s factually wrong. Supply conditions will never lower rents or prices by 10% within a year or two. Second, because highly volatile markets are bad. People don’t like them, up or down, for good reason. And amply supplied markets reduce such wide swings in valuations. They don’t create volatility.
In the end, “Minneapolis and Austin upzoned and prices suddenly collapsed” is misattributing a bad thing to your preferred policy that will cause people to oppose it. I have no political instincts, but I’m pretty sure that’s bad messaging. But, I understand how tempting it is to find wins.
The thing is, we are swimming in wins. Homes in Austin are less than half what they are in San Francisco. They have been for years. They will be for years. In spite of facing higher demand than San Francisco does. That is much more important than how prices or rents changed this year.
Figure 1 compares the annual change in rents, according to Zillow (relative to the US median), in Phoenix, Austin, and San Francisco. Figure 2 compares annual new housing permits in those cities, along with the US total.
The pre-Covid period was stable, and it does tell us some interesting things.
Phoenix had been expanding at a bit less than 10 homes/1,000 residents (about 2% population growth), but rent inflation was still quite high. There is a lot of marginal demand for moving into Phoenix, and Phoenix wasn’t able to meet it with supply.
Austin has been building at 10-15 homes/1,000 residents (around 3% population growth), which was enough to prevent unusual rent inflation. Austin had a lot of demand and was meeting it.
If Phoenix had been able to permit homes at closer to a pace of 15/1,000 residents, the rent trends in Austin and Phoenix would have been in the same ballpark.
San Francisco had been building at a rate of about 3 homes/1,000 residents (less than 1% population growth), and for several years, rent inflation in San Francisco has been relatively normal. There is scant marginal demand for living in San Francisco. Rent levels are high in San Francisco, but rent inflation has not been high. The low amount of housing that San Francisco approves is enough to keep rents stable while demand is low, but when San Francisco was ascendent, rent inflation was very high.
We can infer that marginal demand for living in Phoenix and Austin, before Covid, was high, and marginal demand for living in San Francisco was low. We can also order the metro areas by supply conditions. Austin was the best. Phoenix second. And San Francisco third.
Since Covid, there have been major upheavals in regional demand. First, there were large outflows of residents out of places like San Francisco and into places like Phoenix and Austin. Then, those flows reversed, or at least slowed. Those short-term demand shocks created double-digit shifts in rent inflation which are much larger than the annual differences of a few percentage points that we can infer from the period before Covid that were due to differing supply conditions.
Supply has been rising after Covid in Phoenix and Austin while it has been falling in San Francisco. Absolutely, on the margin, that supply, and the generally higher rates of construction in Phoenix and Austin have helped their rent trends be lower than they would otherwise be, but moments of chaos are not good measures of those supply conditions.
Ask yourself this: were you tempted to trumpet San Francisco’s big housing supply victory in 2021? Why not? Actually, over this entire period, San Francisco has the best rent trend of these 3 cities. Is it a supply success? Why not? (Actually, back in late 2022, I was briefly tempted to speculate that supply was tentatively loosening up in California, but the data turned against that hope.)
Were you tempted to declare supply-side policies a failure when Austin rents shot up in 2021?
What’s going on here is that we tend to think in categories and baskets. San Francisco is in the “bad supply” category and Austin is in the “good supply” category. And those categories are correct! But, what happens, experientially, is that we want to apply confirmation bias to those categories. So, when rents go down in San Francisco, it obviously isn’t the result of supply reforms. It’s demand. When rents go down in Austin, that is a win for a “good supply” city. And vice-versa.
It all seems so obviously empirical. But it isn’t empirical at all. It’s just confirmation bias. The frustrating truth is that there isn’t going to be a “wow” moment where a single month or a single year of rent trends will confirm the YIMBY case. The YIMBY case is the water we swim in, and a lot of folks just aren’t going to notice the water. Month after boring month, rents in Austin will be lower than they will be in San Francisco, under more challenging demand conditions.
The importance of elastic supply is obvious, and somebody that needs a “wow” moment to see that is not ever going to see it. Manufacturing “wow” moments degrades the YIMBY case to tilt at windmills.
Supply Never Causes Prices to Collapse
Note those two vertical markers in Figure 2. They are also in Figure 3. Figure 2 shows new home permits. Figure 3 shows home prices for San Francisco, Phoenix, and Austin.
The period before the first marker (up to the end of 2005) was associated with rising home prices and (very moderate, by 20th century standards) increases in new home construction in these cities. The rise in prices was due to a variety of demand factors (rising incomes, access to mortgage capital, etc.), so both construction and prices were on the upswing in all three cities. But since San Francisco doesn’t build adequately, prices were rising there at a perennially faster pace. Much like the pre-Covid period, the stability of that period can shine a light on relative supply conditions.
Then, in 2006 and 2007, new construction plummeted so much that it wiped out any additional building that had occurred during the moderate building boom in Phoenix and San Francisco. Prices remained stable during that time.
Then after 2007, while construction continued to plummet, only then did prices crater. Supply doesn’t cause prices to collapse. Prices collapsed because the new mortgage crackdown destroyed demand. In fact, which city didn’t see prices collapse? Austin! Was the 2008-2012 period a failure for YIMBY’s? Construction in Austin was still booming in 2006 and 2007.
Of course it wasn’t a supply failure. The frustrating truth is that periods of less than a decade are terrible sources of evidence for supply reforms, especially when demand is in chaos. That means that stable prices in Austin after 2007 don’t debunk the importance of supply. But it also means that a double digit price drop in 2022-2023 doesn’t confirm it!
Elastic supply conditions are the reason why Austin has been cheaper than San Francisco for the entire 24 year period and they are why Phoenix has slowly lost ground to Austin on affordability since 2008. Supply isn’t a “wow” moment. It is long, slow stability and moderation. That’s all it can do.
This is even more clear, using the Erdmann Housing Tracker model to look at price trends within metro areas. In Figure 4, each panel shows price trends for 2 metro areas. The darker lines are for richer ZIP codes and the lighter lines are for poorer ZIP codes.
Prices in poor neighborhoods are driven by supply conditions and mortgage access. Price trends shared by rich and poor neighborhoods are related to regional demand trends.
Period 1
Before 2006, LA and San Francisco were driven by a supply crisis, which mostly made prices in their poor ZIP codes rise (the orange lines in period 1). Phoenix experienced a mass influx of migrants from California, spiking regional demand, driving up prices in both poor and rich ZIP codes (black and gray lines in middle panel in period 1). Seattle was sort of in between. Prices in poor ZIP codes were rising from relatively constrained supply, and prices in both poor and rich ZIP codes were rising because of the housing migrants from California. All prices in Austin and Atlanta were flat, because they had ample supply and they didn’t have an influx of California refugees.
Period 2
In 2006 and 2007, demand started to fall. Construction was collapsing across the country. Prices in rich ZIP codes corrected from their highs where they had been elevated. Where there had been cyclical booms, the booms generally ended.
Period 3
After 2007, the mortgage crackdown had a peculiar effect on American housing prices. In all of these cities, home prices after 2007 were relatively stable in rich ZIP codes. But, prices in poor ZIP codes in every city collapsed deeply, with the exception of Austin, where the collapse was muted.
New supply systematically brings down home prices in poor ZIP codes, but not everywhere at once, not when new construction is at record lows, and not by double digit percentages.
Exorcize from your mind the idea that home prices collapsed after 2007 because of a building boom. All the resources of the entire planet, engaged at capacity to build more housing could not possibly cause such a collapse in home prices.
Period 4
For a decade, the long, slow grind of the construction depression that followed the mortgage crackdown made every city supply constrained, and so home prices in poor ZIP codes have risen in every city - including Austin.
In every case, where prices have declined since 2021, they declined in both rich and poor ZIP codes. They declined because of a shift in regional demand.
More housing supply will shrink the gap between poor and rich home prices in every city that builds. That gap among these 6 is anywhere from 30% to 70%. It operates on a slow twitch - expanding or contracting by 2-3% annually, at most.
At best, we might hope that rents and prices level out for a decade in cities that build. There are a few places, like Dallas and Atlanta, where, briefly during the 2000s building boom, ample construction and relative regional demand slumps led to moderate rent deflation. Supply can’t do that on its own.
Don’t promise that it can. Don’t scare homeowners with the prospect that it will. Don’t write checks on short-term rent trends that your YIMBY butt can’t cash.
Supply has never and will never cause a collapse of prices and rents. It causes stability. It causes moderation. And, when all is said and done, that is likely for the best.
Put all those “wow” claims on the shelf. The only carrot we have to offer is stability and moderation. That’s a really good carrot! It’s the most important carrot! It’s the only outcome that is a solution.
Sometimes I engage in a gruesome thought experiment: what if a Thanos snap wiped out half the population? This would create a massive surplus of homes across the country at the same time as a considerable inflationary surge in the monetary system. In real terms, house prices would fall considerably and filtering distribution would improve instantly---all of Kevin's price/income graphs would become flat lines. However, within a few years we would probably see considerable recovery, i.e. outpacing inflation, of price levels in desirable urban areas. And, many rural and exurban areas would simply be abandoned as population migrated back to cities and the lower density suburbs around them. In essence, the supply of existing houses in established population centers would create its own demand structure at the expense of outlying areas.
Granted, not a serious policy application here, except to demonstrate that supply improvements in housing don't result in broad based price declines that persist for very long. Incumbent property owners should always have an incentive to maintain the quality of their communities as much as the quality of their personal property.
Good post. It seems fair to paraphrase Scott Sumner and point out "never reason from a supply change" when considering housing prices.
Before zoning, property owners had a choice when it came to extracting the maximum rent value from their land. They could buy new land in undeveloped areas and build new stuff, or they could tear down existing stuff and build larger and denser. In either case the new supply drove improvements in buildings and expanded options for renters. Granted, I'm glamourizing periods of history when slumlords were packing families into grim architecture, but the static conditions that we experience now are an anomaly.