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.
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.
In a country where the population is mobile, what possible mechanism is there for local supply to affect local prices? Any expansion in local supply merely increases in-migration (or reduces out-migration). Conversely, lousy local supply conditions don't cause rents to be higher --- they simply cause more people to leave. Of course housing consumers are not 100% elastic and there are a lot of reasons any specific person might prefer not to move, but focus on the marginal consumer, and I think you'll realize that it's nuts for YIMBYs to promise lower rents in Menlo Park if we just build more in Menlo Park. It won't happen. We'll just get more in-migration or less out-migration. And we should do it anyway! It's better for the people migrating in, and it's better for current residents too, who benefit from a greater supply of local services, restaurants, entertainment, and a greater chance your children will be able to live within 100 miles of where they grew up.
I disagree. The Closed Access cities have unusual outmigration but pretty normal inmigration. And, I don't think the inmigration is particularly sensitive to supply. Building more will mostly lower outmigration. I agree that that will provide a floor on rents until building is high enough to eliminate housing-related displacement. But, more building will definitely lower rents and prices in the long run.
Real rents in San Francisco are already down 20% from their peak in 2020. That is from a change in demand rather than supply, but surely it should cause some doubt in the assertion that San Francisco dirt has some minimum inherent value.
The main takeaway of my most recent Mercatus papers is that pressure for immigration isn’t the main driver of high prices. Resistance to outmigration is. The families moving away from the expensive cities are the marginal price setters, and the value they get from their homes isn’t a hot job market. If it was just that, they would move to other cities with just a little bit of cost pressure. The value is idiosyncratic endowments - family, friends, local knowledge, etc. Just moderate supply can relieve those pressures. It’s not really straightforward economic demand that causes prices to be so high. But, you’re right, I think, that there will be some forms of relatively elastic demand that will increase quantity demanded as supply increases, and that is one reason why price relief will be moderate rather than shocking.
I'm puzzled. You wrote "I disagree", and then went on to write how building more will mostly lower out-migration, which is pretty much exactly what I wrote (except that I treated in-migration and out-migration as symmetric, and you point out that there's a lot less elasticity around out-migration). Fine, but I think my basic point remains, which is that marginal new housing in one area affects migration much more than price, agreeing with your original point that YIMBYs ought to be careful about claiming that a small amount of additional construction in one locality will have any significant effect on prices.
Next, I also wrote that building more in Menlo Park will not lower rents in Menlo Park, and you "disagreed" by asserting that building more will definitely lower rents and prices in the long run. I completely agree, assuming that "building more" is at a scale proportionate to the size of the problem. I guess it's true in principle that we could build 1 million units in Menlo Park by covering all 17 square miles with high rises, but when I wrote that "building more in Menlo Park will not lower rents in Menlo Park", I was assuming that (1) we were talking thousands of new units, not millions (after all, there are less than 13,000 units total in Menlo Park today), and also assuming the rest of the country continued with its NIMBY policies. I would have expected you'd agree that 1,000 or even 10,000 new units in Menlo Park will do essentially nothing for rents assuming the rest of the Bay Area continues with its no-growth policies. I would expect 10,000 new units in Menlo Park over say 10 years to result in 10,000 more units' worth of in-migration, as people moving into the Bay Area would find a lot more choices in Menlo Park than other nearby towns thanks to all those new units, and have relatively little effect on price or out-migration --- so come to think about it, I stand by my claim that new units in one locality in a desirable region will mostly increase in-migration --- and that this is a good thing!
You write "but surely it should cause some doubt in the assertion that San Francisco dirt has some minimum inherent value", which was a claim I never made or imagined. I was trying to argue that once a desirable regional market found an equilibrium price, increasing supply in one locality would mostly increase in-migration to that locality, and have little impact on price. To move prices, we need a massive amount of construction in all of our desirable areas, i.e., anywhere where rents minus operating expenses exceed the cost of construction.
Maybe the confusion is over whether the new construction and migration are being measured regionally or locally. I was thinking the latter, but imagine you were reacting to the former.
Anyway, this is all related to the NIMBY problem because from the point of view of any one locality, there is simply no reason to approve construction (well, unless you believe like I do that more neighbors are a good thing, but most people seem to really dislike neighbors, at least in the abstract), because more construction in just one locality won't move prices. The price benefit only comes if all localities in a region get on the same page.
I met with a real estate developer yesterday who claimed that in the Bay Area, the construction cost of a single condo in a high-rise is between $750,000 and $900,000, and he thinks he can sell them for $1.2M to $1.5M, and the barriers are purely regulatory. There are $300,000 bills all over the sidewalk, except it's illegal to pick them up.
The other thing he pointed out that was interesting to me is just how crazy CEQA really is. CEQA forces the consideration of the environmental impact of development one building at a time. This is nuts. The environmental impact of development comes from the aggregate activity. We need to do environmental studies at a regional level, create a regional plan for development that makes good trade-offs between the need for housing and environmental considerations, and then ministerially approve projects that conform to the regional plan. Maybe this has been obvious to everyone for a long time, but it was eye-opening for me.
Your point is that at the jurisdictional level that zoning is applied, voters can't really use their vote to solve the problem because it's the wrong geographical scale. It has to be a metro area solution.
Yes. That's a good point.
When you wrote, "lousy local supply conditions don't cause rents to be higher --- they simply cause more people to leave." I took that to be a comment about the entire metro area, because many people make that claim.
But, your follow-up comment, "It's nuts for YIMBYs to promise lower rents in Menlo Park if we just build more in Menlo Park. It won't happen. We'll just get more in-migration or less out-migration." is absolutely true at the scale at which you were applying it. Building more in Menlo Park would mostly just create more in-migration from Redwood City, Mountain View, etc.
I had a reading comprehension brain fart.
More homes at a scale that markedly increases supply at the metro-area level, though, of course, will lower rents and prices.
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.
"Here’s the tl;dr: Supply is a long-term, slow twitch factor."---KE
This is correct, in the modern, real-world.
There was a time when housing supply expanded so much in Southern California that prices held the line.
There have been periods in many nations, such as recently China, when huge housing blocks were built. France did this for a while. In the US you have Levittown.
Ponder this:
"Stuyvesant Town–Peter Cooper Village (/ˈstaɪvəsənt/), colloquially known as StuyTown, is a large post–World War II private residential development on the east side of the New York City borough of Manhattan. The complex consists of 110 red brick apartment buildings on an 80-acre (32 ha) tract stretching from First Avenue to Avenue C, between 14th and 23rd Streets. Stuyvesant Town–Peter Cooper Village is split up into two parts: Stuyvesant Town, south of 20th Street, and Peter Cooper Village, north of 20th Street. Together, the two developments contain 11,250 apartments."
If housing supply could be expanded as it was in the post-WWII era, you might see some results on prices.
Th two major political parties are much more interested in the culture wars.
Good points, Ben! You’re right that supply used to have much larger cyclical fluctuations, although when there wasn’t an overriding supply shortage, the big fluctuations in supply didn’t lead to big price changes.
I think what it comes down to is that demand elasticity is different under different supply conditions. When supply is ample, changed supply mostly leads to changed quantity demanded. When supply is constrained, changed supply leads more to changing prices.
This is so dumb. The fact that demand is more volatile than supply is what's behind the causality of price fluctuation here. SF rents are stable AT A STUPID HIGH LEVEL, and it's only the low supply growth that keeps it there over the long run. I'm not a YIMBY for next month's rent, I'm a YIMBY so my daughter can live in a better world in 20 years.
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.
In a country where the population is mobile, what possible mechanism is there for local supply to affect local prices? Any expansion in local supply merely increases in-migration (or reduces out-migration). Conversely, lousy local supply conditions don't cause rents to be higher --- they simply cause more people to leave. Of course housing consumers are not 100% elastic and there are a lot of reasons any specific person might prefer not to move, but focus on the marginal consumer, and I think you'll realize that it's nuts for YIMBYs to promise lower rents in Menlo Park if we just build more in Menlo Park. It won't happen. We'll just get more in-migration or less out-migration. And we should do it anyway! It's better for the people migrating in, and it's better for current residents too, who benefit from a greater supply of local services, restaurants, entertainment, and a greater chance your children will be able to live within 100 miles of where they grew up.
That is, I hope we get tons more of this in the future: https://sfyimby.com/2024/05/exclusive-renderings-revealed-for-willow-park-residential-tower-menlo-park.html
I disagree. The Closed Access cities have unusual outmigration but pretty normal inmigration. And, I don't think the inmigration is particularly sensitive to supply. Building more will mostly lower outmigration. I agree that that will provide a floor on rents until building is high enough to eliminate housing-related displacement. But, more building will definitely lower rents and prices in the long run.
Real rents in San Francisco are already down 20% from their peak in 2020. That is from a change in demand rather than supply, but surely it should cause some doubt in the assertion that San Francisco dirt has some minimum inherent value.
https://fred.stlouisfed.org/graph/?g=1pcoG
The main takeaway of my most recent Mercatus papers is that pressure for immigration isn’t the main driver of high prices. Resistance to outmigration is. The families moving away from the expensive cities are the marginal price setters, and the value they get from their homes isn’t a hot job market. If it was just that, they would move to other cities with just a little bit of cost pressure. The value is idiosyncratic endowments - family, friends, local knowledge, etc. Just moderate supply can relieve those pressures. It’s not really straightforward economic demand that causes prices to be so high. But, you’re right, I think, that there will be some forms of relatively elastic demand that will increase quantity demanded as supply increases, and that is one reason why price relief will be moderate rather than shocking.
I'm puzzled. You wrote "I disagree", and then went on to write how building more will mostly lower out-migration, which is pretty much exactly what I wrote (except that I treated in-migration and out-migration as symmetric, and you point out that there's a lot less elasticity around out-migration). Fine, but I think my basic point remains, which is that marginal new housing in one area affects migration much more than price, agreeing with your original point that YIMBYs ought to be careful about claiming that a small amount of additional construction in one locality will have any significant effect on prices.
Next, I also wrote that building more in Menlo Park will not lower rents in Menlo Park, and you "disagreed" by asserting that building more will definitely lower rents and prices in the long run. I completely agree, assuming that "building more" is at a scale proportionate to the size of the problem. I guess it's true in principle that we could build 1 million units in Menlo Park by covering all 17 square miles with high rises, but when I wrote that "building more in Menlo Park will not lower rents in Menlo Park", I was assuming that (1) we were talking thousands of new units, not millions (after all, there are less than 13,000 units total in Menlo Park today), and also assuming the rest of the country continued with its NIMBY policies. I would have expected you'd agree that 1,000 or even 10,000 new units in Menlo Park will do essentially nothing for rents assuming the rest of the Bay Area continues with its no-growth policies. I would expect 10,000 new units in Menlo Park over say 10 years to result in 10,000 more units' worth of in-migration, as people moving into the Bay Area would find a lot more choices in Menlo Park than other nearby towns thanks to all those new units, and have relatively little effect on price or out-migration --- so come to think about it, I stand by my claim that new units in one locality in a desirable region will mostly increase in-migration --- and that this is a good thing!
You write "but surely it should cause some doubt in the assertion that San Francisco dirt has some minimum inherent value", which was a claim I never made or imagined. I was trying to argue that once a desirable regional market found an equilibrium price, increasing supply in one locality would mostly increase in-migration to that locality, and have little impact on price. To move prices, we need a massive amount of construction in all of our desirable areas, i.e., anywhere where rents minus operating expenses exceed the cost of construction.
Maybe the confusion is over whether the new construction and migration are being measured regionally or locally. I was thinking the latter, but imagine you were reacting to the former.
Anyway, this is all related to the NIMBY problem because from the point of view of any one locality, there is simply no reason to approve construction (well, unless you believe like I do that more neighbors are a good thing, but most people seem to really dislike neighbors, at least in the abstract), because more construction in just one locality won't move prices. The price benefit only comes if all localities in a region get on the same page.
I met with a real estate developer yesterday who claimed that in the Bay Area, the construction cost of a single condo in a high-rise is between $750,000 and $900,000, and he thinks he can sell them for $1.2M to $1.5M, and the barriers are purely regulatory. There are $300,000 bills all over the sidewalk, except it's illegal to pick them up.
The other thing he pointed out that was interesting to me is just how crazy CEQA really is. CEQA forces the consideration of the environmental impact of development one building at a time. This is nuts. The environmental impact of development comes from the aggregate activity. We need to do environmental studies at a regional level, create a regional plan for development that makes good trade-offs between the need for housing and environmental considerations, and then ministerially approve projects that conform to the regional plan. Maybe this has been obvious to everyone for a long time, but it was eye-opening for me.
-Ken
Ah. Sorry. Sorry. Now I get you.
Your point is that at the jurisdictional level that zoning is applied, voters can't really use their vote to solve the problem because it's the wrong geographical scale. It has to be a metro area solution.
Yes. That's a good point.
When you wrote, "lousy local supply conditions don't cause rents to be higher --- they simply cause more people to leave." I took that to be a comment about the entire metro area, because many people make that claim.
But, your follow-up comment, "It's nuts for YIMBYs to promise lower rents in Menlo Park if we just build more in Menlo Park. It won't happen. We'll just get more in-migration or less out-migration." is absolutely true at the scale at which you were applying it. Building more in Menlo Park would mostly just create more in-migration from Redwood City, Mountain View, etc.
I had a reading comprehension brain fart.
More homes at a scale that markedly increases supply at the metro-area level, though, of course, will lower rents and prices.
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.
"Here’s the tl;dr: Supply is a long-term, slow twitch factor."---KE
This is correct, in the modern, real-world.
There was a time when housing supply expanded so much in Southern California that prices held the line.
There have been periods in many nations, such as recently China, when huge housing blocks were built. France did this for a while. In the US you have Levittown.
Ponder this:
"Stuyvesant Town–Peter Cooper Village (/ˈstaɪvəsənt/), colloquially known as StuyTown, is a large post–World War II private residential development on the east side of the New York City borough of Manhattan. The complex consists of 110 red brick apartment buildings on an 80-acre (32 ha) tract stretching from First Avenue to Avenue C, between 14th and 23rd Streets. Stuyvesant Town–Peter Cooper Village is split up into two parts: Stuyvesant Town, south of 20th Street, and Peter Cooper Village, north of 20th Street. Together, the two developments contain 11,250 apartments."
If housing supply could be expanded as it was in the post-WWII era, you might see some results on prices.
Th two major political parties are much more interested in the culture wars.
Good points, Ben! You’re right that supply used to have much larger cyclical fluctuations, although when there wasn’t an overriding supply shortage, the big fluctuations in supply didn’t lead to big price changes.
I think what it comes down to is that demand elasticity is different under different supply conditions. When supply is ample, changed supply mostly leads to changed quantity demanded. When supply is constrained, changed supply leads more to changing prices.
This is so dumb. The fact that demand is more volatile than supply is what's behind the causality of price fluctuation here. SF rents are stable AT A STUPID HIGH LEVEL, and it's only the low supply growth that keeps it there over the long run. I'm not a YIMBY for next month's rent, I'm a YIMBY so my daughter can live in a better world in 20 years.
Nice writeup! I hope it finds its way into many a discussion over the years to come!