Are coastal real estate markets far too expensive for new home buyers? One pessimistic theory is that the very few Americans can afford to buy houses in the expensive coastal markets. In this view, we need to produce housing at much lower price points in order to make it “affordable”.
Another question is whether building more housing will reduce prices. One pessimistic theory suggests that just building lots more housing in expensive coastal markets won’t solve the problem of high prices. For example, this is from an excellent article discussing NIMBYism and YIMBYism:
One big problem with SB 50, Nall believes, is that its beneficiaries aren’t clear, other than the real estate developers who back it, and, perhaps, the young white-collar renters who might easily afford to move to Austin instead. Housing isn’t a pure supply-and-demand problem; location is a huge factor. Some say that the amount of demand to live in the Bay is literally insatiable, and that costs will never come down naturally. And the jury is out on whether “trickle-down housing”—also known as filtering—brings down rents. You could fill a basketball court with the economists and policy wonks who are arguing about this right now.
Each of the two pessimistic theories that I described are entirely plausible. Students of EC101 will recognize that both are essentially “elasticity” questions. However, these two pessimistic theories cannot both be true. One assumes demand is relatively elastic and the other assumes demand is relatively inelastic. Either building lots of new housing brings prices down sharply, or lots of Americans can afford to buy really expensive homes in coastal regions.
In fact, both pessimistic theories are addressing relatively uninteresting issues. The interesting issue is this:
If we build lots more housing in the Bay Area, will lots more people be able to afford to live in the Bay Area?
Unlike with the two pessimistic theories above, the answer to this question is unambiguous: Yes!
And this statement is true regardless of the elasticity of demand for housing.
PS. I wrote this post a few weeks ago, and was prompted to post it now because I came across these interesting tweets, on a related point:
READER COMMENTS
Benjamin Cole
Aug 23 2019 at 8:04pm
End property zoning.
robc
Aug 24 2019 at 9:24am
For a change, you are on topic.
And correct.
Floccina
Aug 26 2019 at 11:36am
More realistic to limit it allowing all residential building. Then we’ll move to retail.
Mark Z
Aug 23 2019 at 9:46pm
Another point worth making: if demand is highly inelastic in the Bay Area (which of course bothers many because it means new housing there doesn’t benefit poor people), it means demand must be highly elastic somewhere else, and the diversion of rich people to the Bay Area should be relaxing housing prices wherever they’re coming from.
Iskander
Aug 24 2019 at 4:44pm
Scott, when are you going to start posting on twitter?
You could have directly responded to that Larry summers thread!
Scott Sumner
Aug 24 2019 at 7:48pm
Iskander, I’ve already got a full plate with two blogs. And twitter often seems superficial to me. In blog posts I’m able to explore ideas beyond “sound bites”.
Mark Brophy
Aug 25 2019 at 9:45pm
I’ve boycotted Twitter for the same reason.
nobody.really
Aug 26 2019 at 10:36am
I’ve boycotted twitter for two reasons.
1: I boycott because I’m old. Old people on Twitter sound stupid. Admittedly, I know this only based on the few tweets I see in the news, mostly from the current administration.
And, yes, young people on Twitter sound stupid, too. But they often sound stupid. And being that they’re young, and it’s Twitter, perhaps I’m not in the best position to judge. Maybe those “memes” are hilarious and I’ll wake up tomorrow laughing my head off. But I suspect I’ll be sleeping late.
2: I boycott Twitter because “boycott” sounds better than “can’t figure the damn thing out, or what earthly good it does.”
Lorenzo from Oz
Aug 24 2019 at 9:23pm
Migration increases demand for goods and services. In the case of housing, migration, when allied to positional goods, also suppresses supply (of housing), because it means that lots of housing market entrants are non-voters, making it easier to restrict supply. While positional goods give something for the well-connected to defend.
Not sure any magic wand will change that dynamic. (Apart from substantially slowing down migration.)
BTW, as far as I can see, the economic literature that says “migration, it’s great for everyone, promise”, does not incorporate this ramping up of shelter costs. Which, among other things, discourages locals moving to the high productivity cities and increasingly makes it difficult to have kids in those cities.
Matthias Görgens
Aug 25 2019 at 10:19am
Locals moving to high productivity areas is just another form of migration.
Lorenzo from Oz
Aug 25 2019 at 8:26pm
No, because they can vote. And the migration in of non-voters helps block the migration in of voters, since the latter have to trade down in accomodation while the former are generally trading up and the latter make it easier to restrict supply of land for housing while driving up the demand.
The level of geographical mobility in the US has been steadily falling as the level of global mobility to the US has been rising. These are entirely separate phenomena.
This without the possibility of using out-group migrants to help shift revenue from in-group workers to in-group holders of capital (including human capital).
Lorenzo from Oz
Aug 25 2019 at 8:27pm
No, because they can vote. And the migration in of non-voters helps block the migration in of voters, since the latter have to trade down in accomodation while the former are generally trading up and the latter make it easier to restrict supply of land for housing while driving up the demand.
The level of geographical mobility in the US has been steadily falling as the level of global mobility to the US has been rising. These are NOT entirely separate phenomena.
This without the possibility of using out-group migrants to help shift revenue from in-group workers to in-group holders of capital (including human capital).
ChrisA
Aug 26 2019 at 12:25pm
The interesting question for me is what could be changed which would encourage more people to support more development in these prime areas? Because of course existing home owners unambiguously lose by more development since they get all of the costs and practically almost none of the benefits but they are also the voters who decide. Of course the decision could be forced on the locals by the State or the Nation in the national interest, but that doesn’t sound very fair, people bought these houses on the current basis of decision rights. So time maybe for some lateral thinking?
Myself I like the idea of floating offshore cities to get around this. You can see that offshore wind farms for instance have much less opposition from Nimbies than onshore ones, same with offshore oil and gas platforms. So, a bit like the sea steading idea, but without the new laws, could you have an offshore floating city off the SF bay? There are these things called Tension Leg Platforms (TLPs) where the platform is anchored down to the sea bed by cables so that the platform doesn’t really move with sea states, which means the topsides could just be standard multi-story housing. You can have multiple blocks of these platforms in one large accumulation, linked by pedestrian bridges. Transport to/from the new city to the mainland could be via submerged tube with subway, basically assembled onshore and then each segment is pulled offshore as it is built with enough concrete weight coating to allow it to rest on the sea bed by gravity – probably a lot quicker and cheaper to build than a new subway onshore. You could have multiple lines laid in parallel as capacity needs expands as your city grows.
There is a lot of offshore life support technologies fully developed by the oil industry which makes the viable on a standalone basis, such as water makers, sewage systems and power systems. You could even have windfarms built nearby using the same technologies if you want to be especially green.
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