Tag: Housing

This Is the Housing Market You Wanted, Hillary Clinton Staffers

The New York Times reports:

For decades, idealistic twenty-somethings have shunned higher-paying and more permanent jobs for the altruism and adrenaline rush of working to get a candidate to the White House. But the staffers who have signed up for the Clinton campaign face a daunting obstacle: the New York City real estate market….

Mrs. Clinton’s campaign prides itself on living on the cheap and keeping salaries low, which is good for its own bottom line, but difficult for those who need to pay New York City rents….

When the campaign’s finance director, Dennis Cheng, reached out to New York donors [to put up staffers in their apartments], some of them seemed concerned with the prospective maze of campaign finance laws and with how providing upscale housing in New York City might be interpreted.

Here are some words that don’t appear in the article: rent control, regulation, zoning. But those are among the reasons that housing is expensive in New York. As a Manhattan Institute report noted in 2002:

  • New York City and State have instituted policies that severely distort the dynamics of housing supply and demand. Only 30 percent of the city’s rental units, for instance, are subject to market prices. These distortions—coupled with Rube-Goldbergian environmental and zoning regulations—have denied New York the kind of healthy housing market enjoyed by most other major cities.

And a report by Edward Glaeser and Joseph Gyourko for the Federal Reserve Board of New York Economic Policy Review suggests that “homes are expensive in high-cost areas primarily because of government regulation” that imposes “artificial limits on construction.”

As I’ve said in other contexts: This is the business you have chosen. If you want the government to control rents and impose regulatory costs on the building of housing, then you can expect to see less housing and thus more expensive housing. Welcome to your world, Hillary Clinton staffers.

Housing and Wealth Inequality

American Nightmare is in some ways the most profound of the three books I have written for Cato. It covers a wide range of issues, including a detailed explanation of the 2008 financial crisis. But the overarching theme is that urban planning and zoning are best viewed as a form of economic warfare by the upper and middle classes against the working and lower classes. While that might not have been the original intent, to judge by the smug attitudes of the beneficiaries of such planning and zoning, they are perfectly happy with the results.

The book, therefore, was really about inequality, an issue that of course has been made popular and controversial by Thomas Piketty’s book Capital in the Twenty-First Century. Piketty’s thesis is that income inequality is necessarily rising because the returns to capital wealth are greater than overall economic growth, thus giving people one more reason to hate capitalists.

Last month, a paper by an MIT graduate student in economics named Matthew Rognlie, examined Piketty’s thesis in detail. Rognlie found that, contrary to Piketty, the returns on most kinds of wealth and capital have not been greater than overall economic growth, and therefore haven’t been contributing to income inequality. The one exception, Rognlie found, was housing.

Ignoring the Law of Supply and Demand

A recent report from Fannie Mae finds that baby boomers are not leaving their comfortable suburban homes for lively inner-city communities with walkable streets. As a news article about the report observes, this challenges the “conventional wisdom that ‘empty nester’ baby boomers would eventually downsize from the homes where they raised families, flocking instead to apartments or condos.”

Rather than conventional wisdom, it would be more accurate to say that this notion was wishful thinking among urban planners who believe more Americans should be packed into high-density “compact cities” where they will get around by foot, bicycle, or transit rather than by automobile. In contrast, demographers have known that populations of virtually all age groups, whether millennials or empty nesters, are growing faster in the suburbs and exurbs than in the cities. After all, the baby boomers’ parents overwhelmingly preferred to “age in place” rather than move when their children left home; why should baby boomers be any different?

Despite this, regional planning agencies all over the country are writing plans that presume America will need no more single-family homes, especially on large lots, and instead will need lots of apartments, condos, or townhouses. Many of these plans effectively zone away the possibility of new single-family homes on large lots while they subsidize construction of high-density housing. For example, the San Francisco Metropolitan Transportation Commission’s Plan Bay Area mandates that 80 percent of all new housing be in high-density urban centers.

To justify these plans, the planning agencies often hire Arthur C. Nelson, the University of Utah urban planning professor who in 2006 predicted that the U.S. will soon have 22 million surplus single-family homes on large lots. Nelson wrote a 2011 report predicting that the Bay Area, which has one of the most acute housing shortages in America today, would have a surplus of nearly 572,000 single-family homes by 2040; Plan Bay Area relied heavily on this report to justify its strict land-use policies.

Polarization and Freedom

A new Pew poll finds that three out of four “consistent liberals” would rather live in a community “where the houses are smaller and closer to each other” but within walking distance of schools, stores, and restaurants. Conversely, three out of four “consistent conservatives” would rather live in a larger home on a large lot even if it means driving to schools, stores, and restaurants.


Source: Pew Research Center. Click chart to download Pew’s 121-page (3.5-MB) report on polarization in America.

Pew says this shows that “differences between right and left go beyond politics,” which Pew claims is one of the seven most important things to know about polarization in America. Yet the left has turned the choice between a traditional suburb and a so-called walkable community into a political issue, so it is no wonder that people’s views on this choice are polarized.

Disappointingly, Pew’s report on polarization defines everything in terms of liberal vs. conservative. Pew’s big news is that the share of Americans who are consistently conservative or consistently liberal has more than doubled since 1994–yet you have to read deep into the report to learn that these groups make up just 21 percent of the country. The report says little about the other 79 percent of Americans, yet you’d think they would be important since they outnumber the consistent ones by almost four to one.

Cutting the Tie Between Education and Housing

We already have a market in education: the real estate market. Controlling for other factors, houses in districts with higher-performing government schools are more expensive than those in areas with lower-performing schools. In 2012, the Brookings Institution issued a report finding that in “the 100 largest metropolitan areas, housing costs an average of 2.4 times as much, or nearly $11,000 more per year, near a high-scoring public school than near a low-scoring public school.” The report also found that “the average low-income student attends a school that scores at the 42nd percentile on state exams, while the average middle/high-income student attends a school that scores at the 61st percentile on state exams.”

Essentially, access to a quality education depends on one’s parents’ ability to purchase a relatively more expensive house in an area with a good school. That this is a horribly unjust policy for low-income children is obvious and oft-discussed, but what’s often overlooked is that the negative consequences also extend to middle-income families.

With quality education tied to housing, middle-income parents who desire the best for their children must seek out housing in areas with better government schools or scrape together money for private school tuition. Unfortunately, as a new Brookings report reveals, this too-often means purchasing a home that is just barely within a family’s financial means, creating a situation where millions of middle-income families live “hand-to-mouth” with very low levels of liquid savings though they have considerable non-liquid assets. The Atlantic’s Matthew O’Brien explains:

This shouldn’t be too much of a mystery. Imagine a couple that’s getting ready to have kids, and wants to buy a house near good schools. Well, that’s expensive. As Elizabeth Warren and Amelia Tyagi pointed out in The Two Income Trap, buying a house in a school district you can’t really afford is one of the biggest causes of bankruptcies. Couples can only afford the mortgage with both their salaries, so they’ll get in trouble if either of them loses their job. 

But even if everything goes right, they’ll still be cash-poor for a long time. They’ll probably have to use most of their savings on the down payment, and use a big part of their income on the mortgage payments. In other words, the wealthy hand-to-mouth are parents overextending themselves to get their kids into the best schools possible in our de facto private system.

As O’Brien notes, a system of school choice would sever the ties between housing and education, which is a policy that could keep “many people from becoming cash-poor and wealthy—a precarious thing—in the first place.” School choice also provides a passport out of poverty for those students whose parents could not afford an expensive house at all.

Mayor Bloomberg Doesn’t Understand Economics

Mayor Bloomberg says New York City’s lack of affordable housing is a sign of a vibrant economy, because it proves people want to live there. Despite his reputation in the business world, he obviously doesn’t understand the laws of supply and demand.

“Somebody said that there’s not enough housing,” Bloomberg said on a radio show. “That’s a good sign.” Housing is only scarce, he said, because “as fast as we build, more people want to live here.”

In fact, as I showed in chaper 10 of my book, American Nightmare, as well as in this blog post, high housing prices do not prove that lots of people really find an area desirable. Instead, they are more a sign of government barriers to housing. In a nutshell, downward sloping demand curves means a few people may be willing to pay a high price for any good, but that doesn’t mean the public in general finds that good to be particularly valuable.

As reported by Virginia Postrel on Bloomberg’s own news service a few months ago, America’s elites have built an economic wall around places like New York City and California in order to make these areas more exclusive. Rent control in the city combined with New Jersey’s and Connecticut’s smart-growth policies have turned New York from a fairly affordable place to live as recently as 40 years ago to one that is completely unaffordable today.

Yes, Bloomberg’s city may be building some housing. But it obviously isn’t building enough to meet demand. In 1969, median housing prices in the New York urban area (including northern New Jersey) were just 2.6 times median family incomes, and 3.3 times in 1979. By 2005, they were 8.4 times. Thanks to the recession more than new housing, they were down to 5.3 by 2012–still way too high. But in New York City alone median prices were still 8.7 times median family incomes.

Here’s the surprise: Median family incomes in New York City were just 15 percent greater than in the city of Houston in 2012. But home prices were 284 percent greater. That’s not a sign that people are demanding to live there; it’s a sign of acute shortages.

Houston frets when its median home prices approach $150,000 and price-to-income ratios come close to 2.2. With New York City median prices approaching $480,000 and median values nearly nine times median incomes, Mayor Bloomberg should do more than pat himself on the back; he should recognize that the city is suffering from a major housing crisis.

Obama’s Housing Speech: The Good, The Bad, & The Ugly

Yesterday, President Obama went to what was perhaps ground-zero of the housing crisis: Phoenix. He laid out his vision for the role of housing in building a middle class, as well as his solutions for avoiding bubbles.    

On the rhetorical side, the president certainly laid out some principles that anyone would be hard-pressed to disagree with. For instance, he characterized the business mode of Fannie Mae and Freddie Mac as “heads we win, tails you lose”–which of course it was. The president was correct in calling it “wrong.”  If only then-Senator Obama had aided the efforts to reform Fannie and Freddie by Senator Richard Shelby and others, perhaps this mess could have been avoided. But, hey–better late than never.  

The president is also correct in highlighting the issue of local barriers that increase the cost of housing. Both Cato’s Randy O’Toole and I have written regularly on this topic. You don’t get bubbles without supply constraints. But then every president since Reagan, at least, has pointed to this problem and yet it has only gotten worse. If the president has a substantial plan to bring down regulatory barriers in places like California, then I would love to see it.

Perhaps most importantly, the president recognized that what we had was a housing bubble, and the solution isn’t to “just re-inflate” it. As the president urged, we must “turn the page on the bubble-and-bust mentality” behind the housing crisis. That was the good, and again I applaud the president for recognizing those facts.  

Unfortunately, what details we have of his vision are not exactly consistent with these facts–which are bad and ugly. The president wants “no more leaving taxpayers on the hook for irresponsibility or bad decisions,” but then he implies that government should continue to stand behind risk in the housing market. The primary purpose of FHA, which the president commends, is to allow lenders to pass along the costs of their mistakes to the taxpayer.  

Mr. President, there is only one way to take the taxpayer off the hook:  get the government out of the mortgage market.  Anything short of that will continue to undermine the incentive for lenders to make responsible loans.  

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