by Daniel K. Hertz

Jim Russell, the urban geographer who writes at Pacific Standard magazine, has recently been doing a great series on non-intuitive growth patterns in American cities. One of the more interesting findings is that the traditional connection between income growth and population growth doesn’t necessarily hold for Rust Belt cities, where large-scale manufacturing jobs may still be declining, while a smaller number of high-skill jobs pull in upper-income people.

But in applying some of these ideas to housing markets, he misstates the results of a recent study about why housing prices are going up so quickly in so many places. Not just misstates, actually: he turns the paper’s conclusion on its head. This is what Russell writes:

Urban America is filling up…. To be a superstar metro, to “fill up,” means high incomes piling into a place with constrictions on construction. What a superstar metro doesn’t mean is strong population growth and demand for housing outstripping supply.

That last part, about demand outstripping supply, is actually exactly what the study says creates “superstar metros” where housing costs price out huge numbers of existing and would-be residents.

Here is what the paper says:

In places that are desirable but have low rates of new housing construction, families with high incomes or strong preferences for that location outbid lower willingness-to-pay families for scarce housing, driving up the price of the underlying land…. This process can continue as long as the growth in the income-weighted demand for a location exceeds the addition in supply. We label metropolitan areas and towns where demand exceeds supply and supply growth is limited, “superstars.”

I would rewrite this in non-economic language, but that last sentence is about as clear as I can get, I think.

Anyway, what’s particularly telling is that the authors provide a counterfactual:

By contrast, in municipalities where construction is easier, any family who wishes to live there – rich or poor – can buy in at the cost of constructing a new house and, instead of growth in house prices, the area exhibits growth in the quantity of houses.

If the problem weren’t related to “demand for housing outstripping supply,” new construction wouldn’t matter. But here the authors are telling us, very straightforwardly, that the solution is to “[grow] the quantity of houses.” In other words, allow supply to match demand.

Maybe what’s confusing is Jim’s equation of “strong population growth” with “strong demand for housing.” In a place where zoning allows new construction, those two things are the same. But where zoning makes building new homes illegal, you will, in fact, see prices go up without any increase in population. But that’s not because demand has stayed the same: it’s because there are literally no places to put the extra people. If a neighborhood has, say, 50 people for 50 apartments, and then all of a sudden 50 richer people come looking for an apartment in that neighborhood, they’ll offer the landlords more money and the original 50 people will probably have to leave. Population hasn’t changed, but demand has: there are now 100 people who’d like to live there, even though only 50 can.

Or, possibly, the issue is another report cited in the post, which makes a different but related point about the globalization of housing demand in a small number of cities. The idea, basically, is that as wealthy people in, say, China become more interested in buying fancy properties in New York, or Vancouver, or San Francisco, increasing housing supply becomes much less effective at lowering prices. That’s not because the supply and demand dynamic I just described has changed, though: it’s because demand has so wildly outstripped supply that building enough to meet it is pretty much hopeless.

The idea is that if the people who want to buy really fancy homes in your neighborhood are just coming from your region, or even your country, then there can’t be that many of them. In the example I gave above, you can probably build 50 more apartments and house everyone who wants to live there. But if you’ve got lots and lots of people coming from all over the world who really want to buy in a very specific place, then things can get out of hand. If instead of 50 richer people, 1,000 richer people showed up, you can imagine that it’s probably not possible to build 950 new homes in a place that used to only have 50.

But that’s only really an issue in a handful of places. In the vast majority of North American cities, there is not an endless stream of European or Chinese or American millionaires waiting to buy up every last property. The housing crisis that’s led to wildly growing income segregation everywhere from Chicago to Kansas City is, actually, about “demand outstripping supply.” And this paper is just the last in a long line of research supporting that conclusion.*

* It’s also worth pointing out that one of the paper’s authors, Joseph Gyourko, only a few years ago co-wrote an entire book with Ed Glaeser about how restrictions on housing supply are causing housing prices to rise out of control. Proving the opposite of Jim’s assertion has, in fact, been the thrust of much of his academic career.

(Cross posted from City Notes)