Your First Week of Econ 1 Won’t Solve the Housing Crisis

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San Francisco has become a flashpoint in the national political battle over eye-popping rent increases in America’s cities.

San Francisco real estate developer Michael Cohen, who used to run the city’s economic development department, says “The single most important land use debate that goes on in San Francisco is whether you believe that the laws of supply and demand exist.”

This explanation hasn’t many satisfied longtime residents, whose swelling anger against gentrification and displacement has broken out into mass protests against new luxury developments in historically working-class neighborhoods and a ballot measure this fall to halt all new luxury development in the city’s Mission District.

Cohen, the growing SF Bay Area Renters Federation (SFBARF) and others, say more of these new developments are the only way to bring down rents citywide, because they will relieve the city’s chronic shortage of housing.  They say protests against new development are actually the reason for rising rents, as the city’s constrained housing supply is lagging far behind the demand of young professionals flocking to San Francisco and other urban centers to work in booming well-paid tech industries in recent years.  Others, largely led by community organizations like Causa Justa/Just Cause made up of longtime residents, predominantly working-class families and people of color, call this “trickle down housing” and say it doesn’t work.

So why are these Bay Area native folks so skeptical of basic economic theory?  Well maybe it’s because your basic economic theory is hella basic, bruh.  Economic models are about simplification of the real world—we need models to teach theories, but sometimes those simplifications become a problem when we apply them to real life.

The people who lived and worked and raised their families in low-income urban neighborhoods long before the hipsters thought it was cool, in the decades when the middle-class fled to white suburbia, have a lifetime of experience with the economic reality of urban housing markets, not the basic economic theory.

Here’s what they see:  The same neighborhoods that are seeing the biggest rent increases are those seeing the most new housing developments.  They see the East/West divide of the city of San Francisco: The densely populated eastern neighborhoods like the Mission and SoMa are booming with new development while facing eye-popping rent increases and overwhelming numbers of evictions.  Meanwhile, the western side of the city, with its many low-density middle-class enclaves that are hotbeds of NIMBYism, sees relatively little change.  They’ve seen a boom and bust cycle of interest in San Francisco by developers and yuppies:  the long flight of white middle-class families and employers from the city for decades, followed by a tech bubble in the 90’s that led to a development rush before popping spectacularly, and then a resurgence of the tech industry in the last few years leading to another cycle of development, gentrification and rising rents.  It’s hard to shake the gut feeling that development isn’t for them, that in fact it hurts their community.  They’ve been tossed around by this boom and bust cycle, families losing their homes, friends losing their stores, feeling like strangers in their own neighborhoods, in a story that just doesn’t align with that supply and demand graph.

Where new housing development is being built in SF

Median rents in SF

Housing cost increases in SF

Population density in SF

New housing developments being proposed in SF

For longtime residents, the basic supply and demand theory just doesn’t pass the bullshit smell test.  Maybe it’s not because they’re stupid and don’t understand economics.  Maybe it’s because thanks to their actual lived experience, they understand how urban housing markets work in practice better than the Patiently Explaining Gentrifiers understand them in theory.  So my dear Patiently Explaining Gentrifiers, the next time you roll your fixie past the black family in your apartment and they look at you sideways, please refer to this helpful guide to break down the economics that they understand and you don’t.

  1. Luxury housing doesn’t really substitute for low-income housing

Housing marketed at young urban professionals is not a perfect substitute for housing built for blue-collar families.  That means they have different markets setting their price, which are driven by different levels of supply and demand.  (Not to mention these two segments of the housing market diverge farther and farther apart the more economic inequality grows.)

Imagine a world where you could only buy two cars:  Cadillacs and Honda Civics.  Most people who own Cadillacs wouldn’t be caught dead driving a Honda Civic and most people who push a Civic can barely dream of owning a Cadillac.   So if GM decided to build a lot more Cadillacs next year, you’d expect to see the price of Cadillacs go down, but it probably wouldn’t have much effect on the price of Civics.

But that doesn’t mean the two prices are totally unrelated.  A bargain item can be a substitute for a luxury item, it’s just not a very good one.  Say for example, there’s a sudden rush of rich people wanting brand new Caddies.  They start buying up all the Cadillacs on the car lots, but the people who already own Cadillacs insist that to retain the “Cadillac brand” (and maybe improve the selling value of their car), GM must not produce more than a limited amount per year.  The resulting shortage sends Caddie prices sky high as the dealerships are swarmed with people trying to outbid each other.  But those who can’t get their hands on a Cadillac still need a car.  So the second-class yuppies (you know, the ones who work at Ask.com instead of Google) start buying Honda Civics and tricking them out, adding heated seats and TV screens.  Seeing Civics have gained a new customer base with more money to spend, the Honda dealerships start raising their prices too.

Replace cars with housing and dealerships with landlords, and this is part of what we’re seeing with the housing market in cities like San Francisco, and it’s the basic argument of the folks at SFBARF.

So the natural solution is of course to build more Cadillacs (aka high-end housing developments) to address this problem at its root?

Yes, that’s true to some extent.  Solving the housing crisis will require building more luxury housing somewhere.  But there’s more.

 

2. Neighborhood speculation raises land values

We can’t just replace cars with housing and dealerships with landlords in a simple model of the world.  Because cars aren’t like housing.  If you park your Caddie in the spot next to my Civic, it doesn’t cause my monthly car note to get more expensive.  But with housing, only part of what you’re paying for is the physical structure, most of what you’re paying for is the location, the land, the neighborhood.

When you build expensive new condos next to low-income apartments, it has an external effect:  it raises the value of all the land in the neighborhood surrounding it.  (The same way if you put a toxic waste dump in a neighborhood it lowers the surrounding land values.)  Land is a speculative asset: unlike the buildings on top of the land, you can’t build more of it.  There’s a limited supply and the best way to make money from it is to buy up as much as you can get your hands on now if you think the price is going to go up in the future.  Developers start rushing to get in first on this hot new neighborhood, bidding up land values (“Did you see the New York Times wrote an article about this totally up-and-coming neighborhood??”)

Once the new residents move in, they create demand for someone to open up an artisanal kale wrap deli and kombucha bar next door and a barbershop on the corner that will trim your fixed gear bicycle’s decorative moustache.  Those new amenities create even more demand from yuppies and hipsters to live in that neighborhood.  The cycle of rising land values continues to spiral out of control.

So what the hell happened?  Why isn’t increasing the housing supply bringing down rents?

 

  1. Rising land values reduce the supply of low-income housing

Now if I’m a landlord who currently owns a fairly cheap apartment building and rents primarily to working-class immigrant families, when neighborhood land values rise, suddenly I own an asset that I’m not using to its full potential.  I’m better off completely shifting my business model of what kind of housing I’m providing on the land.  I’m basically burning free money unless I either sell the land to a developer or fix the place up myself and charge higher rents to new customers willing and able to pay more.  This will likely involve evicting my low-income tenants from their homes.  If my city has strong renter protection and/or rent control laws, I’ll have to do whatever I can to harass my tenants, threaten to call the police or immigration on them, refuse to make repairs, or otherwise make their life a living hell until they move out.  I might even convert my rental apartments into condos for sale using what’s called an “Ellis Act eviction” to evade tenant protection laws.  I’m reducing the supply of low-rent housing by converting it to a different type of housing.

Here’s a similar example: Say I grow wheat in North Dakota.  If shale oil is discovered in my region and everyone around me is fracking for oil, I’m sure as hell not going to keep farming my land for wheat.  But if I take my land out of wheat production and sell it into oil production, guess what that does to the supply of wheat?

And if I’m a developer looking to build cheap, low-cost housing marketed at working-class families, I’m sure as hell not going to do it anymore now that the first step is buying some premium priced land, which now covers every single neighborhood in cities like SF and NY.  New development of housing for working-class families basically grinds to a halt, because it’s not profitable to buy expensive land and then rent it for cheap.  Supply of low-income rentals is strangled, despite the fact that the booming growth of tech is also creating tons of low-paid jobs for janitors, landscapers, cooks, childcare workers, and security guards who are fueling rising demand for this type of housing.

Say I want to open a cheap sandwich shop.  I’m trying to decide between selling Mexican tortas for $5 or Vietnamese banh mi for $4.  Suddenly the price of wheat spikes, and bread now costs $3 a loaf.  My old business ideas would no longer turn a profit once you factor in the other costs, so I either don’t open my shop or I change my business plan and open up an Artisan Torta/Banh-Mi Fusion Deli and charge $15 a sandwich.  The higher price of an input, wheat, has restricted the supply of cheap sandwiches, just as a higher price of land restricted the supply of low-income rental housing.

That’s why between 2007-2014, San Francisco built over twice the amount of high-income housing than it was projected to need by California’s housing department, but only built half of what it needed for low-income families and a third of what it needed for middle-income households.

So as speculation raises land values in a neighborhood, landlords shift their buildings away from the low-income market and orient towards the high-income housing market.  And developers are unable to build new housing affordable to low-income families because land values are so high.  Both trends result in a massive sucking away from the neighborhood’s housing supply for working-class families.

 

  1. Yuppies gobble up more housing space per person

But it gets worse. This assumes a 1:1 ratio of replacement as developers and landlords shift from supplying low-income housing to high-income housing.  But blue-collar households tend to have more people in the same space than white-collar households.  Apartments that once held a working-class immigrant family of five are now being converted to become home to a young tech worker, his bandana-wearing pug, and his girlfriend who stays over sometimes to watch Netflix and chill.  That means landlords and developers are responding to speculation by taking low-rent housing supply off the market even faster than they’re putting high-rent housing supply into the market.

Every new high-rent development in a low-income neighborhood contributes to the cycle of speculation raising land values around it, bringing new low rent-development to a halt and converting the existing nearby supply of low-rent housing at an alarming rate into high-rent housing for people who demand much more square footage per person.  Thus a development that helps relieve the shortage of high rent housing can actually create a much worse shortage of low-rent housing.

That’s why residents of rapidly gentrifying neighborhoods like San Francisco’s Mission District are protesting new luxury developments.  When you’ve lived through this kind of speculative development, you don’t need an economics degree to know the math.

 

But it doesn’t have to be a zero sum game.

We can increase the supply of expensive housing while also increasing the supply of affordable housing.  But we need to remove the factor of neighborhood speculation from the equation.

Before I go further, let me make abundantly clear that I agree that we absolutely need to build more housing suitable for young professionals in central cities.  In fact, we need a lot more of it.  Too often, social justice activists struggling every day to defend our communities’ right to live in their own homes forget that white flight to the suburbs in the late 20th century was one of the worst things that ever happened to low-income communities of color in the US.  It devastated funding for urban schools and social services as public resources were shifted out to suburban bedroom communities.  Rising economic and racial segregation widened income inequality, and reduced economic mobility, as the rich and poor lived in two separate worlds.  And the massive environmental toll of millions of commuters driving out to far-flung quiet neighborhoods every day manifested itself in the air pollution and climate change whose burden falls most heavily on low-income communities of color.  We need to ask ourselves:  What’s our endgame?  Maintaining the pre-boom segregated status quo?  Because that’s an awful future.

We know that the reversal of last century’s white flight is a good thing.  But not if it simply leads to displacement of the urban working-class and communities of color.  When the last affordable neighborhood in San Francisco and New York disappears, and the displaced families of the working class are all forced to leave cities and grow a ring of high poverty suburbs, both the economic isolation and environmental devastation will remain the same as it was before.

 

We need shared cities free of land speculation.

We can do this by building high-end housing in urban neighborhoods that are already historically middle and upper class, where it won’t lead to speculation that a neighborhood is “up and coming”.  Every city has these neighborhoods.  They’re on the west sides of Los Angeles and San Francisco and the north side of Seattle (I’m a die hard West Coaster).  They’re the neighborhoods in your city with the oldest median age, the lowest population density, the highest home ownership rate, the whitest residents and the highest incomes.  They’re the places seeing virtually no new housing being built right now.  Often strict zoning codes limit new building in these neighborhoods to two stories or single family homes, and the residents are fiercely opposed to denser apartments near them, using their abundance of free time to rail against the parking problems, crime and noise they will bring (often code for younger, poorer, or browner people).  The residents of these neighborhoods tend to be more well-resourced, well-organized and well-connected than those in low-income neighborhoods, who often face language and educational barriers and are too busy working long hours for low wages to attend planning commission meetings.  Developers quake in fear of their wrath and major new housing projects are rarely proposed, let alone make it to the review phase to be fought over.  These are the real NIMBYhoods and they need to be upzoned.  Simply changing zoning codes in the lowest density parts of cities to allow taller, denser buildings could lead to a housing development surge without raising rents in low-income neighborhoods.

It won’t be easy.  The mayor of Seattle managed to negotiate out an agreement with business interests to pass the first $15 minimum wage in any major American city, but when he backed ending neighborhood bans on apartment buildings by eliminating single-family-only zoning citywide, he met staunch opposition and withdrew the proposal.

As well as political opposition, there’s also a logistical problem.  These neighborhoods tend to have limited public transit service, (part of their exclusion of young people, poor people, and people of color) which makes it hard to add more apartment-dwellers, especially those dependent on public transit.  We’ll need to build out more transit between the NIMBYhoods and downtown areas where young professionals work.

But building high-end housing in already high-end neighborhoods is the only way to increase supply without triggering the spiral of speculation that raises land values and pushes poor people out.

Meanwhile, we need to ensure we’re also increasing the supply of housing for the working-class, which is bound to erode away if yuppies keep coming faster than our cities can build housing for them.

Longstanding tools that cities use to nudge developers to pay for affordable housing, like inclusionary housing ordinances and density bonuses, definitely help, especially as private development booms.  But alone they’re not enough to maintain the balance of different types of housing needed in growing cities where both software programmers and their janitors need a place to live.  With the sharp decline in affordable housing funds from the state and federal governments, this will require new sources of revenue.

A land value tax could finance public transit expansions into high-end neighborhoods while also creating a new affordable housing fund.  This fund could buy empty plots of land or buildings that go up for sale in low-income neighborhoods and add them into a Community Land Trust—publicly-owned land made permanently affordable to low-income families, where the benefits of increases in land values are captured by the public instead of landlords.  This kind of tax would fall mainly on landlords who are riding the wave of speculation, sitting on their land and extracting bigger and bigger profits by charging higher and higher rents to tenants.  It wouldn’t tax building more housing on top of your land.  And it could protect a large chunk of urban neighborhoods from the wild swings of speculation—or at least make sure that longtime residents actually reap their share of the benefits.

I won’t pretend to know all the answers and I’m not an actual economist (to be fair, neither is Matt Yglesias, the intellectual father of the movement to increase housing supply, whose book The Rent is Too Damn High is the only e-book I’ve ever bought).  I’m a guy who lived in Oakland as a kid and knows my rent would be double what I’m paying right now if I moved back there.  And I’d hate to be one of the kids in Oakland right now looking around and thinking maybe my city doesn’t have a place for me anymore.

But it doesn’t have to be that way.

A shared city is possible.  A city where people from a diverse set of racial backgrounds and economic classes cross paths in public spaces, learn from each other, and create things together.  A city where we all contribute to and benefit from the same school districts, transportation networks, libraries, parks and city services.  A city that allows more people to live lifestyles that are walkable and transit accessible, energy and water efficient, allowing us to sustain our planet.  A city where children can grow up, become adults and get good jobs and support their own families, and one day retire in peace.  But unleashing the animal spirits of unchecked speculation, much like the gold rush that once built San Francisco upon the violent displacement of its native inhabitants, will carry us down a much different path.

 

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