December 15, 2005
Ezra Klein quoted yesterday from a Center for Housing Policy report in which they lament the lack of “affordable housing” for low income individuals. The study (and Ezra) focused on the fact that it is becoming a growing concern for low-income individuals and families to try to balance housing costs with the need to work lower-income jobs. Specifically,
that says a whole helluva lot about our economy’s direction, not to mention the sustainability of the housing market. Workers in many of the country’s fastest growing sectors will not be able to afford decent housing. Wage subsidies like the EITC might help them over the hump, but the promise of a middle class lifestyle will remain, save for some radical legislative changes, an empty dream.
Now, all of us who understand markets know that there are very good reasons for the rising costs of housing. Of course, we don’t even need to understand the mechanics, the very existence of an “efficient market” sort of hypothesis teaches us that there must be some sense to this. Housing costs do not rise and “affordable housing” remain sparse without there being some sort of mechanism.
One mechanism, of course, is a general lack of space. Jobs are located in and near major cities, and thus there is a pressure by workers to live as close to their workplace as possible. This is especially true in major cities, where traffic is horrible. In cities, land usage is already fairly substantial, so with high property values it only makes sense to produce housing of high enough value to recoup their investment. I would actually stipulate that in and around cities, the general lack of space is frequently the largest contributing factor to housing costs.
In a free market, however, certain equilibriums are found. As space becomes a premium, population density tends to increase. There is a lot to be said about government restrictions and zoning guidelines which slow the rate of growth of any housing, and those regulations play a huge factor in this part of the equation, as Doug points out over at The Liberty Papers:
Existing homeowners, in other words, have become more politically active and have been using the power of their local governments and zoning boards to prevent developers from building new homes regardless of whether the demand exists. The result, of course, is predictable, with a decreased supply of housing, the price of that housing increases. Hence, the housing market â€œbubbleâ€ that everyone talks about. And, since the market is not being permitted to operate in its normal fashion, distortions are inevitable.
As I said above, markets are naturally efficient. They provide what is in most demand in the market. Obviously, that does not mean in any sense that markets provide what is socially desirable. Markets don’t necessarily provide “affordable housing”. It is a simple fact that in a market, often we are faced with trade-offs. And those trade-offs ensure that in places like Manhattan or San Francisco, there is simply not enough space for a market to create affordable enough housing that low-income workers can live comfortably. And markets find their equilibriums based on all information available. The fact that in places like San Francisco, there are such anti-building policies, change the enviroment surrounding the market, and thus impact the market’s behavior considerably.
According to Wikipedia, the population density of San Francisco is 6212.25/kmÂ², and in New York, it is 10,292/kmÂ², yet the cost of living between the two is equal. How can this be? As I pointed out in the comments of Ezra Klein’s post, here it comes down to regulation and other zoning issues.
In New York, they took the limited real estate and expanded the one place you don’t need more land: UP. But that’s something you don’t see in San Francisco. Having lived in San Jose a couple years ago, I can’t say that I saw many residential buildings taller than 4 stories. And even in an earthquake zone, you can easily build structures well above four stories. Comparing the cities, New York is 66% more dense than San Francisco, but they’ve adopted policies that make them roughly equal in cost-of-living*. And San Francisco isn’t likely to change any time soon, as the city has decided (certainly not consciously) that it is more important to keep the status quo and watch families and low-income people leave in droves, than adopt policies that will solve the problem. At the same time, they lament the fact that builders are only building luxury dwellings, when their own policies ensure that builders will only make a profit on luxury dwellings.
As they say, TANSTAAFL.
UPDATE: It looks like Ezra Klein had a malfunction, and all posts after Dec 9 got eaten. Unfortunately, it looks like it may not be possible to access the link over there.
*No, don’t get me started on rent control. Both cities have it, so I’m not even tackling the negative implications of that one today.
The Unrepentant Individual linked with Housing Costs - great read
Searchlight Crusade linked with The Economics of Housing Development
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