BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Additional Building Won't Make City Housing More Affordable, Says Fed Study

Following
This article is more than 5 years old.

[I've found that I must add some caveats at the top so people read what is here.

  1. The study is based on a simulation because there is a lack of hard data. Simulations could be wildly off.
  2. The focus is on the most expensive neighborhoods. Would adding housing in lower-income areas help on that end? No way to know yet.
  3. The simulation looked at relatively small percentages (single digits) of additional housing. Maybe more would help.
  4. In many places, there are natural constraints on building, which could restrict the amount of housing that could be added.
  5. A number of people have contacted me to say I should have offered a solution. I don't have a good one that I know would work and is possible to do. How would you double housing in a place like New York or San Francisco, for example? Extra land is at a premium, and you may have other physical restrictions. (Some larger buildings in San Francisco are beginning to tip because of the landfill base they sit on, so assuming tall, higher density apartment buildings as a solution isn't always practical.)
  6. Some people are absolutely certain that adding housing would limit rents. The point of discussing this study is to  suggest that the assumption might not be valid, or could require resources, whether money or land or political will, that won't be available.

If you're going to solve a problem, you can't blindly assume that your pet approach will work. You must at least be open to the possibility that you need to adjust your strategy.]

Housing costs in cities are brutal. Some people have enough income to live wherever they will. Most do not.

It's become so bad that in some cities, wealthy populate a central metropolitan area, surrounded by areas where the decreasingly well off can afford to stay, often with long commutes for work in the city.

Housing prices are so crazy in San Francisco, for example, that the US Department of Housing and Urban Development has had to readjust income limits for to qualify for housing assistance. The new limits for the city "allow middle-class workers to qualify for affordable housing developments."

One of the suggestions you hear, particularly in cities like San Francisco or Seattle, where rents and prices are also ridiculously high, is that cities need more housing. It's an appeal to the most basic of economic principles: supply and demand. Add more supply and demand, in the form of competition for available units, will lessen and prices drop in response.

An example is Los Angeles, which has a goal to build 100,000 new homes by 2021, according to the Los Angeles Times.

"We face a housing shortage unlike anything we've seen since World War II," Garcetti told a meeting hosted by the Los Angeles Business Council. "The high cost of housing affects everything in this city."

A number of studies recently have placed Los Angeles among the least-affordable housing markets in the country, a function of both high rents and relatively low wages. Garcetti said both income and housing supply were part of the solution to the city's housing crisis, and while he has focused heavily in recent weeks on a push to raise the city's minimum wage, Wednesday's speech was billed as his first major address on housing.

Only, that concept relies on the most elementary and simplistic of teachings from economics, which, as anything in engineering or science, must radically simplify constraints and conditions to address any question. Too much complexity prevents manageable solutions.

A Federal Reserve published report from earlier this year looks at the notion of marginal additions to housing and finds that they're unlikely to help. Prices will march on as they have.

Researchers at the Fed found there were no "direct estimates of the rent elasticity with respect to

new housing supply in the literature." No one knows how much housing you'd have to add to have any significant impact on costs. So, the researchers built a simulation to estimate, directly from data, the elasticity of rent with respect to housing supply.

They wanted to know how much rents might change if there was an influx of new housing. Given metropolitan housing crises and a lack of other data, it was an important study.

However, elasticity isn't a simple phenomenon. There are products where changing the price doesn't necessarily result in big shifts of demand. Look at the Apple iPhone X: $1,000 for the device and tens of millions purchased it.

The Fed report suggests that housing will be much the same:

The implication of this finding is that even if a city were able to ease some supply constraints to achieve a marginal increase in its housing stock, the city will not experience a meaningful reduction in rental burdens.

Add 5% more housing to the most expensive neighborhoods and the rents would drop only by 0.5%.

The reason is that people like the amenities in given neighborhoods and want to live there, so will continue to pay higher prices. Amenities can include shopping, schools, and ease of access to public transportation.

The researchers thought there might be a workable alternative to increasing the housing stock, which would be improving the amenities in other neighborhoods:

For example, improving access to and the quality of public transportation in neighborhoods far from the city core could make these neighborhoods more competitive with more expensive, downtown neighborhoods and so could relieve some price pressure in downtown neighborhoods through a substitution effect.

Maybe. But that seems more a solution for those at the top of the food chain, as they'd be the ones in the most expensive neighborhoods.

Some applied logic suggests that should other neighborhoods get an upgrade and the substitution effect work, people with more money would outbid those who are in less expensive neighborhoods in a cascading gentrification engine. It doesn't take a lot of imagination to see this as pushing more moderate- to lower-income people out, unless there was a big push to reserve housing for them. Hard to see that happening in the current political climate.

Follow me on Twitter or LinkedInCheck out my website