The difference between these two periods really does have to do with the decline in unions, because unions were probably a particularly tempered way of extracting rents. Today, the housing constraints that are creating economic rents in our large cities are operating in a context where highly skilled and intensively networking individuals can leverage their incomes practically without limit in the technology and financial fields. So, it is true that unions in a semi-skilled mass production context put a cap on income inequality while today rent-seeking among tech and finance high performers is leading to a particular rise in the small number of earners at the top of the income distribution.
But, I think we need to be careful about one error in thinking about this distinction. Both eras had rent seeking. Both kinds tended to capture excess income for a select group by limiting access to opportunities. The solution isn't to re-implement the former source of rent seeking. The solution is to remove the source of economic rents. This is clear when we look at Washington, DC, which has become the metro area with the highest incomes. Those high incomes are not related to housing constrictions, but they are related to unionization, since the public sector is the one area where unionization continues to play a strong role.
Instead of trying to be a different version of a limited access society, let's strive again to be an open access society. This is not as easy an idea to sell as it should be, because open access means letting builders build, letting lenders lend, and letting high income workers work. But, doesn't it seem like they are the problem? Of course, our punitive instincts at this point have made things even worse. The nationwide housing depression that is the result of the collapse of our mortgage market has pushed housing expenses above their comfortable range across the country. Now if you can manage to qualify for a mortgage, you can access economic rents from anywhere, and some of that additional 5% of incomes that is being extracted for housing can be yours. Limited access, macroprudence edition!
All of these graphs are scatterplots of the 20 largest metro areas. The x-axis measures net domestic migration and the y-axes are various measures of housing affordability. The dark red dots are the NY/California problem cities and the US average and the orange dots are the other cities.
By the way, this is all from Zillow. What a valuable courtesy it is that Zillow makes all of this data available.
1: Rent Affordability
2: Rent
These cities tend to have higher income variance than usual, especially at the top of the income distribution. This makes sense, if we think through the supply and demand chart from yesterday's post that I have re-posted above. Low income households will be at the margin of sustainability in these cities. But, at very high income levels, the real demand for housing will eventually be elastic enough that those households will be able to manage housing expenditures more like people would in a city without a housing constriction. In other words, when a household's income is high enough, they will naturally decrease their housing expenditures to the lowest level they can live with until their housing expenditures reach that 20-25% comfort range. This causes de facto income inequality to be higher than measured inequality, because the higher a household's income is, the less of it they will have to pay to landlords. This leads to high demand for high end housing and high income in-migration, because the value of living in these cities is much higher, in individualized real terms, for high income households than for low income households.
3: Price / Rent
We see the same pattern in price/rent levels. Across the open access portion of the country, there is no relationship between Price/Rent and migration. Populations and opportunities equilibrate. Price/rent levels during the boom moved up somewhat because of the natural effect of real long term interest rates on home values. But, again, we can see here that the limited access cities create a continual ratcheting up of housing costs and incomes. The expectation of continuing limited access creates a premium for real estate owners.
One way to think of this is that real estate prices internalize expectations about the future and the value of limited access rents. The unfortunate news is that we have already paid the full price for the error of our limited access policies and we can never recapture those losses. That is because past real estate owners already captured the gains from all the expected future limited access rents - in the form of higher rents and in the form of higher Price/Rent ratios that reflected those expectations. If we manage to overturn these longstanding policies, the value of urban real estate should plummet. But, at this point, that is simply a transfer from existing real estate owners to new real estate buyers. It is still worth doing, because it means less of our output will be diverted to unproductive rent collections and it means that costs in our most innovative sectors will be lower when global competition comes to challenge them. But, the married professionals that cashed out their $5 million homes in LA and retired to mountain villas in the Rockies aren't giving it back.
4: Home Prices
A similar pattern comes through if we look at home prices as a proportion of income. Price to income in California is about twice the rest of the country.
Lastly, here is a chart comparing Home Price/Income ratios for NY, LA, and SF, compared to the national level. The national level includes these cities, so it was distorted higher by these cities during the boom. And yet, at the height of the boom national price/rent levels were just reaching the bottom of the range of price/rent levels in these cities.
There was a small inflationary effect on home prices from falling long term real interest rates, but as with all of these measures, this is largely the picture of localized supply issues, not national demand factors.
There was a Cato conference Oct. 15 on zoning...
ReplyDeleteThanks, Benjamin.
DeleteFrom the Cato article, which I just started reading, "Zoning has shaped American cities since 1916, when New York City adopted the first comprehensive ordinance."
Guess what decade marked the high point of population in Manhattan......
Amazing. Can we go to zero zoning? Or "use only" zoning? That is, zoned residential but density is left to market?
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