Thursday, January 28, 2016

Housing Part 110 - Housing and Incomes

I have recently been reviewing an interesting paper from the Boston Fed.  (HT: Jason Schrock, the Chief Economist of Colorado Governor's Office of State Planning and Budgeting)  From the abstract:

Using a logistic migration model, this paper examines the relative role of economic factors—namely labor market conditions, per capita incomes, and housing affordability—in determining domestic state-to-state migration flows....

...The model’s estimates show that while all three measures of relative economic conditions are significant determinants of migration, the magnitude of their impact varies. The estimates also show that the impact of these economic factors on state-to-state migration flows has changed considerably over time. For example, the importance of per capita income as a determining factor has fallen considerably since the late 1970s, while that of housing affordability has risen.
I'll get back to that.  From page 1:
Although the region’s unemployment rate was below the national rate as of May, New England had not recovered all of the jobs it lost during the 2001 recession before entering the current economic downturn, largely because of sluggish employment growth in Massachusetts (see Figure 1). At the same time, real house prices jumped 50 percent in New England between 2000 and 2005, compared with an increase of only 33 percent nationwide (see Figure 2). Moreover, household incomes did not keep pace with the run-up in house prices, causing housing affordability to decrease during this period in every New England state (Sasser, Zhao, and Rollins 2006).
Throughout the paper, they do this weird economist thing where they route the causality of constricted housing through prices and elasticities.  In some ways, I am sure that helps to think about things properly.  But, if there is a hamlet with 20 houses renting for $1,000, and 5 years later, the hamlet still has 20 houses, now renting for $1,500, it seems strange to me to think about it in terms of price.  There were 20 households there before and there are 20 households there now, because households need a  house.  The change in price is a reflection of other factors.  Generally, they reach the same conclusion either way.  Housing constrictions have become the bottleneck in most of New England.  But, I think this way of thinking about the effects of housing through elasticities instead of simply through supply may create more heat than light.  If Boston adds enough housing to add 100,000 new workers, normal employment levels will rise by roughly 100,000.  They seem to be thinking about causality as:

More houses => lower home prices => inflow of workers => higher employment

But, I suspect that it makes more sense to think about it, at least in the current situation, as:

More houses => inflow of workers (and employment) => lower local incomes => lower home prices

I think the elasticity that is important here is the elasticity of demand for labor services that gain an advantage by being located in Boston.  Thinking about it this way also makes it more clear how deeply local self interest would cut against any solution to the problem - even if that self interest is intuitive.  Heck, even if intuitions are completely off base about this, simply the causation of a housing solution leading, invariably, to lower local incomes, will create political pressures against it.  If a local political faction institutes a broad set of policies that include a housing solution, they may be run out of office when incomes start to drop, even if not a single voter understands that falling incomes are a necessary part of a housing solution that makes the city livable for middle income families.

Here is a line I will quibble with a bit (also from page 1):
If greater out-migration from New England is related to high housing costs that stem from excessively restrictive zoning regulations, then policymakers might consider expanding the use of statutes such as Massachusettss 40B, 40R, and 40S, which require or encourage the building of affordable housing.
This is kind of the nub of the problem.  This statement would be inordinately more true with the removal of the word "affordable".  In fact, with the word "affordable" it may not be true at all.  I expect there is a nearly perfect negative correlation between cities with "affordable" housing statutes and cities with affordable housing.  Likewise, a nearly perfect positive correlation between cities that encourage affordable housing and cities with affordable housing.

Page 3:
During the 2001 recession, the net number of individuals leaving the region increased as expected, yet the exodus continued to accelerate through 2005, reversing course only recently (KE: 2009).
That reversal is likely due to increased utilization of the housing stock because there is little building in the rest of the country.  Since the constraints to building in Closed Access cities are regulatory and since those constraints maintain the value of land that is approved for development well above its alternative uses, the constraints created by national policies since the crisis have had a much more devastating effect on building in Open Access cities than they have in Closed Access cities.  Ironically, even though everyone was concerned about housing affordability, the policies we have imposed only continue to undercut homebuilding in the most affordable places.  Those also happen to be the places where the supposedly irrationally exuberant homebuyers were building before we imposed macro-prudence on them after 2005.

This explains the strange divergence of average new home prices from existing home prices and the subsequent convergence.  Seeing the housing boom from a credit-side perspective, it might have seemed as though the relative decline of new home prices was the result of an influx of many low income borrowers.  But, there weren't an influx of low income borrowers, in the aggregate.  This divergence was a product of location.  There are several ramifications of this.  I'll go into this some more in another post.

In this post, I want to go back to the finding in the paper from the Boston Fed.  They found that migration flows were sensitive to incomes in the late 1970s and 1980s, but that in more recent years, housing affordability has become more important while income has become less important.

But, I think this poses a problem, because the defining characteristic of the period since 1995 is that there is a small subset of cities which have become extreme outliers in both incomes and housing affordability.  In prior periods, higher incomes would induce in-migration, which would induce housing expansion.  In that regime, incomes would correlate with in-migration.

But, in the housing-constrained regime, higher incomes induce in-migration, which induces rent inflation.  So, this paper appears to measure a small in-migration effect from higher incomes and a small out-migration effect from higher home prices.

I think there is probably a more useful way to look at this.  Here is a table of estimated effects from Unemployment, Income, and Housing Affordability, from the paper:

I hope this is readable for you.  The column on the far right estimates the effect, in thousands of residents, of a one standard deviation change in the factor.  The proxy for unemployment is unemployment insurance claims.

From 1977 to 1986, a rise in local unemployment led to out-migration of 209,000 residents, a rise in local income led to in-migration of 789,000 residents.  Housing affordability had negligible effects.

By the 1987 to 1996 period, the unemployment effect remained similar, but now the income effect was small, and there was a small countervailing housing affordability effect.

By 1997 to 2006, a rise in local unemployment appeared to lead to out-migration of 69,000 residents, a rise in local income appeared to lead to in-migration of 32,000 residents and a rise in home prices appeared to lead to an out-migration of 89,000 residents.

I think the way to look at this is that housing supply is largely unresponsive to demand.  So, net relative migration from these factors is forced to zero.  The early period represents the effect of employment and income on migration flows in an Open Access setting (or something resembling that).  I think the measures should be taken as constants for the later period.  The net out-migration of 69,000 residents due to rising local unemployment may be the net effect of falling employment prospects mitigated by falling home prices.  We might think of it as out-migration of about 269,000 residents due to employment shocks and an in-migration or retention of about 200,000 residents because of the directly related relief in housing affordability.

Similarly, rising incomes in the later period might draw about 750,000 residents to the area, but since the area can't take more residents, this leads to higher housing expenses, until about 700,000 residents out-migrate.

It may be that gross coefficient of migration induced by higher incomes that is the most informative.  In 1979, the median income in Boston was about 9% above the US median.  By 1995, it was 27% above, and in 2015 it was 42% higher.  In 1995, Median Income net of Median Rent in Boston was 24% higher than the US median.  By 2015, it had grown to 33% of the US median.  The median household in Boston has only kept about half of their relative income gains since 1995, and Boston has fared better than the other cities that I call "Closed Access" in this regard.

The question this paper poses, to my mind, is, "In gross terms (without the countervailing influence on migration from the constricted housing supply), how much in-migration was induced by a 30% rise in relative incomes?".  That is roughly how much of an increase in housing would be required to make Boston affordable again.


  1. The average new home sales price has grown much faster than the Fed's all-transactions index since 2011. The closest parallel is with 1985-1987.

    1. I think they are for different reasons, though. Now it's because new building is stronger in expensive markets and only high income households can qualify for mortgages, skewing new homes to higher price points.

  2. Kevin,

    I'm having trouble reproducing your permits/pop chart. When I build out the same sheet, I get a much different result in the numbers (even though the trend is the same). Did you use MSA populations or single county populations for the divisor?

    1. I got permits off of Fred2, so, for instance, the code for New York City is NEWY636BPPRIVSA

      Then, the populations are from BEA table CA1, for the MSA.

      Let me know if that helps.

    2. Woah. This is very helpful. I went through and compiled each MSA by country for your closed/open access cities. This BEA table is much better. I assume you just did linear interpolation for the monthly population series?

    3. No. I just used each year's population for that whole year. For this purpose, it wouldn't make much difference.

      Did you mean by county? I'm hoping to break down some things by county, eventually, too, to compare incomes with rent, rent inflation, prices, migration patterns, etc.

      So, you were able to replicate my chart?

    4. This comment has been removed by the author.

  3. Every place will be affordable when the 800 mile per hour vacuum hyperloop train is perfected in Las Vegas. I won't ride the d*** thing, but people will be able to commute from Las Vegas to Los Angeles in less than 1/2 hour. And there will be a regular high speed train as well with 150 MPH which will allow Victorville to explode.

    1. True. Tech developments in transport should help.