Friday, November 17, 2017

Housing: Part 269 - Maybe it's not just the Closed Access cities.

As reader Benjamin Cole frequently points out, the constraints on new building are not limited to urban cores.

It could just be most noticeable there because that is where demand is the highest for new building.

Here is a great post at "Granola Shotgun" about the generalized problem of costs imposed on investors who want to improve properties or start new small businesses. (HT: MR)

At the post, the author runs through several examples of basic infrastructure and building improvements in places that really could use them that are stymied because of the array of regulatory hurdles that are in place.

Really, this gets at the heart of the problem with the current discourse about moneyed interests, monopoly profits, haves vs. have-nots, etc.  So much of the discourse builds on the notion that moneyed interests benefit from deregulation.  But, we can see in the post at Granola Shotgun, in so many little ways, how small, little, well-meaning regulations pile up, add tremendous fixed costs to any sort of at-risk investment, and these costs are extremely damaging to small-scale investments.  Those investors are willing to take on significant risks.  Taking on those risks is a service they are providing to their communities.  But, the risks aren't economical if they have a quarter-million dollar fixed cost.

On the other hand, a Burger King franchise, for instance, has a pretty good idea of the cash flow expectations a new location will have, so those fixed costs aren't a large of a problem for a large organization with an established model.  And, those fixed costs make sure the mom-n-pop hamburger stand doesn't open up in the old abandoned bank building down the block.

Maybe, to an extent, this is a universal problem.  In urban centers that have this problem, but that also have a tremendous amount of economic momentum, development of the city infrastructure is obstructed, but the existing infrastructure is valuable enough to induce a bidding war for access to the infrastructure that exists.  Those are the Closed Access cities.

Then, there is a middle tier of cities who have some combination of growing economies, more liberal land-use policies, and open spaces for building that can avoid this problem, and those cities take in many in-migrants, grow, and maintain a moderate level of income growth that is somewhat universally available to any households who can move there.

Then, there is a bottom tier of cities and towns that aren't growing.  There is no point in growing out into the undeveloped surroundings, because the existing town is underutilized.  (Although, in some cases, we do see dying Main Streets while new retail centers open up in places like highway intersections on the edge of town.  Of course, since the country is bound up in its politics by attribution error, this just gets blamed on the capitalists involved in the developments, and not on the structural problems that lead to it.)  So, while incomes rise in the Closed Access cities because of the bidding war to get into a space with limited infrastructure, incomes in these cities and towns decline.  And that decline is hastened by the inability to improve existing infrastructure.

Maybe, it's all just one big problem, and the problem is decades and decades of unfunded mandates.  As John Cochrane comments about all of these regulations:
These (KE: mandates like building code updates, parking requirements, landscaping, etc.) are important, and desired, public goods. The problem is, these things we want cost a lot of money. $340,000 for one firehouse. The town wants them, but is not willing to raise general taxes to pay for them.  It's sane enough to realize that it cannot make owners of existing properties fork over $340,000 per firehouse. So it passes, what is in essence, a lump-sum tax on people who want to start new businesses, or use the property up the economic foodchain. Alas, the people second-most-unlikely to be willing or able to pay such taxes are small-scale entrepreneurs trying to start a marginally better business in a run down neighborhood.  So nothing happens until either the town reverts to wasteland, or until nearby prospects brighten enough that a large commercial developer can move it back to the top of the food chain, and also extract enough tax breaks so that in essence the city does pay for the public goods from general taxes in the first place.
The thing that makes the Closed Access cities different is that these problems have creeped so far into dysfunction that even the developers who can run the gauntlet are harassed because they have to pass the costs of those obstacles on to the residents and consumers of those new homes and shops. Having effectively pressed all of those costs  onto the developers, and having been convinced that governance is some sort of redistributionist magic machine that forces costs onto capital that are simply paid for by capital's bottomless vat of funds, some locals are offended when those costs become visible to them and reality comes crashing into that fantasy.

And the irony is that when all of this adds up to economic inequity and stagnation, so many blame deregulation.  If someone living in a place like San Francisco, paying $4,000 in rent on a 1,000 square foot condo with an hour commute, can convince themselves that deregulation is the cause of rising economic rents, and economic opportunities moving out of reach of common people, then, I don't know what to say to them.  And, you see this all over the place.  Expensive housing units are blamed on investors and developers pushing up prices and rents.  If what we desperately need is an influx of capital to provide housing in locations that are bursting with opportunities for working class employment, I don't see how that problem can be solved without a wholesale change in perspective.  When this can appear in a Bloomberg article:
Housing advocates have called for federal intervention: They complain that lower-income home buyers are being shut out of the market, worry that the need for big profits will push up rents and are skeptical that the return of the real estate money machine will end well. “The last time Wall Street devised a plan to make mountains of money off our homes it ended catastrophically,” the Atlanta branch of the American Friends Service Committee said on its blog after a protest at a foreclosure auction that was dominated by private-equity bidders. Economists at the Federal Reserve have noted the same potential for danger. can we ever really supply enough housing?  What source of capital is acceptable?  That's one of the things I worry about if I am able to get this project into the public eye.  What if I get that sort of question - "What if the need for big profits will push up rents?" - and I'm facing a room full of people who sincerely want to know the answer?  What do you say to that?  I wouldn't even know how to begin unwinding the web of odd presumptions that the question is resting on.  But, this seems to be a consensus way of thinking.

In this context, maybe the best solution we can hope for is to just make housing a federal service.  Put out $2 trillion in Treasuries to fund 10 million units, placed in cities with high incomes.  Even subsidized rents would create a huge amount of Federal revenue.  It would probably be a disaster, in the end.  But, what choice do we have as long as every possible source of private capital is presumptively derided?

I wonder if we can generalize this to the broader economy, and not just to building.  What if the tech sector is like the outskirts of town, where new things can happen without the legacy of obstructions?  And, healthcare, education, etc. are like the old Main Street.


  1. Well, I am red-faced with embarrassment at seeing my name in print, and in the lede paragraph no less.

    I liked the Granola Shotgun story, and it adds (for me) another dimension on why building is so expensive.

    But my view (based on decades of observation in California) is that apartment houses would pop up like magic if neighborhoods zoned R1 were rezoned R5, even with all the stipulations extant. That is why property owners are so zealous in "protecting" their neighborhoods. They know the bulldozers want in---even with terrible government-imposed stipulations (parking regs, outdoor and accessible fire hydrants, etc).

    In part this is a tribute to how zoning has amplified scarcity to the point that government hurdles are but molehills, compared to the profits to be made by construction anywhere near the West Coast.

    But R1 or other density limits are common all through California, and not just in liberal San Fran or West LA but everywhere, including much of Orange and San Diego counted (usually thought of as GOP territories).

    I think there is no political solution to this problem and I hereby give up.

    Even if the federal government built millions of housing units, voters would not allow those units to be built where needed. Yes, Palmdale, not Newport Beach.

    One approach (my fantasy) may be to bribe cities to zone land R5, the bribe related to density of adjacent areas. If a city rezones land R5 and is a dense city, it gets lots of money.

    And it would be legal for the city to bribe extant property owners. That is, "If you voters vote to allow a condo tower in your neighborhood, everyone gets a check for $50,000."

    My real fantasy is an end to property zoning, which was made legal only in 1926 by a split vote of the Supreme Court, a court that gratuitously added class warfare to its decision by opining that apartments in single-family detached neighborhoods were "parasitic."

    We believe in free markets (except when we don't).


    not a bad view into L.A housing markets