Tuesday, January 9, 2018

Housing: Part 275 - Closed Access Watch: Denver

Cities like Denver, Seattle, and Washington, DC are sort of cities on the fence.  They generally can build more houses than the Closed Access cities, so that they don't tend to have such strong out-migration of working class households.  But, they also dabble in their share of odd housing policy choices.

Denver was the topic of this recent article in the Wall Street Journal.

The title is: "Denver Has a Plan for Its Many Luxury Apartments: Housing Subsidies", and it opens: "Denver has a plan for its glut of sparkling new, high-end rental apartments with amenities like gyms, roof decks and sometimes even pet spas: It will use them to house teachers, medical technicians and others who can’t afford the city’s soaring rents."

How do we have a glut of units and soaring rents at the same time?  How is this article a thing at all?  The story should stop here.  "Hey! Great news! Denver built a bunch of housing units, and now rents aren't high any more."  One way to make sure added supply doesn't create affordable rents would be to throw a bunch of subsidies at the demand for the market, so if there is a need for a story here, it seems like it would be to explain that this is a bad idea.  This seems like a classic Baptist & Bootlegger setup, where subsidies for working class households are used to mask payoffs to politically connected business interests.

The plan depends a lot on the notion that there is a luxury market, which has been overbuilt and currently has vacancies, even though rents are out of reach for typical buyers, and an affordable market which has seen little building so that there is a shortage of supply.

Within a city, there are countless processes which create substitutions between those markets.  The conceit that somehow they are separate enough to treat them this way is wrong.  Households in Denver spend about 30% of their incomes on rent, give or take.  It doesn't really matter whether there is 4,000 sq. ft. of housing in Denver for each household, or 500 sq. ft.  It doesn't matter if they have dirt floors or granite countertops.  Whatever the stock of housing is, residents of Denver will settle on using that stock, and they will spend about 30% of their incomes to do it.  The idea that there are units that will have to sit empty in the midst of a housing shortage because they aren't built for the right sub-market is ludicrous.  Making that match is what markets do.  If they aren't doing that, then we need to find what is blocking markets from working, not start building a bunch of makeshift, distortive taxpayer-funded subsidies.

The unasked question here is, why are there too many luxury units and not enough affordable units being built.  It really is depressing to see how universally satisfying it seems to be to chalk this up to developers' stupidity or greed.  Oddly, 12 years ago developers were building too many affordable houses because of their stupidity and greed!  Developers' stupidity and greed really is the most powerful force in the universe.  It can explain everything, all the time.

According to the article, "Residents in this city of roughly 693,000 will receive subsidies to live in the units for two years, during which time a portion of their rent will be put into a savings account that can be used for a down payment."

Now, Denver has become a bit expensive, because rent inflation has been persistently high there.  It's not fully a "Closed Access" city, but it's working on admission to the club.  But, even in Denver, you can find properties like this: a 1,600 sq. ft. townhome, which, as of today, is valued at just under 300,000.  Zillow estimates rent at $1,850/month, and monthly mortgage expenses of $934.  These households don't need a subsidy.  They could lower their monthly expenses today by buying a home like this.

Why don't they?  Because it's basically illegal to lend to them.  So, the city decides to concoct this scheme of subsidies to do publically what we have deemed unacceptable to do privately.  Doesn't it just sound so precious and good, though, when we reframe it as a public program that subsidizes a down payment for a teacher or a nurse.  So much more morally uplifting than giving an auto mechanic a subprime mortgage with a 3% down payment to move into that townhome.  Never mind that the math is basically the same.  (Actually, the townhome buyer gets to pocket the rent payments, while the subsidized teacher sends the rent payment to the developer as long as he is technically a renter.)  Private lending is the devil's work.

In the meantime, the fact that a 1,600 sq. ft. townhome costs nearly $300,000, and that many more expensive homes can be found throughout Denver is all the evidence we need to call foul on the notion that there is any sort of supply glut of housing in Denver.  Realistically, Denver would need to build until there was significant rent deflation to get anywhere near something they could claim was a glut.  That is basically their choice - keep letting these incongruities build up until they are fully Closed Access, and tens of thousands of working class households have to pack up and move each year so that Denver can become another mega-sized gated community for the winners in the post-industrial, Closed Access economy.  Or, build until rent inflation reverses.

There aren't any other options, even if we want there to be.  The default outcome here is to pretend there are other options, which really just means you will be a Closed Access city.  As far as I know, this is the primary path for becoming a Closed Access city.  I am not aware of any metropolitan policy statements from 20 years ago laying out how any city intended to create outrageously high real estate prices and an American refugee crisis so that local real estate owners could capture the productive surplus of the post-industrial economy.  This means that there is plausible deniability and when Closed Access overtakes a city, the complexity of the problem allows everyone to blame their favorite scapegoats - housing programs, developers, lenders, the Fed, the GSEs, "the rich", monopoly corporations, etc., etc.

PS: Here is a measure of unsold inventory in Denver, from Zillow.


  1. This comment has been removed by the author.

  2. Great post.

    I wonder if closed access is a part of the city maturation process. People like single-family detached housing and commercial deserts---no retailing in the neighborhood, no offices, no business, no big developments. But over time, a city runs out of single-family land. They can build further out but commutes get terrible, and traffic worsens everywhere. So, people start protecting their turf, their neighborhoods. Even suburbs become undevelopable.

    People who can afford property do not like riff-raff. (I do not take this personally).

    Not all cities evolve like this, perhaps not Houston. And NYC has expensive high-rises.

    But it sure seems like cities everywhere are getting more concerned about development.

  3. If one problem is that potential buyers can't get mortgage loans, how is that consistent with continued declines in inventory? Are investors buying these properties?

    1. Inventory might rise after a negative demand shock because the market briefly is out of equilibrium, but this is a long term problem.

      For example, if Wal-Mart overestimates demand for Super Bowl Sunday this year, they may be left with a surplus of tortilla chips on Monday. But, if every year people are less interested in the Super Bowl, then Wal-Mart will carry less inventory of tortilla chips.

      Also, I suspect there is less churn in entry level markets because many families are trapped in the homes they currently own, because they would have trouble qualifying for a mortgage on a new home if they moved.

      Generally, I am perplexed at the way real estate industry folks talk about inventory and its relationship to sales and prices.

  4. "Because it's basically illegal to lend to them." Do you mean, it's basically illegal for *banks* to lend to them? But then, why don't *non-banks* lend to them? What flaw (government regulation?) is preventing the capitalist system from functioning here?

    1. https://www.consumerfinance.gov/about-us/blog/the-cfpb-launches-its-nonbank-supervision-program/

  5. Keep up the good fight. There's a quote by Mark Twain that I could put in quite a few comment sections here. It applies to the general public and these silly things they say about housing.
    "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

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