Friday, February 1, 2019

Housing: Part 342(A) - Building Homes Helps

Quick follow up to the earlier post.

I should have added in the numbers for the US, for more perspective.  Here, I have also added Atlanta, which I would point to as an example of a city that was growing and has generous local building policies, but doesn't have as strong of an income trend as Austin.

I apologize, though.  This first graph is getting a little messy with all this new data.  The messier lines are for housing permits per thousand workers, on the left scale. Per capita income is the right scale.

Austin = Blue
Seattle = Red
San Francisco = Green
US = Black
Atlanta = Purple

Points I would make.
  • Ample building is one reason why Austin and Atlanta have per capita income levels near the national average.  Mobility is a key equalizing factor.
  • Notice that home prices in Austin have trended higher since the crisis compared to the national average.  Atlanta has trended lower.  So there are three basic trends here:
  • San Francisco (and Seattle to a lesser extent) had high incomes and high home prices during the boom, and have continued on those trends since the crisis.  Building levels have recovered to their boom levels in both cities (low in SF and moderate in Seattle).
  • Austin had average local incomes and home prices during the boom and both incomes and prices have risen since the crisis.  Building has recovered to its strong boom level.
  • Atlanta had average incomes and prices during the boom and lower income and home prices since the crisis.  Building was strong during the boom and has been weak since the crisis.
The takeaway from these trends is that the housing boom was facilitating aspirational mobility.  But, since there is a supply limit in most of our most prosperous cities, in those cities, aspirational mobility can only lead to a bidding war on prosperity and a segregation by class and income.  Homes could only be built where it is legal to build them.  Incomes were high where housing obstruction causes that segregation to happen but building was high where it isn't so obstructed.  Seattle is in the middle between Austin and San Francisco, and where it ends up will be determined by supply.

There has been much misplaced kvetching about overinvestment in housing during the boom.  Notice how, of these cities, Austin is the only one that shows a real reaction in building permits.  That's because it has great economic promise and it doesn't restrict housing growth.  Imagine if Seattle and San Francisco had supply reactions like Austin did!  Imagine if housing permits could have doubled in those cities between 2002 and 2005.  The deep and undeniable irony is that if those cities, and others like them, had local housing supply that was responsive to demand like Austin's is, there never would have been a national moral panic about overinvestment in housing.

By the way, also note that, even with all of that building in Austin, even as late as 2006 and 2007, there was no price collapse there!  I can't tell you how much the literature on this topic is tainted with the presumption that the price collapse in non-bubble cities is the result of overbuilding.

Now, look at Atlanta.  There was little change in the rate of building in Atlanta during the boom.  Atlanta had a sort of steady-state rate of growth - a strong rate of in-migration - that continued during the boom.  And, then the bottom dropped out, and it didn't recover.  Building is still very slow in Atlanta, local incomes have dipped, and home prices dropped below the national trend.

That is because the moral panic that began in 2008 led to a public imposition on entry-level and low income home buyers.  The sort of buyers that used to be able to move to Atlanta aspirationally.  The borrower-based lending constraints that have been in place since 2008 that have kept first time homebuyer rates low and have reduced homeownership among young households and households with low incomes killed the Atlanta housing market in a way that high-flying Austin had the escape velocity to outrun.  Within each metro area, a comparison of building rates and prices between high tier housing markets and low tier markets is similar to the comparison between Austin and Atlanta.

As a result of all of this, building pre-2008 was strongest where incomes were moderate and building post-2008 is strongest where incomes are high.  Pre-2008 was defined by constrained supply and post-2008 is defined by constrained demand.  The ideal would be a housing market similar to Austin and Atlanta in 2005, that is relatively unconstrained by either supply or demand, and Americans are in fairly universal agreement that 2005 Austin and Atlanta is to be avoided at all costs.  And all costs is exactly what we're getting.


  1. > [...] Americans are in fairly universal agreement that 2005 Austin and Atlanta is to be avoided at all costs. And all costs is exactly what we're getting.

    Nice turn of phrase.