Irrelevant real estate trends

Earlier this week Wendell Cox wrote a piece at New Geography arguing that projections for increasing demand for multifamily housing relative to single family homes are incorrect. He was criticizing a study by Arthur Nelson that predicts increased demand for multifamily housing relative to single-family housing in California between 2010 and 2035. So far, Cox points out that this hypothesis is not being fulfilled; between 2000 and 2008 slightly over half of newly occupied housing units were single-family homes on conventional lots (larger than 1/8 acre), not indicative of a shift in preferences toward multifamily housing.

Cox emphasizes that his data is based on revealed preferences rather than forecasts or surveys which may indicate a false preference for denser housing. However, he does not acknowledge that these preferences he cites are not revealed in a free market. The mortgage interest tax deduction biases home buyers toward larger homes, the complex entitlement process for dense infill development restricts supply of denser housing, and the the zoning and parking requirements that regulate development all shape revealed consumer decisions.

Both Cox and Nelson seem to base their views of consumer preferences heavily on introspection, assuming that over time more Americans will come to share their preference for suburban or urban living respectively. And they both take the same approach of looking at the real estate trends aggregated across the entire state. This is an interesting question for academics, but not a particularly relevant area for real estate markets. Real estate is local, and state trends are not likely to apply to many cities and neighborhoods. The average home sold in California went for $309,000 at $195 per square foot last month. However this statistic is meaningless for West Hollywood residents where the  average sale price was $378 per square foot. It’s equally meaningless for Bakersfield residents where the per-square-foot price was $87. Only one of these local areas faces a housing affordability problem, which Cox emphasizes is an important concern for land use policy.

Fortunately for consumers, it’s not necessary for academics to accurately forecast changing real estate preferences. They only need for local developers and homebuilders to do so, and the profit incentive leads developers to do just this, unless policy prevents them from doing so. High housing costs indicate supply restrictions that prevent developers from meeting consumer demands. If Bakersfield city planners adopted a binding urban growth boundary, the type of policy Cox decries, we would see the cost of conventional single family homes rise. In most of the places where we see housing affordability problems such as West Hollywood, it’s not Smart Growth policies that are to blame, but rather conventional zoning that prevents increased density from bringing down housing costs.

The most notable exception to this is Portland’s Urban Growth boundary which, in conjunction with density restrictions, keeps house prices in the city at $200 per square foot compared to the state average of $135. This UGB seems to be the driving force behind the work of many anti-density “market suburbanists,” which alone is enough of a reason to oppose this policy. However, in the cities where residents pay the greatest premium for housing, it’s likely that we would see much more multifamily home construction in a freer market.

If zoning restrictions and parking requirements were relaxed in areas of the country where residents currently pay the highest premiums to live, we would in large part see more multifamily construction rather than single family. This is why, despite the cumbersome entitlement process for multifamily buildings in many cities, and the mortgage interest deduction luring consumers to larger owner-occupied homes, over half of last year’s building permits were for multifamily units in some of the country’s most expensive cities like Los Angeles, New York, and Washington, DC.

  • http://motowntotreetown.wordpress.com/ Andy

    Nothing I enjoy more than a good Wendell Cox takedown.

  • http://twitter.com/ChrisBBradford Chris Bradford

    Are you aware of any (reliable) studies on the price effect of the Portland UGB?

  • Marc

    I’d agree with people like Cox and Kotkin on the most general terms that a majority of people *do* prefer SFDH over the alternatives, even though there so obviously are many governmental and economic distortions that affect what people want and are able to choose.

    Keep in mind that people like Cox and Kotkin are “masters of the historically self-evident.” They’re great at analyzing historical patterns and maybe even current behavior, but (and I would say many “urbanists” do this too from the opposite direction) they have ideological investments in a certain outcome and, like all econometricians, economists and statisticians, they have a biased habit of projecting and extrapolating selective historical patterns into the future and then creatively finding free-floating justifications for why an arbitrary projection/prediction or a short-term or historical observation is supposedly a long-term future certainty.

    Not only this, but Cox and Kotkin are also masters of the truism: they report emergent phenomena as “choice” when most of these phenomena would probably have occurred anyway:

    http://oldurbanist.blogspot.com/2012/03/can-loosening-development-restrictions.html

  • RobS

    A problem with Cox’s argument: The numbers are all from before the real estate crash, when the housing market was in a bubble. It’s also from prior to Nelson’s prediction and those figures are all part of Nelson’s analysis, so I don’t see how it is a refutation. And, as long as the sprawl machine was going full steam ahead, the supply was determined by the zoning, which in the suburbs is overwhelmingly single-family detached. Nelson notes that the zoning will have to change for the market to meet the demand. In the meantime, I doubt we are going back to the pre-2008 scenario.

  • Emily Washington

    Knapp (1985) is widely cited but out of date. I think Phillips and Goodsteins’ 2007 article is well done.

  • Joseph E

    People often talk about the Oregon Metro UGB without knowing anything about it. The Urban Growth Boundary does NOT prevent sprawl. It wasn’t designed to stop sprawl, but just to direct it into certain places. The fact is that Metro (the 3-county government for the greater Portland area) is legally required to add more and more land to the UGB every few years, to maintain a supposed future supply of residential, industrial and commercial land. Right now there are huge tracts of land available for exurban sprawl in Washington and Clackamas counties. Also, the UGB does not extend to Washington state, which is just 10 miles north of downtown Portland, so there is plenty of room for sprawl up there.

    The reason Portland has high housing costs is restrictive zoning, common to other higher-cost West and East coast cities, and transportation network limitations (i.e. no huge freeways) that slow down “cheap” sprawl on the margins. Also, Portland is the cheapest large metro on the west coast, so the many transplants from SF, LA and Seattle drive up the price of housing here.

  • Ben Ross

    I certainly agree with the basic point that high prices are evidence that something is in demand, not the opposite! But the Portland story is more complicated than stated here.

    Both the poster and Joseph E. misunderstand how the urban growth boundary works. It was very definitely intended to stop sprawl — the original purpose was to preserve farmland in the Willamette Valley. The expansion rule was added later, and it requires the boundary to be moved out only to the extent that there isn’t enough room for housing inside the boundary. This stimulated the anti-sprawl groups to support densification in Portland in order to minimize spread of the boundary. This led to major reforms of the zoning ordinance in the 90s that allow single-family areas to become denser. It also added to the political support for large multi-family buildings on the outskirts of downtown.

    Without the growth boundary, the zoning reforms certainly would not have occurred and the expansion of downtown (most prominently, the Pearl District) might well have been less intense. Portland’s supply of housing in walkable neighborhoods would have been substantially less than it is. Quite possibly (a blog post isn’t the place to untangle all the feedback loops) the price of walkable housing in Portland would have been even higher than it is, or possibly the city would have been less attractive to high-tech employers and the price of housing would have been lower due to economic weakness. Taking the politics into account, the urban growth boundary is not what keeps housing more expensive than in the rest of the state (especially since the growth boundary law applies to the entire state).