As a pro-housing person, I’m predisposed to find new reasons to love HIAHP (you can read my version of the “housing theory of everything” on Discourse). But I came away thinking that housing is very useful for preventing homelessness while not necessarily a solution to the penumbra of problems surrounding it: mental illness, drug abuse, public disorder, and so on.

Also read: Michael Lewyn’s earlier review in this space.

HIAHP’s strengths

Homelessness is a Housing Problem is structured around a series of graphs showing all the things that fail to explain regional variation in homelessness. These aren’t formal statistical tests, and of course it’s possible for relationships like these to reverse themselves in the presence of confounding factors, but the overall picture is nonetheless convincing: homelessness isn’t just an outgrowth of the broader social problems we associate with it.

The other great strength of HIAHP is its accessibility: aside from the second half of Chapter 1, which lays out their methodology, the authors keep everything at a ninth-grade reading level. This isn’t, and isn’t intended to be, a book for scholars, and you can give a copy to your aunt or your mayor and not worry that they’ll get bored or confused.

HIAHP’s weaknesses

Against this parade of failed explanations, the authors present a powerful-looking graph of a clear positive relationship between housing costs and the rate of homelessness.

Colburn and Aldern’s simple graphs are persuasive in the negative. But positive proof requires more than a positive correlation – indeed, more than statistics alone. And it certainly requires correctly-executed statistics. Look again at the chart: instead of giving each city and county one data point, each gets 13. They differ slightly (2007 rent versus 2007 PIT count, and so on), but only slightly – they are strongly autocorrelated. Statistically, one would need to cluster the standard errors. (I emailed Colburn to ask about this problem and asked for his data; he did not respond.)

So those skinny error bands in the plots? They’re wrong. (The slope and R squared may be fine, though.) The whole relationship is much less certain than the authors claim. It’s very easy to imagine confounding omitted variables that might explain away the correlation via some intermediate factor or third cause. I shouldn’t need to say this, but correlation isn’t causation.

My disappointments ran beyond the statistics, though. I had hoped to learn from HIAHP the personal, micro-level narratives that links high housing costs to homelessness. Even in cheap cities, low-end rent isn’t so low that people without a regular income can afford an apartment of their own.

Are marginally-housed people in Birmingham and Buffalo renting rooms? Staying for free with family members? As Alexander the Grate said, everyone has “some degree of shelter insecurity”; it’s not a binary condition. There’s a huge liminal range between “leaseholder” and “homeless”; there must be cross-sectional differences in that range that explain why Buffalo can house people who Boston can’t.

HIAHP could have been a persuasive, useful addition to the literature either as a solid statistical work or as a qualitative exploration of the mechanisms linking market prices to homelessness. It falls well short of both.

Solutions?

The authors toss out some favored ideas for addressing homelessness. But without a micro-level understanding of low-end housing in cheap cities, it’s hard to evaluate these ideas.

Nor do the authors subject their suggested solutions, like expanding the portion of the housing stock “decouple[d] from the market”, to even the simple correlation tests that they used in the diagnostic part of the book. It’s plausible, given their diagnosis, that non-market housing is a major part of the cure. But it’s not obvious, nor is it a novel idea, and testing the performance of that idea would seem in keeping with the book’s approach.

In fairness, a market-only approach is equally suspect. The authors claim that “housing doesn’t magically ‘filter’ or trickle down to low-income households” (p. 134). Aside from the “magically” part, this is exactly what happens in a well-functioning housing market! It would be interesting to look at the residences of marginally-housed people in low-homelessness cities: I’d wager that more of them live in structures that were originally built to serve the top 1/3 of the market than originally “de-commodified”. But that’s a guess – I don’t know. More and better research is apparently needed to take us beyond solutions to homelessness with the epistemic status of a blog post.

The post Book Review: HIAHP appeared first on Market Urbanism.

City officials and legislators are, reasonably, going to have questions about the likely effects of minimum lot size reductions. Fortunately, one major American city has offered a laboratory for the political, economic, and planning questions that have to be answered to unlock the promise of minimum lot size reforms.

Problem, we have a Houston

Houston’s reduced minimum lot sizes from 5,000 to 1,400 square feet in 1998 (for the city’s central area) and 2013 (for outer areas). This reform is one of the most notable of our times – and thus has been studied in depth.

To bring all the existing scholarship into one place, I’ve compiled this annotated bibliography covering the academic papers and some less-formal but informative articles that have studied Houston’s lot size reform. Please inform me of anything I’m missing – I’ll add it.

Political economy of Houston’s reform

M. Nolan Gray & Adam Millsap (2020). Subdividing the Unzoned City: An Analysis of the Causes and Effects of Houston’s 1998 Subdivision Reform. Journal of Planning Education and Reform.

Jake Wegmann (2020). Bayou City Townhouse Boom: Does Houston Have Something to Teach Us About Pro-Climate Urban Transformation? Platform,
The University of Texas at Austin School of Architecture.

NuNu Chang (2018). Planning the Houston Way, Part II: Special Minimum Lot Size. Rice Design Alliance.

Big ideas

• HOA deed restrictions & opt-out options enabled the broad reform of Houston’s lot-size mandates.
• The reform slowed gentrification in low-income neighborhoods, concentrating rather in middle-income neighborhoods.
• Builders took advantage of reform to build “Houston townhouses”, which are not attached to neighboring houses and are usually 3 stories tall with a “tuck-under” garage.
• Normal fee simple ownership is a key to townhouse success. Nobody wanted condo-ownership townhouses.
• In not-yet-published work, Wegmann and co-authors have found that relatively few Houston townhouses replaced single-family homes.

Discussion

• Shane Phillips, Mike Manville, and M. Nolan Gray on the UCLA Housing Voice Podcast.
• Max Masuda-Farkas in The Regulatory Review.
• M. Nolan Gray and Jessica McBirney at the Mercatus Center.
• Salim Furth at Market Urbanism.

History and geography of Houston townhomes

Stephen Fox (2000). The Houston Townhouse. Cite: The Architecture and Design Magazine of Houston.

John Park, Luis Guajardo, Kyle Shelton, Steve Sherman, and William Fulton (2021). Re-Taking Stock: Understanding How Trends in the Housing Stock and Gentrification are connected in Houston and Harris County. Kinder Institute for Urban Research, Rice University.

Big ideas

• The unique “detached townhouse” is a new concept, probably owing to the 1999 regulatory reform.
  • As of 2000, Fox makes no mention of detached townhomes.
  • In 2005, Houston had about 12,000 detached townhomes and 31,000 attached townhomes.
  • From 2005 to 2018, Houston added 34,000 detached townhomes against 5,000 attached townhomes.
• Detached townhomes are common in inner neighborhoods undergoing redevelopment; greenfield development is almost entirely traditional single family and large-scale multifamily.
• Construction and demolition are more frequent in affluent and already-gentrified core neighborhoods than gentrifying ones, as shown in Figure 4.

Discussion

• Jake Wegmann at Urban Edge (Kinder Institute)
• Luis Guajardo at Urban Edge (Kinder Institute)

Who benefits from small lots?

Mike Mei (2022). House Size and Household Size: The Distributional Effects of the Minimum Lot Size Regulation. Working paper.

Big ideas

• Small lots result in smaller houses. The average new house size in Houston declined by 10 to 15 percent when small lots were legalized.
• A simplified model shows that smaller, lower-income families and those who have not yet bought a house are big winners. Most existing homeowners took small losses (See Figure 15).
• The lot size reform was equivalent to a one-time gift of $18,000 to every Houston household living in a single-family home (the model doesn’t incorporate apartment dwellers). That adds up to about $8 billion.

Discussion

• Salim Furth at Market Urbanism

Yard space isn’t highly valued

Salim Furth (2021). Foundations and Microfoundations: Building Houses on Regulated Land. Mercatus Center Working Paper.

M. Nolan Gray and Salim Furth (2019). Do Minimum-Lot-Size Regulations Limit Housing Supply in Texas? Mercatus Center Research Paper.

Big ideas

• Houston area homebuyers are happy to pay more for bigger houses – but they don’t place much value on larger yards.
• In suburbs of Dallas and Austin with large minimum lot sizes, most house lots are built very close to the minimum lot size (or below it via various exceptions). See Figure 4.
  • But in Pearland, with many small lots available in nearby Houston, suburbanites are happy to buy larger-than-mandated lots.

Discussion

• Nolan Gray at Strong Towns.
• Nolan Gray and Salim Furth in the Austin American-Statesman.

Lot Size Reform Boosted Property Values

Joseph Shortell (2022). The Effect of a Minimum Lot Size Reduction on Residential Property Values: The Case of Houston. Universitat de Barcelona master’s thesis.

Coming soon: Emily Hamilton addresses the same question in a working paper near release. I will update this post to include it.

Big ideas

• In theory, lowering lot size mandates ought to raise the price of land while lowering the price of existing structures.
• Comparing Houston lots (which benefited from reform) to those outside the city, he finds that the price of land definitely rose and the price of existing structures may have fallen (but the evidence is less clear).

Discussion

Nobody has critiqued or dissected Shortell (2022) yet. It is an excellent master’s thesis, but readers should bear in mind that it is student work and has not undergone peer review.

• Florian Martin in Houston Business Journal covers the unaffordability of larger lots.

How does small lot development handle stormwater?

Samuel Brody, Russell Blessing, Antonia Sebastian & Philip Bedient (2012). Examining the impact of land use/land cover characteristics on flood losses. Journal of Environmental Planning and Management.

Big ideas

• The authors examined the Clear Creek watershed, in Houston’s southeastern suburbs. It’s not directly a study of Houston small-lot development, though.
• They found a mixed relationship between impervious cover and flood losses. An area surrounded by “medium” coverage development (50 to 79 percent covered) fared best, even better than one surrounded by “developed open space” (0 to 20 percent).
  • The authors guess this is because denser development is usually accompanied by better infrastructure.
  • The worst-performing category was “low” coverage (20 to 49 percent).

Discussion

• Houston planners have noted that impact fees from small-lot infill development have helped fund stormwater improvements and sidewalks. Houston incentivizes shared courtyards in part because they handle stormwater better. Further research is needed on the fiscal consequences of small lot reform.
• Phil Magness offers a quick history of Houston flooding.
• Nolan Gray notes the irrelevance of zoning to flood damage.

The post Resources for Reformers: Houston’s minimum lot sizes appeared first on Market Urbanism.

EDITED 3/3: I’ve edited the post to take into account pushback from the authors I’ve criticized. Edits are in boldface.

The touchstone of YIMBYism is the sensible idea that housing markets follow the normal patterns of supply and demand.

It’s true. But it’s a deuce to measure, because housing markets don’t have sharp boundaries – they bleed across distance, tenure, and unit type. Suppose 200 new one-bedroom apartments open up in Bushwick. Do those mostly steal business from similar buildings in their immediate neighborhood? Or do they compete with all types of housing throughout the tri-state area? Or something in between?

Further complicating the story, new investment in a neighborhood can have “amenity” effects (positive or negative). These don’t work like supply and demand, but in any specific case it’s hard to distinguish the amenity effect from the supply/demand effect.

Neighborhood effects

A few years ago, most economists and urbanists (myself included) believed

1. At the metro-area level, a broad increase in supply will lower rents.
2. At the neighborhood level, amenity effects dominate.

That is, we thought the [edited 3/20] West Palm Bushwick apartments had a mostly-regional supply effect but an entirely local amenity effect. The evidence for this included many gentrification anecdotes: new “luxury” apartment buildings were accompanied by rising rents.

Enter Xiaodi (and friends)

Around 2017, a few economists started testing these beliefs. Could there be local supply effects after all? And do new buildings accelerate or decelerate gentrification? To my surprise, Li and others found that yes, there do appear to be hyperlocal effects from supply and demand.

In Li’s case, identification is based on timing: tall New York buildings take several years to build, and the unpredictability of the end date allows us to treat the year when new condos become available as essentially random (whereas the application date is not random). Li finds that new housing lowers rent within a 500-foot radius, but doesn’t have a statistically detectable in the 500 to 1,000 foot “donut” beyond that.

What Li’s paper doesn’t ask or attempt to answer is a different, broader question, what is the citywide effect of new supply on rent?

Cards on the table, I remain skeptical that Li is interpreting her core finding correctly (she can’t fully rule out disamenities). But Holleran and Schragger aren’t expressing skepticism – they’re misinterpreting her answer to one question as the answer to a very different question.

Clearing up a little misunderstanding

I expect that randos on Twitter (don’t harass them) are going to misapply Li’s work, assuming that the hyperlocal effect – a 10 percent increase in housing supply within 500′ decrease rent by 1 percent – represents the entire supply effect. But when housing scholars are taking it out of context, we need a reminder.

Law professor Richard Schragger cites Li’s paper in footnote 177 here, using it as evidence that new housing supply has “very limited” effects on “overall rents” in “specific locations”:

Some studies indicate a decrease in overall rents from increased market-rate housing, [176] but there are others that indicate the opposite or very limited effects overall. [177]

Schragger, The Perils of Land Use Deregulation, U. Pa. L. Rev. (p. 164)

Sociologist Max Holleran misunderstands it in a slightly different way:

One New York City study showed that every 10 percent increase in market-rate housing in a given neighborhood would result in a 1-percent reduction in rental prices: a supply effect but notone that gives much optimism to public policy officials tasked with solving the affordability crisis.

Holleran, Yes to the City (p. 13)

Both authors appear to clearly think that Li’s estimate is evidence about the overall effectiveness of housing supply in lowering rent. But that’s simply not the question she’s asking; her paper offers no evidence one way or the other on what the market-wide rent effect of a market-wide 10% increase in housing supply would be. Both authors identify Li’s study as a localized one, but then interpret her findings pessimistically. That’s the reverse: this study (along with those of Mast, Pennington, and others) made economists more optimistic about supply effects.

Li’s study doesn’t tell us what would happen if new buildings were simultaneously completed every 1,000 ft through New York City. It instead asks what happens when one – literally one – building is completed.

When Schragger returns to the question Li is actually answering
a few paragraphs later (“Places with a relatively low cost of living may lose that attribute once enough wealthier people move in”), he doesn’t cite her work.

The paper you’re looking for

What papers should they have cited? My go-to estimate is
Albouy, Ehrlich, and Liu‘s: a 3 percent increase in housing stock lowers rent by 2 percent. Older estimates were often in the 1:1 range, which is more optimistic about supply. I dug into this in a recent blog post here, highlighting that broad affordability and unit-specific affordability usually come from totally different channels:

I confronted the hard truth that supply changes need to be very large to make a real dent in prices. If, as Albouy, Ehrlich, and Liu estimate, it takes a 3 percent increase in the housing stock to bring prices down 2 percent, then a major metropolitan area needs a massive increase in housing to make a real dent in rent.

Can we get there faster with composition effects? Let’s do a quick back of the envelope. First, assume population and housing stock would grow 10% each at baseline, with no resulting change in price.

–> Supply only approach: we add 40% to the housing stock without changing the mix of housing types. Result: 20% affordability gains.

–> Composition-only approach: we add 10% to the housing stock, but with the average price just 50% as high as the norm. Result: 5% affordability gains from lowering average price.

–> Mixed approach: we add 25% to the housing stock, with the average prices 75% as high as the norm. Result: 15% affordability gain (10% from supply, 5% from lowering average price).

How realistic are any of these scenarios? I’m not sure. But my takeaway is that supply remains the primary avenue for broad-based affordability gains. But the “you get what you pay for” and “only pay for what you want” channels are far more important for the affordability of a particular new housing unit.

Salim Furth, Is affordability just, “You get what you pay for”? Market Urbanism

There are questions worth asking about the impact of broad-based housing supply, and unresolved questions in the hyperlocal housing supply literature, but they’re different questions with presumably different answers.

The post Xiaodi Li, Misunderstood appeared first on Market Urbanism.

I think we can.

Demsas’s article is “The Homeownership Society Was a Mistake” in The Atlantic. In it, she diagnoses a major economic problem in America: our government often treats housing as an investment whose price should go up, while America needs housing to be a consumption good that is cheap to use. Her recommendation is that government should focus on making housing cheap and plentiful, “diminishing greatly” “its attractiveness as an investment.” And, if that wasn’t clear enough, she ends with “Let housing be a home; … Just don’t let it be an investment.”

Demsas’s problem is real, but her solution shocked me. It is both dangerous and unworkable.

Not treating housing as an investment is dangerous because housing is an investment. An investment moves value across time. If I spend money to build a house, that house is still valuable in 10 years. If I buy land, the land is valuable forever (barring disaster-movie disasters). In fact, housing is one of our country’s most valuable assets: land and buildings in America are worth more than the entire stock market. To not treat housing as an investment risks squandering that value.

Demsas’s solution is unworkable because we live in a democracy and the majority of voters own houses. Nationwide, 65% of housing units are “owner occupied” and homeowners are more likely to vote than renters. One study put it at 3% to 8% more likely. It is unreasonable for any elected official to go against homeowners.

Demsas’s solution can be ignored, but her problem should not be. Our government is currently prioritizing housing as an investment, rather than a consumption good, and that’s harming our country.

To understand the mechanism causing the harm, we need to look at housing as a risky investment. Land usually goes up in value, but it can go down. A dramatic example of that is Detroit from 2006 to 2009. Land prices plummeted. The price of the average single-family house on a lot fell by 55%. Some fell more.

The risk to homeowners is actually greater than that. A fall in land prices is usually caused by a worsening local economy. Over that same period in Detroit, unemployment rose to 16%. So, just when homeowners are most likely to lose their job, their asset falls in value.

Homeowners want to limit their risk. They elect officials who will protect their risky asset.

And, since homeowners are the majority, those elected officials go further by propping up that asset with tax benefits and competition-reducing zoning laws. The costs of those sweeteners are paid for by non-homeowners: we penalize renters. The penalties/favors drive low-wealth families to buy a home and go “all in” on a single risky asset. It is a matter of luck which ones profit from the bet.

By this mechanism, the Homeownership Society harms society. It penalizes the poor, encourages foolish risk, and generates inequality.

But the Homeownership Society is not all harms, or we would have gotten rid of it years ago.

Homeownership means permanence, which inspires residents to invest in their community. Homeownership means less risk, because any time you rent something there’s a risk that the renter damages it. Lastly, homeownership improves efficiency. Homeowners maintain their buildings better than renters. Homeowners are willing to invest in insulation, because they also pay the electrical bills.

Although Demsas doesn’t mention these benefits in the article, I’m sure she knows them. And I don’t think Demsas is against homeownership, per se. She is focused on the decisions of government officials to protect and prop up the price of housing. She sees their choice as lying on a single axis. They can choose high-priced housing or low-priced housing. You can see that in her self-question and self-answer: “How do we ensure that housing is both appreciating in value for homeowners but cheap enough for all would-be homeowners to buy in?” And seeing no options, she answers “We can’t.”.

I think we can. I think we can protect investments and lower the cost of housing. And, even more importantly, I think we can do it without denying the political reality that homeowners vote and that democratically elected officials serve (service?) the voters.

How do we get these benefits of homeownership without Demsas’s problems? Housing is two things: the land and the building on it. Most of Demsas’s negatives have to do with the land: it lasts forever (barring disasters) and swings up and down in value with the local economy. On the other hand, most of homeownership’s positives have to do with the building: lower risks, better maintenance, and better efficiency. If we can financially divorce the land from the building, we can get by Demsas’s impasse.

To do that, we need Financial Engineering. Financial Engineering is the art of writing a contract to allocate risks and financial incentives such that all parties benefit. An example contract that you’re familiar with is your insurance policy. You have risks you do not like: your house might burn down or your car might be hit by a garbage truck. The insurance company is willing to take on that risk if you pay a premium and a deductible. A financial engineer designed the contract with an “insured side” for you and an “insurer side” for the insurance company, to the benefit of both parties.

To solve Demsas’s problem and get past the impasse, we need a contract that pulls out all the “investment” qualities of the land and passes them on to an investor and leaves the “consumption good” qualities of the building with the homeowner.

I call this contract a “land-value contract”. With it, the homeowner will (effectively) sell the land under their house to the investor. If a property is valued at $300,000 for the house and $200,000 for the land, the homeowner signs the “seller side” of a land-value contract and receives $200,000. The investor signs the “buyer side” and delivers the $200,000. If the homeowner ever sells the property, the contract will end and the homeowner will pay the investor the current price of the land, which may be more or less than $200,000.

The investor is giving up $200,000 for this contract and taking on risk, so they must receive something in return. Thus, the homeowner pays a premium to the investor. The premium depends on the value of the land and is, effectively, the “ground rent”, the rental cost of the land under the house. The homeowner has, effectively, sold the land to the investor and now rents it back.

For housing policy geeks, this is almost Georgism. Homeowners pay rent for their land and those payments go to the nation’s investors (rather than the government). The contract can also be seen as a market-driven land trust. Homeowners own their home and pay rent for the land under their house, but those payments are done at market rates (not subsidized)

Homeowners would need a smaller down payment, since they are borrowing less and the risk is less. Homeowners would need to make a payment, the ground rent, that would change from year to year, but they already experience that with property taxes.

Investors should be interested in these contracts. A study of housing in multiple counties from 1950 to 2015 showed that the capital gain from housing has a risk-adjusted-return close to that of stock indices. And housing is weakly correlated with the stock index. The very wealthy, who own most stocks, could diversify by buying land-value contracts and the less wealthy, who currently put too much into a single piece of real estate, could diversify into stocks.

How does the land-value contract solve the problems of the Homeownership Society? It may pass the land value on to investors, but the land-value contract is still a large risky asset and won’t investors vote to protect against its risk? True, but the investors are different from the low-wealth homeowners going “all in” on a single risky investment. Investors diversify, by holding equities and by holding land-value contracts from many cities. And when someone invests in multiple assets, they care less about the ups and downs of any particular asset.

Land-value contracts will allow current homeowners to sell the land under their house and invest that money in stocks and in the land under every house in America. They would have to pay the ground rent for their house, but they would also receive the dividends and ground rents from other properties. Changes in the local ground rent are a risk, but it is a dramatically smaller risk than what homeowners hold right now. This lower risk weakens the motivations of elected officials to prop up those assets, at the cost of others.

Land-value contracts will allow current homeowners to sell the land under their house and invest that money in stocks and in the land under every house in America. They would have to pay the ground rent for their house, but they would also receive the dividends and ground rents from other properties. Changes in the local ground rent are a risk, but it is a dramatically smaller risk than what homeowners hold right now. This lower risk weakens the motivations of elected officials to prop up those assets, at the cost of others.

Land-value contracts could be created today by a company. A bank could sell them, combined with lower-downpayment mortgages. But it would be hard to launch this financial product. First, the bank would have to recruit new investors and educate them about the investment. Second, the bank would have to roll out the program nationwide, rather than in one city, to enable diversification. Lastly, and most importantly, there is no independent organization calculating the ground rent and land values in the contract. Customers would be scared to sign a contract where the bank determined that rate. Customers accept variable-rate mortgages, but that rate is set by an outside(ish) entity.

It would be easier for the government to launch the market. The government is independent(ish) and can compute the ground rent and land values. The government can also mandate the data (housing prices and rents) required to calculate those values. The federal government has an incentive to create this market: it implicitly backs mortgage-backed bonds and could reduce its risk by mandating the signing of land-value contracts by mortgage holders.

(Finance experts will point out that financial contracts on real estate already exist. The Chicago Mercantile Exchange (CME) has futures and options on the Case-Shiller Housing Index of 10 cities. These are based on the price of the land and the house on it. That, and other factors, make it difficult for homeowners to know how to offset their land’s value using these futures. These existing contracts are not the same as land-value contracts; ease-of-use and exact offsetting of risk matters.)

If you have access to The Atlantic, I encourage you to read Demsas’s article with the concept of land-value contracts in mind. The article is dense with arguments and supporting data. I believe the ability to separate the land’s value from the building’s value illuminates the arguments. Land-value contracts add a new axis, allowing us to see that cities prosper when (un-propped-up) land values increase and building costs decrease.

I value Demsas’s article for bringing attention to a problem. She wants housing to be a consumption good, like a TV or car. With land-value contracts, I think a house becomes exactly that. And it is achieved without denying the economic realities of housing and the political realities of our democracy. With land-value contracts, we can fix the Homeownership Society.

The post The Homeownership Society Can Be Fixed appeared first on Market Urbanism.

He’s right- if you define “suburb” broadly as “everything that isn’t downtown.” A downtown that isn’t surrounded by neighborhoods is just a small downtown.

But that isn’t always the way Americans understand suburbs. If you think of suburbs as “towns outside the city with a different tax base that are usually much richer than the city” , suburbs aren’t good for the city at all. Because of the growth of suburbs, cities have stunted tax bases because they have a disproportionate share of the region’s poverty, and have to pay for a disproportionate share of poverty-related government programs. By contrast, if cities resembled the cities of 100 years ago that included nearly all of their regional population, they would have stronger tax bases. (This may seem like a pipe dream to residents of northeastern cities trapped within their 1950 borders, but plenty of Sun Belt cities include huge amounts of suburb-like territory).

Similarly, if you think of suburbs as “places where most people have to drive to get anywhere” their existence is not so good for the city. When suburbanites drive into the city they create pollution, and they lobby for highways that make it easier for them to create even more (while taking up land that city residents would otherwise use for businesses and housing). And when jobs move to car-dependent suburbs, that devalues city living, either because carless city residents are frozen out of those jobs, or because city residents have to buy cars to reach those jobs (which sort of defeats the point of city living, insofar as short commutes are an advantage of city life).

To put it another way, a city needs neighborhoods outside a central business district. But it benefits far less than it otherwise would if those neighborhoods are car-dominated or outside city limits.

The post Do The Cities Need The Suburbs? appeared first on Market Urbanism.

Here’s a short interview we did over email.

Emily: How did you become interested in cities?

Michael: A coincidence back in 2018 got me to look into cities. I had read a pop science article about how zoning policy in San Francisco was driving up the price of homes. The article stuck with me, because I’m fascinated by economics and it was so strange. I had always rented and didn’t know how regulated housing was. Then, at a party, I happened to mention this curious article in a conversation. The person I mentioned it to was Josiah Stevenson, an influential member in AURA, Austin’s YIMBY organization. He quickly recruited me into AURA and got me to look at cities.

And once I started looking into cities, I wondered why economists haven’t studied them more! Cities are where they gather. They’re where information and goods are gathered. In cities, the biggest economic decisions get made and the most goods trade hands. Fission reactors work by bringing refined uranium into a tight space, causing an energy-producing chain reaction. Likewise, when you bring people into a tight space (with the right conditions), it causes the bright glow of economic activity. I believe that making that economic glow brighter will improve my life and everyone else’s life too. That’s what made me so interested in cities.

Emily: What cities have you lived in?

Michael: Ordered by the time I’ve spent as an adult: New York, Austin, Charlottesville (Virginia), Minneapolis, London (UK), Berkeley, and Nijmegen (NL). I have a great love for Philadelphia, having grown up an hour away, but I never lived in the city.

Emily: Wow you have a knack for living in places with high-profile land-use debates. If you could spend a year in a city you’d never visited, where would it be?

Michael: Singapore! Roads are the dominant transportation technology and Singapore is the only city in the world that does roads right. It does (proper) congestion pricing. I’d love to see first-hand how that remedy improves the other transportation networks and the city as a whole.

On a more practical note, half the population speaks English and the city is at a shipping crossroads, which means all sorts of interesting people must show up. Its heat and humidity are awful?—a continuous Houston summer?—but we’re only talking a year, right?

Emily: Tell us about your work with AURA.

Michael: I’ve done it all for AURA: leadership, outreach, political organization and think-tanky analysis. The work I’m most proud of is an analysis of land prices. It showed prices doubling from 2014 to 2019 and that small (cheap) lots are in high demand.

Emily: What’s the current state of CodeNEXT?

Michael: That analysis explains why we need to change Austin’s zoning laws. CodeNEXT, for those unfamiliar, was a proposed rewrite of Austin’s zoning laws. It contained a number of reforms, including taller buildings within 3 blocks of major streets. CodeNEXT was defeated in 2018. A new version of the law was passed in 2020, but a lawsuit stopped it from going into effect. The courts said that state law requires 9 out of 11 votes on City Council to change zoning laws. Until we get those 9 votes, we’re stuck.

Emily: What other issues is AURA focusing on?

Michael: Recently, the big issue has been elections: we need those 9 votes on City Council! In 2022, we had a good year: AURA’s preferred candidates won 5 out of 5 races for City Council and our preferred candidate for Mayor lost by just 900 votes.

Until we get our 9th vote in 2024, we are working on a number of important projects. The new Mayor is a fan of expanding Interstate 35, which is not just a “major artery” but Austin’s aorta. AURA abhorred the initial plan and an offshoot group is suing to stop it. The public transit expansion had its budget upset by COVID’s economic waves. AURA will be monitoring the cutbacks. Lastly, the public transit expansion has opened a door for smaller-scale zoning reform. The land around train stations may be rezoned and we expect to get 9 votes for our policies there.

Emily: Finally, give us a little preview of what you plan to write about here at Market Urbanism.

Michael: Readers will see a variety of posts from me. Some brand-new ideas as well as some new-to-the-reader ideas unearthed from economics paper and books. Some colorful data and some new perspectives on old idea. And, maybe, a rant or two.

The post Welcome Michael Nahas appeared first on Market Urbanism.

How to you allocate housing?

But these regulations have one fatal flaw. San Francisco is a very attractive city. Even if the economy is worse than it used to be, the culture, geographical location and climate make it a place where thousands of people would love to live, and are currently blocked only by the high rental prices. If you artificially lower these prices (through legislation), you end up with way more demand that the supply can handle. Even if you think this is morally the right thing to do, you have to address the mismatch between the demand and supply you’re creating. 

In other words: how will you allocate housing in the absence of the market mechanism? 

When confronted with this question, American leftists usually do not have an answer, or provide some muddy explanation that still focuses on existing residents, as if their living situation was never changing: they never got married, divorced, their kids never grow up, they never leave for a reason other than being priced out etc., and as if there were no new potential residents who would like to move to San Francisco for whatever reason. 

History provides a warning

In the absence of their answer, we can look at history. In the Eastern Bloc (where the state actually built housing – just never fast enough to house its growing populations), the price mechanism was also removed from the housing equation. How did those states allocate housing, then? 

Let’s look at my home country, Poland. In the socialist Poland, the housing shortage was acute. But it was especially acute in the most-attractive big cities, similarly to how it is in America today. Warsaw in particular was the place where everyone wanted to live (socialist states are typically very centralized, with all the good jobs and services focused in the capital city), but there was never enough housing.

Since rents could not be raised to depress demand, the state had to resort to other tactics. They introduced meldunek, which can be translated as geographical registration. Every Pole was assigned to a specific address, and could not live anywhere else.  There was just no such a thing as geographical mobility – unless you could secure meldunek in a different location, you could never move. Even if you had all the money in the world, or were a world-renowned scientist, or needed to escape your abusive family, you just could not move to a different part of the country. 

Besides the personal implications to the lives of millions of Poles, this policy also had a disastrous economic impact. Warsaw did not reach its pre-war population levels until the 1970s (similarly destroyed Rotterdam managed to get back to its pre-war population by the early 1950s) because the state could not build enough housing and was artificially suppressing demand.

Some towns around Warsaw were more lenient and grew tremendously (in fact, many of the most densely populated towns in Poland are just outside Warsaw to this day), putting pressure on railway lines and forcing long commute times on people who could have lived in Warsaw proper if it wasn’t for the meldunek system. Officials in charge of the meldunek system would also get bribed by people who desperately wanted to live in the capital.

Those who couldn’t afford bribes and could not secure meldunek in satellite towns of Warsaw had to live elsewhere – often in small, provincial towns, where their talents were wasted, they grew angry (often at those who managed to get to Warsaw), and now their children (who moved to Warsaw and other big cities since Poland is a capitalist economy now) dealing with parents left behind while they struggle to organize childcare. 

There is no denying that market forces are not always pleasant, and that sometimes the misalignment between supply and demand puts pressure on people. But the opposite is arguably even worse, trapping people in places they don’t want to live, destroying economic growth, and driving resentment. 

The post The fallacy of total rent regulation appeared first on Market Urbanism.

Graduated Density Zoning

Although he’s mostly known for parking research and policy, Donald Shoup responded to the ugliness of eminent domain in Kelo v. City of New London, with a 2008 paper suggesting “graduated density zoning” as a milder alternative. Graduated density zoning would allow greater densities or higher height limits for larger parcels – so that holdouts would face greater risk.

Samurai to Skyscrapers

Junichi Yamasaki, Kentaro Nakajima, and Kensuke Teshima’s paper, From Samurai to Skyscrapers: How Transaction Costs Shape Tokyo, is a fascinating and technical account of how sweeping changes put the relative prices of different-sized lots on a roller-coaster from the 19th century to the present. First, large estates were mandated as a way for the shogun to keep nobles under his close control. Then, with the Meiji Restoration, the nobles were released to sell their land, swamping the market and depressing prices. The value of land in former estate areas stayed low into the 1950s.

But with the advent of skyscrapers – which need large base areas – the old estate areas first matched and then exceeded neighboring small-lot areas in central Tokyo.

A meta-lesson from this reversal is that “efficiency” is a time-bound concept. One can imagine a 1931 urban planner imposing a tight street grid and forcing lot subdivision to unlock value on the depressed side of the tracks. That didn’t happen; instead, the large lots were a land bank that allowed a skyscraper boom right near the heart of a very old city, helping propel the Japanese economy beyond middle-income status.

We should take a long, uncertain view of all “efficiencies”. Instead of just optimizing under current conditions, imagine a range of conditions. Does a proposed policy improve life under most of those? Or are we better off with some apparent inefficiencies and redundancies that might have extremely high value in some states of the world?

Back to graduated density

With Tokyo as an inspiration for cautious policymaking, let’s turn back to Shoup’s idea. In Shoup’s telling, the reason that the government would value pushing the landowner to sell is that there are technical reasons (such as skyscraper footprint requirements) why small lots cannot achieve such high efficiency. Larger lots, bigger pie.

But if that’s the case – if small lots could not physically take advantage of the higher density or height limit available to large lots – then graduated density doesn’t change the game, as in Scenario 1 below.

Land assembly cases involve bargaining: if assembly can create $2 million, who gets that value? If either the owner or developer demand all of it, the other will walk away.

A case that Shoup doesn’t explicitly discuss is Scenario 2, where the small lot owner could gain some value from the more-intensive zoning, but is blocked by the graduated density provision.

The owner and the developer are still playing the same bargaining game in Scenario 2, but regulations have contrived to make the “pie” they’re splitting larger than it would be under equal zoning and to worsen the owner’s bargaining position.

There’s only a plausible role for government here if you believe that the bigger pie & worse bargaining position will make deals more likely. But even then, you have to overcome a serious moral question of whether the government should put its finger on the scales in a bargaining game. And you ought to be quite certain that a lot more assembly deals will take place, because the new regulations seriously decrease the potential unassembled value creation.

No (that’s my answer to the post’s title)

The value of treating everyone equally under law is sufficient for me to be opposed to graduated density zoning. But even for unobjectionable policies, the changing nature of “efficiency” along even such a simple dimension should be cause for greater humility.

The post Should governments nudge land assembly? appeared first on Market Urbanism.