Witold Rybczynski’s 2007 book Last Harvest helps answer these questions. It tracks a specific cornfield in Londonderry, Pennsylvania, from the retirement of the last farmer to the moving boxes of the first resident.

With its zoomed-in lens, Last Harvest answers (or at least raises) lots of questions that are interesting but not especially important in the grand scheme: Why do expensive homes mix some top-line finishes with cheap, plasticky ones? Why do anti-development communities permit any subdivisions at all? What is ‘community sewerage,’ and how does it work? Exactly who thinks it’s attractive to have brick and vinyl cladding on the same house? What’s it like to buy a house from a national homebuilder? Does Chester County really produce forty percent of America’s mushrooms?

The Stack

Rybczynski does not use this term, but what he describes is part of what I call the “stack” of housing supply. One of the central facts of development is that it relies on a very long chain of industries and professions, each of which relies on every other part of the stack doing its job. If one part is left undone, nobody gets paid:

‘Without a water contract, we can’t get a permit for the water mains, and without a permit, the builders won’t buy any lots and start building their model homes,’ says Jason. ‘Everything is held up.’ (p. 223)

 This is an institutional outcome – I won’t say a ‘choice’ – and is not, strictly, necessary:

Americans take this for granted, but there are other ways to build communities. Some countries depend on centralized planning, in which the public authorities decide where people should live, and what kind of housing they should live in… The cities of the developing world, by contrast, depend on the unplanned and unregulated efforts of millions of individuals who build their own homes in so-called squatter or informal settlements, which eventually turn into urban neighborhoods. (p. 273)

Rybczynski calls this a “business” or “market” approach. The first term is clearly more accurate. The developing world is more of an open spot market, with many isolated, uninsured transactions and a very large number of decision makers. The American approach relies on predictable, tessellating business models.

Unlike in a simplified model, each stage of the work is done by a specialist who has to worry about reputation and liability. Joe Duckworth is the lead developer in Last Harvest, but the subdivision is planned by Bob Heuser and the architectural choices are the subject of an endless series of negotiations between the Londonderry Planning Commission, Duckworth, a loftily-titled ‘town architect’ (basically, a consultant), and the formula-driven homebuilders.  

The key source of tension in the book is that the township sought a neo-traditional development for the site, but would have preferred no development at all:

‘We’ve been doing conventional development and we hate it,’ [one public meeting attendee] says. ‘Why don’t we try something new, and if we don’t like it, we won’t do it anymore.’

‘Doing something new’ implies departures from the usual practice, and that creates problems throughout the stack. The drip irrigation sewage system is new to Chester County and takes longer to permit. The homebuilders stick to their standard marketing practices – advertising the interiors of homes – when the developer and township intended the exterior neighborhood to be the main draw.

Exurban new urbanism isn’t very urban and isn’t especially novel. But even its minor deviations put stress on several of the stack’s business models. So imagine the difficulty of trying to push through something really revolutionary!

The developer as a risk agglomerator

The business models in the stack are principally structured around the avoidance of risk. Even the largest, most liquid companies – the publicly traded “national” homebuilders – rarely buy a land parcel until they have a contract with a homebuyer. Their work is not riskless: they contract for parcel prices ahead of time, and a market decline can cut into their expected profits. But they can always walk away rather than take a substantial loss.

For most industries in the stack, participation is a simple fee-for-service. The businesses that provide site plans, utility connections, and lumber, for example, are all paid on delivery and expose themselves to very little risk.

The stack does as much as it can to offload risks to the farmer, the homebuyer, and various insurers. When the developer and farmer first strike a deal, it’s an option: the upside belongs to the developer, the downside to the farmer. The farmer is compensated, of course. But he cannot quickly receive the value of the site’s full potential. Rybczynski notes that conservation easements are attractive to farmers because they pay out immediately.

Years later, early homebuyers not only accept long-term market risk but also the risk that the site is not completed as (or when) planned.

In Last Harvest, the developer finally buys the land when the farmer refuses to renew the expiring option contract. The land has appreciated; both sides would like to capture those gains. Some of the increased site value comes from the general state of the market, but much is due to the developer’s work in shepherding a rezoning and development agreement through the township’s slow-moving approval processes. The final value depends primarily on how many homes can be built on the site, and township politics are mostly geared toward trying to reduce density.

For a few agonizing years, the developer owns the land. He pays for site improvements, strikes contracts with builders, and tries to time the market. The source of the risk, of course, is that an enormous amount of labor and capital must be sunk into the site before it becomes a habitable, valuable good. Until very late in the process, it’s possible for much of the investment to be lost to the vagaries of the market or the local government.

In a downturn, Rybczynski notes, about one in four developers go out of business. Even Robert Morris, the financier of the American Revolution, spent three and a half years in debtors prison (p. 47). Despite hitting the market at almost the worst possible moment (2007), the New Daleville subdivision survived.

Conclusion

So should all this detail – and I’ve only unpacked one aspect of the book – change the way we theorize housing construction? The importance of regulatory risk and the obvious risk aversion of all involved are clearly central to the internal mechanics of development. Slow permitting implies a disconnect between the price of land at the time a contract is written and the spot price that would prevail when the option is executed.

One paper (Mayer and Somerville 2000, JUE) incorporated this disconnect by modeling development as a two-stage process of land development and, subsequently, construction. They found that incorporating this complexity did not change the results appreciably.

The fragmented, interdependent ‘stack’ is likely more important to suburban reformers interested in changing what gets built. Incorporating accessory dwelling units, triplexes, or cottage courts into suburban development requires more than just regulatory reform. It also requires demonstrating to developers that no layer in the stack is going to fail them – and that everybody will ultimately get paid.

The post Book review: Last Harvest appeared first on Market Urbanism.

As a result, more-diverse metro areas are usually ranked as more segregated by the Divergence Index. And as America became far more diverse over the past 30 years, it is logical that the Divergence Index would rise in most metro areas.

Why is it so hard to measure segregation?

Racial segregation is easy to see. You walk down the street and almost everybody in one neighborhood looks different than you and almost everybody in another neighborhood looks the same as you. The human eye and ear can also distinguish categories that are meaningful in some contexts but not others. Everybody but me in the café where I watched European soccer last week appeared to be not only Black but specifically Ethiopian. Was that café integrated or segregated? I certainly felt welcome as I bantered at the bar with an Ethiopian-American tennis instructor. But statistically, the café was far more Black and vastly more Ethiopian than the D.C. region as a whole.

In this context, “segregation” refers to places where one group is overrepresented – like the café – not to the legal regime that imposed second-class citizenship and pervaded every aspect of life for black Americans. Given the word’s loaded history, it would have been wiser for social scientists to choose another term.

The forms of segregation social scientists worry about are, of course, in areas of life more consequential than café preference. Residential and school attendance demographics are probably the most important and commonly studied areas of segregation.

But even where it matters, the statistics of segregation seem to tell us less than meets the eye.

Measurement is difficult because segregation is the characteristic of a region, not of a person or household. We cannot measure the segregation of a neighborhood in isolation; it depends on its context. A Madison, Wis., neighborhood that is equal parts white, black, Hispanic and Asian would earn a high Divergence Index – indicating high segregation – since it would sharply overrepresent all three non-white groups relative to the metro. An identical neighborhood in Miami, Florida, would score much lower, with only Asians significantly overrepresented.

This relativity exposes a gap between the conversational and statistical meanings of “segregation.” If Madison really did have a neighborhood like the one I described, nobody would call it segregated. We really should have a different word for this.

The Divergence Index

The Divergence Index arrived in a sharp 2016 paper by Elizabeth Roberto, then a Princeton University post-doctoral researcher. Roberto skewered the field, which had fallen in love with using “entropy” – a concept from information theory – to measure segregation. Entropy, Roberto argued, does not even measure segregation – it measures neighborhood diversity.

Roberto proposed to fix entropy by introducing a contextual element. Her new relative entropy metric – the Divergence Index – would not mistake a lack of regional diversity for segregation. The result is conceptually simple:

1. Measure the shares of each racial group in a metro
2. Measure the shares of each racial group in each neighborhood
3. Use a statistical formula to determine how much the neighborhoods differ from the metro

However, she may have gone too far in the opposite direction. The Divergence Index penalizes additions in regional diversity unless those additions are spread very evenly across neighborhoods. Understanding why this occurs requires two insights.

• First, the most helpful way to think of the Divergence Index is as a weighted average of concentration scores of the various groups in the model.
• Second, when one race is the overwhelming regional majority, its members will (by necessity) almost all live in neighborhoods that do not diverge much from the regional average.

Per the first insight, a newly sizable group – such as Hispanics and Asians in many cities – must be less concentrated than the weighted average of the existing population in order to decrease the Divergence Index.

As the second insight suggests, the typical biracial U.S. metro during the 20^th century had a white majority with low divergence scores and a black minority with a high divergence scores. And where whites were seventy, eighty, or ninety percent of the population, the weighted average – the Divergence Index – ended up much closer to whites’ mechanically low concentration score than to blacks’ high score.

Thus, for an influx of Asians or Hispanics to decrease the Divergence Index, the new group has to hit a concentration score almost as low as whites – but without the advantage of achieving low divergence scores in any highly concentrated enclaves.

A new Asian or Hispanic minority can thus contribute to statistical segregation despite being much less segregated than the 20^th-century black population.

New metric, old problems

The Divergence Index is not immune from data problems that plague most statistical measures of segregation. As Douglas Krupka has documented, bigger cities usually fare worse on segregation measures in part because of the artificial ways that lines are drawn. This seems to be the case in OBI’s study, where the nine largest U.S. metros are all among the 20 most segregated. 

Implicit in Krupka’s argument is that cities with larger minorities will fare worse as well. An insular immigrant enclave that covers only a few blocks will be averaged together with the rest of its Census Tract. A much larger, but equally insular, enclave that fills out a Census Tract is caught in the statistical spotlight.

Viewing segregation holistically

This essay has been perhaps unnecessarily harsh toward the Divergence Index. The Index has problems. But so does every other measure of segregation. Still, OBI’s headlining of the Divergence Index shows that its status in the field has risen rapidly and it is ripe for critical review.

Returning to the newspaper headline that sparked this essay, is it fair to say that cities have grown more segregated since 1990? Behind the reliance on Divergence Index for headlines, OBI’s research carefully documents a half dozen segregation metrics. Drawing on the excellent interactive map, I revisited three metro areas that OBI reports as having among the greatest increases in segregation over the past 30 years: Fayetteville, Ark., Reading, Pa., and Boston.

What if we looked at these in a more holistic manner, putting Divergence Index into the context of metrics that might be less influenced by those metros’ rapidly diversifying populations? I recorded four measures of segregation for each city: Black-White Dissimilarity, Hispanic-White Dissimilarity, Black-White Exposure, and Black Isolation. As OBI notes, each “provides some insight into the phenomenon of segregation, while also concealing other facets.”

If these metros were becoming more segregated, in a holistic sense, we would expect to see most or all of the various measures pointing in the same direction. Instead, most of them point toward falling segregation, and it is likely that the rising Divergence Index indicates rising diversity in these metros.

In Fayetteville, two measures showed rising segregation, two falling. In Reading and Boston, all four measures declined. In all three cities the white population share fell and the entropy index, which measures neighborhood diversity, rose sharply.

If we take the Divergence Index as a single facet of statistical segregation in a more complete context, we should conclude that Reading and Boston exhibit clear evidence of rising diversity and falling segregation. Fayetteville is also becoming more diverse and its segregation indicators give mixed evidence.

Segregation is a loaded term, with serious moral connotations. Before warning the public that segregation is increasing, researchers and journalists ought to check that a multifaceted, careful look at the data confirms this summary of the data. 

Salim Furth, Ph.D., is a DC-area housing policy researcher and lifelong urbanist. The views expressed here are not necessarily those of his employer.

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Another argument is that housing markets are segmented: that if you increase the supply at the top of the market, it will not help anyone who is not already at the top of the market.

It seems to me that these arguments contradict each other: the first argument is based on the idea that high-end housing does affect the market as a whole (or would if rich people stopped using apartments as second homes); the second is based on the idea that high-end housing doesn’t affect the rest of the market at all.

*In addition, I have recently published a much longer article in the New Mexico Law Review, discussing the pros and cons of high-end condos.

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This seems like a public necessity – but even here the long arm of big government seeks to smash affordability. The article notes that Columbus, Ohio “passed an ordinance that subjects them to many of the same regulations as apartments” because “The hotels had an unfair competitive advantage.” In other words, the city is basically rewarding landlords for turning out bad-credit tenants, and punishing the hotels who seek to house them.

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Boudreaux had the misfortune of being ahead of his time. The housing market was so soft in 2011 that his book landed with nary a sound. A quick web search turned up no book reviews besides the publisher’s blurbs. The book (and you’ll be forgiven if you stop reading right here) will set you back.

That’s unfortunate. Just a few years later, the book would have connected with passions shared by the rapidly growing YIMBY movement and a publisher would have marketed it to the masses.

Boudreaux’s thesis is that “the laws that govern our use of land are biased in favor of one specific group of Americans—affluent, home-owning families—who least need the government’s help.” He keeps his ideological cards close to the vest. But that’s the point: one need not lean left or right to want to stop using the power of the state to comfort the comfortable and afflict the afflicted.

The first chapter is the most important, because it lays out the foundation for all that local governments do, good and bad, in land use: the police power. He’s writing from Manassas, Virginia, where “restaurants with Aztec pyramids on them” telegraph the large Hispanic immigrant community. A vocal minority opposed this local immigration, and pressured local governments to stop it. Of course, the city doesn’t issue passports, but the police power allows local governments to make life uncomfortable for an unwelcome minority in many ways.

In the second chapter, Boudreaux meets the last holdout in a Brooklyn condominium condemned for the megaproject anchored by the Brooklyn Nets arena. Eminent domain is a unique city power – and one that fits uneasily with the rest of book. Daniel Goldstein (the condo holdout) is the sort of affluent homeowner in whose favor the system is biased. The appearance of Robert Moses’ successors is a good reminder that “not in my backyard” was once a heroic rallying cry of Davids fighting Goliaths.

The book moves along with a history of the Mount Laurel decisions (Chapter 3) and a retired farmer in Michigan fighting large lot zoning. For housing scholars and advocates, most of the material is not new, but it’s refreshed and worth reading from a muckraking law professor’s point of view. And (if you’ve got a spare Benjamin) it’s the perfect book to buy for the friend who promises to read just one book on housing if it will only shut you up.

Back to the story: the final chapter, set in Los Angeles and narrating the political difficulty of infill development, ends on a dour note like the four before it. A modest attempt to ease permitting for accessory dwelling units (ADUs) in LA was politically annihilated. This echoes the setbacks in Manassas, where Hispanics quietly moved away; Brooklyn, where Daniel Goldstein took a buyout; New Jersey, where Governor Chris Christie announced a “funeral” for a Mount Laurel program; and Michigan, where the farmer lost his court case.

A decade later, we know that’s not where LA’s story ends. California State Senator Bob Wieckowski led an ADU enfilade in Sacramento that succeeded while his colleague Scott Wiener’s frontal assaults on single family zoning occupied the opposition. A series of bills hammered away at the limits California cities could place on ADUs.

As a result, the City of Los Angeles issued 6,747 ADU permits in 2019, up from 80 in 2016.

The story of America’s housing bias is still being written. And if the 2020s really do bring a revolution in housing policy and the urban environment, I hope Paul Boudreaux writes a book about it.

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The most famous example of this argument is from Ian Mulheirn. He argues that the collapse in the mortgage interest rate since the 1990s, as well as growing demand from international investors, has made it easier to purchase property causing a rise in demand. To him, this is the biggest reason for the crisis.

However, simple price theory tells us that prices only rise when supply grows less than that rise in demand. Whilst lower interest rates have made it more affordable to buy houses, if supply were to rise simultaneously by the same amount then we should expect prices to remain stagnant. Indeed, we can observe this in history – after the Great Depression, Great Britain reduced interest rates massively. However, rather than causing a boom in prices they remained stagnant, due to an increase in housebuilding. Moreover, this is unhelpful from a policy perspective given increasing interest rates would risk higher unemployment. The argument is therefore unhelpful at best, and insufficient at worse in explaining why rents aren’t increasing as quickly as prices.

A recent paper published by the Centre for Economic Performance at the LSE has sought a better explanation. Here, Christian Hilber and Andreas Mense argue that the price to rent ratio only increases with a demand shock where supply is sufficiently constrained. Indeed, they find that in Greater London, one of the most toxic areas to house building in the world, local labour demand shocks account for 63% of the increase in the price to rent ratio. So why do supply constraints affect house prices so much more than rental prices in superstar cities?

Since rental markets depend largely on short-term demand and supply, then the elasticity of this supply curve will determine the impacts of a demand shock on prices. This means that markets will experience higher rent inflation after a demand shock where housing supply is less elastic in the short run.

What they find is that short-run supply is a lot less elastic than the long run (which is a determinant of prices). This is because demand shocks lead investors to update their expectations of risk premiums and growth rates. Given rental markets will be determined more by the short-run than house purchasing markets this will have the effect of the impacts of a demand shock being less substantial.

This can be explained through the diagram below:

The blue line represents location A and the red line location B. In location A supply (an area with less price constraints) is a lot more elastic. This is because there are less planning constraints to building more housing. The effect of this is that where housing rents increase in the short run the market can react leading to rents falling from RA1 to E(RA2).

However, in the less elastic market (representing a city with more planning constraints) supply does not react as substantially. This results in the demand shock (D1 to E(D2)) having a significant effect on prices rising from RB1 to E(RB2).

So, prices rising faster than rents, as Ian Mulheirn holds, doesn’t tell us that supply constraints are an improper diagnosis for the cause of our housing woes. Instead, it is the opposite. The main reason why this discrepancy exists is down to supply constraints.

Therefore, challenges to the conventional wisdom that higher house prices are down to supply constraints made through appeals to the price-rent ratio should be ignored. Instead, we should focus on increasing supply as a vehicle to help bring down both rental and buying costs of housing.

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Allowing gradual densification is an absolutely necessary step towards general affordability. Supply, demand, and price form an iron triangle–the more responsive we can make supply to demand, the less price will spike to make up the difference.* What I really want to focus on here, though, is less about policy and more about political economy. I believe allowing medium-intensity residential development could make additional reforms easier to achieve and change views around development going into the future.

We Love What We Know

More often than not, I think a generalized status quo bias explains a lot of NIMBYism. Homeowners are most comfortable with their neighborhoods as they are now and are accustomed to the idea that they have the right to veto any substantial changes. Legalizing forms of incrementally more intense development could re-anchor homeowners on gradual change and development as the norm.

The first part of the story is about generational turnover. If the individuals buying homes today–and the cohorts that follow–are exposed to gradually densifying neighborhoods in their day-to-day, they’ll anchor on that as what’s normal and therefore acceptable. Moreover, if we’re debating whether to rezone an area for mid-rise development a generation from now, I imagine that those changes will get a much fairer hearing if for no other reason than the homeowners in prosperous communities will have spent a lifetime seeing gradual densification and population growth. 

Making Homeowners Pro-Growth

Beyond simply changing what people are used to and therefore comfortable with, I think there’s another pro-growth element here that’s about economic incentives. In a world where homeowners can add housing to their properties to make money, they’ll increasingly become focused on their right to develop their own land instead of their right to stop other people from developing theirs.

This doesn’t necessarily mean everyone is going to tear down the family home, put up a duplex, and live next door to or above some tenants. But if that type of development is legal, it’ll be priced into the market value of everyone’s property, giving homeowners additional incentive to anchor on a pro-development norm–to do otherwise would be to actively advocate for reducing one’s own property values. 

A lot of land use rules need to be changed in a lot of places across the country. As we address the technical challenges of better policy, we have to address the incentive structures and belief systems that conspired to create the world we’re dealing with now. And I’m happy to say that as we start to bring back neglected forms of residential development, I believe we’re going to get progress on all three fronts.

*See Nolan Gray’s Density is How the Working Poor Outbid the Rich for Urban Land.

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For example, Kate Pennington wrote a paper on the relationship between new construction and housing costs in San Francisco.  What is unique about this paper is that while other papers focus on a broad sample of new construction, Pennington focuses on one subset of the market: “new construction caused by serious building fires.” Why?  Because most new construction is in high-demand areas.  Any study that focuses on such construction will be more likely to conclude that the new construction is related to high rents, when in fact the real cause of increased rents is increased demand for certain neighborhoods.

Pennington found that rents actually decreased within 500 meters of new buildings- by 2.3 percent, compared to similar blocks without new buildings.   Pennington also found 17.1 percent less displacement (which she defines as moves to poorer zipcodes) near the new buildings, and found that landlords were less likely to evict rent-controlled tenants.

One paper was a partial exception to the pro-supply trend of recent scholarship: a paper by Anthony Damiano and Chris Frenier found that new buildings in Minneapolis lowered rents for most nearby buildings, but increased rents for the cheapest buildings. But the UCLA researches point out that “Damiano and Frenier do not adjust the rents in their study for inflation, which is an unusual decision, and one that makes the rent increases they report look much larger than they actually were.” Adjusted for inflation, rents near new buildings declined by 7 percent overall, and increased by only 0.2 percent for the cheapest buildings.

One point that the UCLA researches do not mention: although the Damiano/Frenier paper seems to be more skeptical of the benefits of new housing supply than the other papers, even Damiano and Frenier admit that “Research shows that new housing supply at all affordability levels is an important step toward ensuring housing is affordable to urban residents.” (p. 30)

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