This paper has been making the rounds lately:
Let's assume this is true. Los Angeles has roughly two million apartment units and adds about 10,000 new ones each year. If, through some herculean effort, LA managed to increase this by 20x, it would amount to 200,000 new units. This in turn would....
....reduce rents by about $50 per month. That's barely noticeable. It's less than 1% of the median household income.
This is why I think the prospect of bringing down rents in big cities is close to hopeless. Even a gargantuan construction boom would have only a tiny effect in the face of steady demand.
It may be true that cities like LA and New York need to build way more housing, but even if they do it won't make them much more affordable for young families that really, really want to live there. In places like this, ironically, the cost of housing is determined less by supply than by the very fact that so many people really, really want to live there.
Gotta start somewhere. Not “building way more housing” in LA or NYC isn’t going to make them “much more affordable” either. You don’t make every shot you take but you definitely miss every shot you don’t take. Somebody will move into the housing built in LA/NYC who isn’t living there now, even if those people aren’t the working class… and that in turn might free up some housing perhaps in other lower tier metro areas where the rent is also too high.
Exactly.
Also,,markets aren't linear.
I signed on to say exactly this. There is often a tipping point somewhere, though I admit that I have no idea where that might be in the LA apartment market.
Now, if 50% of those new units were public housing, it would make a difference. It would definitely push down rents at the low of the market.
And include a ban on sub renting those units out for short term rentals or other.
If there's a demand for ahort-term units, that's still a demand.
People in small houses still need relatives to visit, businesses still need to house workers for short contracts.
Banning subletting is basically banning rentals.
Not for public housing, it isn't. Public housing doesn't go to the highest bidder.
Then they're not owners, they're renting.
Allowing them to have roommates and swap places lets them have more access to worldly wealth.
Tokyo?
Please explain. I was just in Japan and might go back for more. But Kyoto-Osaka-Tokyo is pretty much one very dense megalopolis while places like Los Angeles are vastly less dense, built on the car based suburban model which mostly works fine in a city of 100K but not millions.
Other than main streets in Japan it's ALL what we would call alleys. No back or front yards. So even if the buildings were about the same it would already be several times denser than for example my neighborhood in Brooklyn, not exactly a suburb.
BTW most of the apartment buildings being built in Los Angeles since 1970 or so are very poorly designed cheap crap.
Please explain...Kyoto-Osaka-Tokyo is pretty much one very dense megalopolis while places like Los Angeles are vastly less dense...
The explanation is: Japan has a famously strong "by right" law with respect to building new housing. So they build new housing. Loads of it. And as a result housing is far more affordable there than in most other high income countries, even in big cities like Tokyo. And, part of their YIMBY rules include allowing for very great density. Even if the US eliminated regulations such as large minimum lots sizes and detached-SFH-only zoning, no US metro will ever approach Tokyo-like density, both because of market preferences among Americans, and because Americans don't prioritize the kind of transit required to make Tokyo-like density work.
But we could have cheaper housing!
This is why I think the prospect of bringing down rents in big cities is close to hopeless.
Red herring alert!
It's true a hugely increased pace of housing unit construction is hardly guaranteed to bring down rents in absolute terms in our most in-demand cities.
But such an increase absolutely will bring down future rents relative to where they'd be absent the increase.
Thought experiment: in scenario "A" Los Angeles increases the number of housing units by 100,000 between now and 2050. In scenario "B" Los Angeles increases the number of housing units by 400,000 between now and 2050.
All else equal, under which scenario are rents going to be lower?
The question answers itself.
Also, let's not exaggerate the difficulty of lowering rents even in absolute terms (but sure, you do need truly large-scale quantities of building).
https://x.com/mattyglesias/status/1875926784891572647
Let's also add that although for small perturbations practically everything is linear, for large ones most real world effects are not linear. (Obviously, if you increased housing supply by 600% rents would not become negative.)
I strongly suspect that if you double LA's housing supply you will get a decrease of more than 19% because there will be a large glut of housing on the market that exceeds demand. Price war.
Build baby build! The only way to reduce rents is to increase housing supply.
The arguments that have been used successfully is that increasing housing supply also increases traffic and demand on schools. Local residents fight this stuff like crazed weasels -- but they also whine like babies about homeless encampments and tent cities near them. It's a no win situation, other than to build and those that don't like it can move to a nice gated HOA somewhere.
MAGAnomics is going to revolutionise the way markets work. For example, increasing the supply of gas will force the price down, thus giving drilling companies an incentive to develop increasingly costly new production facilities. As the cost of production goes up, the price to consumers will come down! Thanks, President DJT!
MAGAnomics of course based on prize-winning work by pathbreaking economist Escher, who's being recognized more and more these days
Don't forget the contributions from Dali.
And what's true in LA is true across the country: the pace of housing construction, with very few exceptions, is not keeping pace with demand in any of the places where people want to live.
We still haven't recovered from the housing bust that was a consequence of the financial bubble. And we probably won't, because it really solidified the commodification/financialization of housing. It's now a core part of the rentier economy.
+100
Anyone remember the rather similar if also different Savings and Loan crash a couple decades earlier? We must unshackle the financial sector from onerous reguation. Again.
That begs the question: is it possible to make Indianapolis and Fargo popular places to live?
Houses still age out of the system.
And Fargo has been growing and has its own problems.
That begs the question: is it possible to make Indianapolis and Fargo popular places to live?
All kinds of second/third/fourth/fifth tier cities—including many in the Midwest or Rust Belt—are attracting growing numbers of people priced out of larger metros, or simply looking for more space for the money. So, I think the answer to your question is: blue metro NIMBYs are indeed making such places more and more popular. Toledo, Ohio currently tops the Zillow "most popular" index:
https://www.boston.com/real-estate/home-buying/2024/12/31/new-england-city-most-popular-zillow-2024/
Faster Pussycat, faster.
The key there would be a combination of jobs and schools. Parents will move where ever there are good schools, but they also need jobs.
Yes. All that's needed is jobs there. They will never be popular retirement communities, but that's a different issue.
There would be more affordable housing construction except that usually banks won't approve the pro forma that doesn't show a profit even if you manage to find a developer/builder willing to take the construction risks on a low-budget, zero-profit project.
If the project is zero profit then there is no risk - it is a guaranteed loss and of course no one will pay to build it.
But if you open up more land for construction and lower regulatory barriers you can reduce the cost of buidling housing which will result in more housing being built and prices converging on cost of construction and operation.
I'm not talking lender risks. Construction risks, unlike lender risks, are roughly the same (differences on project types) whether you make a profit or not.
I'm a little confused.
Who do you think finances the profit free project?
The construction company does not care if the project is profitable for the financier as long as the construction company gets paid. But no one will finance a profit free project.
This is not a lender's pro forma; it's the developer's. Absent risk (default), the bank's loan is always going to return a profit for the bank. If the developer's pro forma can't show a profit, the risk of default would presumably be extremely high for the bank, and therefore, the bank would not lend.
When I wrote, "usually banks won't approve", this is what I was referring to.
Aside from that risk for the lender (of default), there are risks to the developer/builder. Those risks exist even with E&O, liability, and other (umbrella) insurance, that specifically makes a profit-free affordable housing project unattractive to any developer/builder.
When I write, "developer/builder", that's not shorthand for "developer and, or builder"; it's a specific type of company that is created to allow it to squeeze profitability out of an otherwise unprofitable project. Which is to say, the developer/builder must still make a profit for it to proceed with an affordable housing project.
Zero profit is not the same as guaranteed loss. Zero is not a negative number.
I think Kevin is misreading the conclusion. and the impact is much more dramatic according to the paper.
The supply increase referenced in the paper is not '1% increase in the total housing stock', instead it is '1% increase in the new housing stock made available'.
I think you're correct. The abstract of an earlier version of the paper (https://ideas.repec.org/p/zbw/vfsc20/224569.html) states the claim this way:
"Adding one new housing unit to the stock for every 100 rental housing units offered on the market in a given month reduces rents by 0.4-0.7%."
While it looks like Mense may have adjusted the claimed impact downward somewhat in the more recent version of the paper, it's pretty clear the increase he is modeling is relative to units on the market in a given period, not to total rental stock.
I agree. Kevin's argument appears to be totally off base, because he crunched the wrong numbers.
That said, I'm not sure what would be the right numbers to crunch. I would think there is a difference between "new supply" and "housing units offered offered on the market in a given month" which Amil Eoj cites from an earler version. The abstract itself also talks about "second-hand units available for rent" , which appears to be yet another category.
Good point, thanks.
You don't even have to parse academic papers to understand the dramatic effect of new supply on prices. Just look at what's happening in Austin, where rents are *dramatically* down after a bunch of new units came on the market. This isn't an abstruse academic debate anymore.
Thanks. I was going to mention that real world example. I have no idea, but I'm guessing it's about knocking down a lot of cheaply built little ranch style houses on big lots from the 1950s and replacing them with townhouses and apartments.
Hopefully not the cheaply built extremely poorly planned (other than for maximum profit) stuff built in Los Angles and elsewhere for decades.
Anybody got a good link or two to articles about Austin?
It's one of the few places that's actually built enough (for now), but I worry (on their behalf; I'm never moving there) about other consequences in the medium/long terms such as car dependence and externalization of costs (including but not limited to those brought by car dependence).
This is all due to the *avoidable* growth in population, which nobody seems to understand or want to limit. Why bother debating a topic when one of its main aspects is deliberately ignored? That's how it is with affordable housing.
This country did not have to have 330 million people, but we do, and so the natural consequence is economically unfair "solutions", like New York's congestion pricing. Almost every time density increases, it's harder on the poor, while the rich - who can afford whatever barriers are implemented to limit resource use - aren't affected at all. You'd think low(er) density would be something liberals would aim for, but they don't.
Dude, population growth isn't avoidable. I'm not going to stay in my rural town I grew up in with no jobs.
And the 'units added' doesn't count units lots to demolition, red tags, or fire.
This doesn't make any sense. Lower density by itself doesn't improve housing costs or quality of life.
People don't talk about this because they are mostly focused on things that matter.
If you prefer lower density living, that's great! But it isn't the hidden secret to affordable housing or quality of life improvements for the country.
This is a good point. European cities like Vienna or Stockholm are pretty high-density, and also offer a fantastic quality of life. Affordable housing, good public transportation, schools, green spaces, etc. can make city living rather nice, especially for families with young kids.
I need the forest in my life but I also feel pretty insulted that we can't build the sewers our villages need to retain the density they had a hundred years ago.
And instead we cut down all the forest for cookie cutter subdivisions before we even think about it.
Locally a horse-farm is about to sell out to be subdivided - except it's the green belt between the state park and all the horse-houses and they platted to cut off the bike trail and the ranch is outside the urban boundary so it doesn't have sewer, water, and they made no provision for additional traffic on our evacuation route which depended upon that open land to exits for fire/tsunami etc.
This is all due to the *avoidable* growth in population, which nobody seems to understand or want to limit.
We had far greater affordability when the country was growing much more rapidly, back in the 1950s and 1960s. But we're no longer growing rapidly. Far from it. Indeed, the last census revealed that the United States experienced literally the slowest population growth in its history (not making that up, we even "beat" the 1930s) in the previous decade.
https://www.brookings.edu/articles/population-change-and-the-projected-change-in-congressional-representation/
Most estimates suggest the current decade will see even slower US population growth. If anything, far from a population explosion, America is experiencing acute demographic stagnation.
https://www.axios.com/2023/12/29/us-population-decline-down-projections
It's the lack of supply. Full stop.
PS—I've noticed you seem awfully agitated by the specter of run away US population growth. The reality is very different. I suspect if you got yourself better informed, you'd feel a lot more relaxed about this issue.
No, it is not the lack of supply. It is the lack of good places to live because of lack of infrastructure provision and the purchase of houses by private capital, and excessive finance provision for housing. Private capital should go to increasing productivity, not capturing rents. Read Kevin's lips (or in this case, fingertips) - every one wants to live in New York or LA. Why is that? Why don't they want to live in places that are cheaper? That is the question you should be asking. And easing regulations won't produce more supply, just worse houses. It is the cost of land that is the problem, and that is driven by the financial limits to buying in desired housing locations, not the cost of building. High building costs, will just send the price of land down, not the price of houses.
No, it is not the lack of supply.
Yes it is. Also, you're confused in your observation that some destinations are more popular than others: that's always been the case (and always will be). New York and California both experienced eras of rapid population growth. Clearly they were very popular! But they also maintained affordability by increasing supply. And so they grew! They're still highly popular (ie, demand for housing is high), but now that popularity translates into very high prices—not population growth—because it's mostly illegal to build new housing there.
And easing regulations won't produce more supply
Of course they will. This isn't remotely controversial.
https://en.wikipedia.org/wiki/New_York_City_housing_shortage
Dude, you'e saying they built 10k, lost an unknown number due to demolition, fire, etc, and gained 66,000 people and it would be heculean to add an apartment per three people added?
The wildfire thing seems like a turn off.
Wildfires mostly affect the rural boundary so... not much of a turn off to people wanting apartments.
Although tonight they're moving into the urban urbans. Because houses are actually more flammable than trees.
People should read better sources for land price economics. Try here: https://www.fresheconomicthinking.com/
But also read https://www.amazon.de/Between-Debt-Devil-Credit-Finance/dp/0691169640
Our 40+-year experiment with tight fiscal policy and loose monetary policy, has produced disastrous consequences - massive inequality and more rent seeking than productive investment. We should have the opposite policy mix, and more of our fiscal dollars should go to public investment. How could they have ever thought that more private debt was a recipe for stability?
but conservatism can never fail!!!
Unfortunately, this has nothing to do with "Conservatism" (it isn't conservatism it is radical reactionism), but with a failed economic orthodoxy. Both sides have subscribed to this failed orthodoxy. We were much better off when there were requirements for large deposits before borrowing was allowed and tighter money (but looser fiscal constraints). You can only create money, via debt. The trouble with creating that via private borrowing is that it doesn't increase the net financial wealth of the private sector as does public borrowing from the central bank (i.e. money printing). Of course, too much money printing is inflationary but so is large private borrowing and private borrowing increases the chance of snowballing insolvencies.
"Conservatism" has been reactionary for a long while.
You're right, there is far too much build up of private "capital". Increases in productivity did not lead to corresponding increases in worker pay, but, instead, in available loans to the working class. Wealthy build wealth, poor build debt.
Increasing income inequality since Reagan is a lot of the problem in all kinds of ways. Around 1980 middle/lower incomes stopped tracking overall productivity increase and all the wealth started going to the already well if not incredibly well off.
I have charts and graphs that can't be posted here at Charts Graphs and Cats. No cats though.
If someone is making $150K a year instead of $75K housing costs wouldn't seem so bad.
New urbanists discover induced demand.
?????
It is at this point a new urbanist trope that increasing highway capacity does not reduce commute times.
Replace "highway capacity" with "rental market size" and "commute times" with "rents" and the same logical framework applies. The argument is even stronger, because new construction will generate new demand, in addition to existing latent demand.
You can see this in midtown Atlanta, for example. Single family homes and small apartment complexes have been replaced with numerous giant 30-story apartment buildings in the last decade. And yet rents are up by more than 50% in the same area over the same time.
That's not a new trope.
And no, new apartments don't induce as much demand.
See, you add a lane, and the amount of places a 'half hour' from work expands - until that lane fills, and it's not anymore.
Unlike, say, a train, which a half hour away remains the same even when the train is full which is vastly more bodies than on a roadway.
Apartments don't induce that demand. You can only live in so many units.
"And no, new apartments don't induce as much demand."
Because you say so?
There are massive numbers of people that want to live in, e.g., midtown atlanta. In spite of massive new residential towers being built on every corner, rents in midtown atlanta have increased.
Seriously - go to google maps street view and compare midtown atlanta 2024 to midtown atlanta 2014. For example, 1155 W Peachtree St NE looking south.
Atlanta should be the example of development reducing rents, but that didn't happen.
https://atlantaregional.org/whats-next-atl/articles/5-things-to-know-about-rising-rents-in-metro-atlanta/
Induced demand would require people to buy and live in (or take out of the housing market) multiple houses as housing supply increases.
We do not really see this at all. Anywhere. Certainly not in Atlanta.
Demand for housing increases as population goes up and we live in smaller family groups (fewer kids, fewer extended families). Demand for housing has not increased because there is too much supply, a large drop in prices and people are consuming more houses than they used to. We haven't seen this latter scenario.
Even you are saying that supply is not keeping up with demand. You seem confused.
Induced demand does not require people to live in multiple houses. What are you smoking?
We are talking about the market in a particular geographic area. People can move into the area as it becomes more affordable. Also, as you note, people can stop living with family or roommates if costs decrease.
Moving into an area as it becomes affordable is analogous to selecting a route because commute times on that route have decreased. Ditching roommates is strongly analogous to ditching public transit.
Building also induces demand in a way that adding capacity to highways does not -- new residential construction (particularly dense construction) creates demand for amenities that in turn create demand for additional capacity.
But more importantly, look at the degree of construction in midtown atlanta. In 10 years they dropped 30 story condo buildings on nearly every vacant lot. This is a massive degree of disruption. And rental costs still rose 50%.
As another example, the number of housing units in Boston increased by 20% between 2000 and 2020. But rental costs in Boston are through the roof.
That's also not induced demand.
That's existing demand.
You are very confused on this topic. Mixing up terms and confusing demand and supply.
Obviously you are describing the very normal situation of supply not meeting the demand for a product. Your insistence that this is induced demand and people only want to move to Atlanta because they aren't building enough housing isn't supported by any facts, or even an argument.
You're really confused
good luck!
"Your insistence that this is induced demand and people only want to move to Atlanta because they aren't building enough housing isn't supported by any facts, or even an argument."
That is not my argument, you utter tool.
Nobody is saying that "people only want to [drive to work] because they aren't building enough [highways]."
I'm saying that there are factors that reduce the impact on rent price of increases in rental market capacity. In exactly the same manner as in transportation. Whether you call it "induced demand" or "latent demand" or "generated demand." The label doesn't matter.
As a result of these factors, its seems unlikely that you can merely build your way out of high rents, particularly in areas with high wages and lots of amenities. In exactly the same manner as you can't build your way out of congested highways.
You're describing existing demand. That's not induced.
Look guys, a dumb troll!
look guys, senile blue MAGA boomer.
Well, you keep describing the induced demand in housing as 'people who already need a place to live' occupying new units.
Demand may not be filled. There's sometimes, excess demand. That's not induced demand.
People who are living with roommates already have a place to live. But in response to an increase in rental market capacity, they may choose to move into their own apartment.
This is exactly the same as a new road (an increase in road capacity) causing a person who may have previously taken public transit to drive.
In the context of transportation planning, this phenomena is referred to an "induced demand."
You're the senile one here, buddy. I don't think you even know what those words mean.
I'm probably the youngest commenter here.
Commuter rail?
Change in local zoning laws?
Is the CA experiment, build apartments around public transit, working?
fyi: Cities by density (US):
https://en.wikipedia.org/wiki/List_of_United_States_cities_by_population_density
We have barely started yet.
But of course as tech-sector toadies move their operations closer to Trump, Abott, or Desantis property, jobs will move their. Then people won't feel compelled to find housing in LA and New York. Problem solved. Well, at least the problem of raising GOP property values.
Why?
Hardly anyone wants to leave the state unless they've made their money and are retiring.
I think that Donald promised a bunch of new cities. That should do it. No problemo.
You have to wait till AFTER the inauguration. Then it's going to be a beautiful golden age like never before.
I've been training for the past 30 days to get ready for all the winning. /s
Yes, like no one has ever seen.
Apparently there are no solutions to the exorbitant rents of large cities in a liberal capitalist political economy.
There are solutions, but no one likes them.
Banning short term rentals is a solution.
Banning second homes or unoccupied units is a solution.
Banning short term rentals only makes short term rentals unaffordable to the middle and working class.
If the demand exists, you can't will it away.
You can't ban unoccupied units because some number always need to be unoccupied for repairs, etc. It penalizes people trying to move!
And if you do the former you will end up with the latter.
You're just moving chairs around the edges, a distraction that doesn't solve the problem that we haven't been building as many units as we need to replace those lost or needed for the next generation.
Banning short term rentals only makes tourists go to actual hotels instead.
Entire buildings are built in places like Manhattan for super wealthy people to stay in once in a while. Some owners here leave apartments empty because they got burned by some tenant (some related laws bad tenants exploit no doubt could use reform). Others use the excuse that a hundred thousand dollar renovation is needed so they don't rent the apartment out. They mostly mean that it would cost too much to fix it up to sell for $900K or rent it for $4000 a month instead of $1500.
There's an entire semi-triangular block near me in southern Brooklyn where a parking lot/diner used to be that has been a big hole for five years. There are one story strip mall type stores among higher rise apartment buildings. These are all because government can't interfere with private ownership. Maybe the often abused eminent domain thing should be used for good if possible.
Weird, you seem to assume there's empty hotels.
The story you spin is farcical.
There's a demand. If hotels served it, the airbnbs wouldn't survive.
This is misguided.
You say we haven't been building enough housing, but then you dismiss a proposed solution to create more housing supply. Restricting short term rentals will create more housing supply and it could do so very quickly.
We don't actually have a building shortage, we have a supply shortage. Building more houses is a way to fix this problem, but it isn't the only way.
Eliminating short term rentals or placing limits on them will certainly help, although by itself probably can't fix the problem.
Doing this could cause a different problem, making vacations marginally more expensive or less enjoyable. If this is an actual problem will depend on the state of hotel capacity and the specific limits put in place. Many would think that improving housing costs at the expense of vacation costs is a good trade. There is certainly a distribution effect here as the impacted groups (renters vs vacationers) are not the same people.
Looking at short term rental rules is not a distraction. Most of policy change is a matter of shuffling things around, it's silly to make this sound in inconsequential. When it comes to medical costs or tax burden, these shifting deck chairs are seen as dramatic. Housing is a big deal.
By definition, rents CANNOT be "exorbitant". If they were actually exorbitant -- which means "unreasonably high" -- enough people would be forced or decide voluntarily to leave the region, reducing demand to the point that rents become "reasonable".
The reason that rents and owning are so expensive in desirable cities is that those cities are "desirable" places to live. Either they are sited in a spectular place or they have developed mastery in one or more valuable human endeavors.
Once a city becomes such a place there will always be more people who would wish to live there than those who already do who choose to leave or die. If the city loses its pre-eminence in its field(s) of excellence or the world no longer values it, the city can fade economically. Think Youngstown.
But the spectularly sited ones seem able to find a new excellence to support themselves and live on through centuries and millennia. Does anyone not love ridiculously overcrowded Athens?
This problem is not new, nor will it ever become passé. Those who do not contribute sufficient economic value-added simply can't live in the most vibrant cities. Instead of living in the shadows in Seattle, they should seek a better life in a place like Springfield, Missouri where their otherwise less-than-adequate skills may find greater opportunities.
I grant that there may not be such a "welcoming" government in those other places, which is an argument for a national solution
That thing you're worried about (the housing crisis in the places most people want to live)? It's not a big deal to Kevin Drum because it's simply hopeless, abandon all hope ye who read this blog post.