The Economic Implications of Housing Supply

A new paper with the above title by urban economists Edward Glaeser and Joseph Gyourko provides more evidence to back up the Antiplanner’s recent paper on the New Feudalism. One of the major points of that paper was that the Obama administration’s plan to force suburbs to relax zoning codes to allow higher density housing is not the solution to housing affordability problems.

Glaeser and Gyourko point out that housing is affordable in most of the country despite zoning. In some parts of the country, however, “property rights have essentially been reassigned from existing land owners to wider communities, which have chosen to substantially reduce the amount of new building.” The result is that the supply curve for housing, which is nearly horizontal (meaning changes in demand have little effect on prices) in communities with traditional zoning, becomes very steep in the overly regulated communities (meaning small changes in demand can result in large changes in prices, i.e., prices will be more volatile).

Glaser & Gyourko make one interesting point that I had not raised. One of the impediments to housing production in California is a state environmental quality act that requires developers to assess the local environmental impacts of new housing. The result is that little new housing has been built in California, forcing people to move to places like Arizona and Texas. But California’s temperate climate means that greenhouse gas emissions there are far lower than in interior states. “If California‚Äôs restrictions induce more building in Texas and Arizona, which require far more artificial cooling,” says the paper, “then their net environmental [effects] could be negative in aggregate.”

The New York Times reported on the paper, but I think the writer misstates one of the main points. Instead of viewing homes as an investment, suggested the reporter, Americans should view them as consumer goods and accept that prices will fall. Americans need to “open our eyes to the negatives of the national obsession of owning a home, expecting its value to rise, and using the levers of local government to keep neighborhoods as they are,” says the Times.

Yet homeownership isn’t an “obsession”; it is a natural, worldwide desire to have a predictable, stable home life. Nor does “using the levers of local government to keep neighborhoods as they are” make housing unaffordable: instead, it is using the levers of state or regional government to keep rural areas as they are. While the Antiplanner prefers the Houston model of deed restrictions over zoning, city zoning really isn’t a major problem for affordability so long as there is plenty of unzoned land outside the cities.

In such areas, people don’t buy homes expecting to get rich from rising prices. But they do see the equity they build in their homes as a store of wealth that they can borrow against to start small businesses, put their children through college, or retire on.

The one thing missing from the Glaeser/Gyourko paper and the Times article is a way out of the housing affordability mess. Glaeser/Gyourko suggest a federal program of building large numbers of homes in unaffordable areas, but considering the kind of homes federal bureaucrats are likely to build, this is likely to do more harm than good. The Times falls back on the Obama solution of building higher densities, but that’s not how most Americans want to life, and it seems silly to demand higher densities in states like California and Oregon that are at least 95 percent rural. The best solution to the conundrum, the Antiplanner has suggested, is through the courts, not legislation.

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4 thoughts on “The Economic Implications of Housing Supply

  1. Frank

    “But they do see the equity they build in their homes as a store of wealth”

    Which is a fallacy as owning a house is an expense, not an investment or a store of wealth. A house is a consumer durable good. The main contributor to increasing housing “values” is inflation and speculation. When factoring interest paid over 30 years, repairs, property taxes, insurance, etc., it becomes clear that owner-occupied housing doesn’t store wealth very well.

  2. CardGame

    The main point of Glaeser and Gyourko’s paper is that restricting supply has negative economic impacts, so it can backup part of “The New Feudalism”. But Glaeser and Gyourko don’t really say that “allow[ing] higher density housing is not the solution”. I fact they say the opposite on page 8:

    “The literature on this topic is now voluminous and has recently been reviewed, so we refer the
    interested reader to that work (Gyourko and Molloy, 2015). There is no doubt that binding
    density restrictions affect supply.”

    That part of their paper focuses on minimum lot sizes, so someone accepting the message of their paper could still be suspicious of replacing two-story buildings with four-story buildings. But the authors and their data don’t themselves discourage mid-rise density. They just don’t attempt to determine whether height restrictions, minimum lot sizes, or urban growth boundaries do the most damage in making cities more expensive.

    Having said that, I’m not trying to suggest the opposite extreme from avoiding density. My gut instinct is that Mr. O’Toole is correct to criticize _subsidizing_ or _mandating_ density, I only argue against his criticism of _legalizing_ density.

  3. The Antiplanner Post author

    There’s a difference between legalizing density in relatively undeveloped rural areas that are strictly regulated and legalizing it in already developed neighborhoods where residents believe part of the value of their homes is based on the existing density. I support the former but instead of the latter I would say, “eliminate zoning and allow people to write deed restrictions with the support of 75 percent of their neighbors.”

  4. prk166

    How much does this affect the less well off? How much more of their income, even with a theoretical boost in income, does housing cost them in Seattle or San Diego versus Phoenix or Dallas?

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