Demand is Not Limitless

Over at Strong Towns, there’s a post offering a few thoughts on housing, including applying “induced demand” to housing. Induced demand has become something of a scriptural truth in urbanist thinking, making the leap from its origin as an explanation of what happens when you widen freeways to a more widely applied principle.

Way back in the days when I had time to blog more regularly, I suggested latent demand would be a better term for what happens when traffic lanes on a newly widened freeway get jammed up. To briefly recap, “induced demand” suggests that the very act of building a freeway lane (or house) creates the people that use it (or live in it), like applying an electric current to a coil induces a magnetic field. This is not really what happens with transportation or housing; the people and their desire to travel (or live somewhere) already exists.

Since building freeway lanes and houses does not create people, demand is not limitless. Even in the case of heavily congested freeways like the 405, widening the freeway unleashes some latent demand but it also diverts demand from competing facilities. This is in a case where we literally give away capacity for free.

For housing, which you have to pay for, we should expect demand to be more limited than freeway capacity. While there’s clearly a lot of latent demand to live in Los Angeles, both in terms of people who want to move here from other regions and existing households that would split up into multiple households, it’s also clearly not limitless. There are only so many people in the United States, and about 1 in 32 of them already live in Los Angeles County; my guess is it’s unlikely that even 1 in 25 want to live here. There is some level of housing supply that would satisfy the demand to live here at a reasonable price, just like there are cities in America that don’t have terrible traffic congestion.

Meanwhile, calling demand “induced” leads you to some strange conclusions. For example, the Strong Towns post says that the more housing is added, the greater the city becomes, and so demand for housing continues to rise. Logically, that would mean that to make Los Angeles more affordable, we should go out and start demolishing existing housing – but I doubt anyone really thinks that would work. People that are currently housed don’t disappear if you demolish their housing, just like building housing doesn’t create new people.

This also ignores that, like America’s many lightly used rural freeways, the United States has cities that have high vacancy rates and low housing costs. These places have a lot of housing, but having a lot of housing is not a guarantee that you will have people who want to live in it.

Now, none of this is to deny that amenity effects are real. New development in one neighborhood can increase that neighborhood’s level of amenities relative to other places in the region, making it more attractive to prospective residents. That can lead to displacement. But the solution to that is new development all across the region, so that new amenities are not all concentrated in one place.

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How Downzoning Kills Affordability & Drives Gentrification: Sunset Junction Edition

We often talk about zoning in the abstract, making it hard to understand just how restrictive zoning destroys affordability. We looked once at how downzoning in Venice is resulting in multi-family buildings being converted into single-family homes, causing a decrease in the housing supply and evictions of current residents. Here’s another example, this time near Sunset Junction.

The project in question is a small lot subdivision. While these projects can be a good way to increase the housing supply, this is an example of the policy going wrong. The project would replace 10 existing units (one single-family home, one fourplex, one duplex, and one triplex) with 14 small lot houses. This is a net increase in housing supply, but all of the existing buildings were constructed before 1978, so 9 of the existing units are rent-stabilized. Though it is much less common than people think, this is a pretty clear case where new development is destroying rent-stabilized units and replacing it with new housing that the current residents won’t be able to afford.

So where does zoning come in to this? The property is currently zoned RD2-1VL, having been downzoned from R4-2 in the first wave of NIMBY downzonings that swept LA in the late 60s and early 70s. This is an 80% downzoning in dwelling units (DU) allowed. The property totals just over 30,000 square feet (SF); here’s what could have been built under each zoning designation, along with what would be possible under R4-2 with a density bonus.

Here’s the result of downzoning in Sunset Junction: the only project that can be built is a project that might displace low-income residents. Under the previous R4 zoning, with a density bonus, a project could have been built that would result in no net loss of rent-stabilized housing – perhaps an agreement could have been negotiated to allow the residents of the 9 existing rent-stabilized units to remain in the new dedicated affordable units at their current rents. The loss of rent-stabilized units and displacement are not an accident, they are exactly what we have stated we want to happen with our current zoning policies. Note also that the project that will be constructed is much more auto-oriented than what would have been built under R4 zoning.

To see how upzoning can help, consider that this property is also in the Transit Oriented Communities (TOC) Tier 1 area. Here’s a comparison of what’s possible under the current zoning and the previous zoning using a TOC bonus.

Using a TOC bonus, even in the lowest tier, would result in enough affordable units to more than replace the existing rent-stabilized units, resulting in an increase in the affordable housing supply.

The people who downzoned LA in the past, and are trying to downzone it again, got what they wanted. They got a city that is more auto-oriented with fewer apartment buildings. They didn’t care about affordability 40 years ago and despite any claims otherwise, they don’t care about it today. No matter who is going to build the housing, overturning the zoning restrictions that the opponents of new housing put in place is a critical first step.

The Same Challenges Face All Solutions to the Housing Crisis

In the wake of the failure of SB 827 to make it out of committee, there has been a lot of discussion of how cities should grow, and a lot of social media ink spilled over who is to blame for the housing crisis, to put it mildly. I think it’s useful to take a step back and remember what the larger state of play for housing in California looks like.

SB 827 Did Not Fail Due to Left Opposition

Like many people in YIMBY groups, I was disappointed that left groups like the Democratic Socialists of America (DSA) chose to not support SB 827, even after it was amended to include many tenant protections that do not exist today. This seemed like a departure from the DSA Los Angeles (DSA-LA) stance on Measure S, which held that they “distinguish between developers and development” and that existing restrictions on apartment construction, which would have been undone by SB 827, were “pushed by wealthy property owners who did not want apartments built in their neighborhoods.”

On the other hand, it perhaps should not be too surprising that socialists would not support a bill that largely depends on private construction. The DSA-LA endorsement of No on S also stated that the housing crisis “must be understood through a critical lens as an outcome of capitalism,” a lens that I certainly disagree with, but would likely lead one to oppose SB 827.

However, the DSA and similar left groups are relatively minor players in state politics. YIMBY groups were the force behind the election of one state politician, Senator Scott Wiener; left groups have elected none. The driving force behind the failure of SB 827 was opposition from the same players that have thwarted both market-rate and public housing construction in middle class and upscale neighborhoods for decades.

Opposition from Entitled Incumbents is Still the Problem

The sniping conversation between YIMBYs and leftists is unproductive, and probably counterproductive, but mainly irrelevant.

The Los Angeles City Council voted to oppose SB 827, and they didn’t do it because they decided they like the People’s Policy Project plan for social housing better. Mayor Garcetti initially said he would support the bill if it included tenant protections and was then forced to flip flop when Senator Wiener added those protections, saying that apartments would look out of place in single-family neighborhoods. The council and the mayor didn’t decide they want social housing in single-family neighborhoods, they decided they want no new housing there.

People from the most insufferably entitled jurisdictions in the state, such as Beverly Hills Vice Mayor John Mirisch and Marin County columnist Dick Spotswood, turned up to oppose SB 827. While they are happy to cloak their opposition in social justice rhetoric, (hopefully) no one is under the delusion that they are going to support a social housing program instead.

Overwhelmingly, the opposition to new housing of all types comes from these well-off communities. They fought public housing in the brief era that the federal government tried to build it, and they fought market-rate housing when the private sector tried to build that. Overcoming this widespread opposition remains the primary challenge in solving the housing crisis, no matter what solution is pursued.

This reality is strangely absent from some takes on the crisis, such as Steve Randy Waldman’s long-standing position that YIMBYs are bad and we should solve the housing crisis with “new towns” such as are built in Singapore (or Hong Kong or other Asian countries). Waldman argues that rather than adding density to existing neighborhoods, we should “[build] out extremely dense but nevertheless green, livable, and attractive ‘new towns’… and when we run out of space for those, new ring cities?”

Leaving aside Singapore’s dual housing market (subsidized for citizens, very high rents for immigrants), where exactly would these new towns be built in California without opposition? Like, name me one site in the Bay Area or LA where this could happen without opposition! In fact, the status quo forces the construction of new towns on the suburban fringe, for example Winchester Ranch or Mountain House or Ontario Ranch. I would love to drop a Hong Kong style new town on top of a greenfield high-speed rail stop in Palmdale. The reason these places are not denser than they are is the same reason that Cheviot Hills doesn’t get denser than it is.

Building Housing Costs a Lot of Money

Moving past local opposition, another common problem to all types of housing is that it is expensive to build. The cheapest new market-rate construction in California, in places like the Victor Valley and the Central Valley, starts around $200k, and in LA County, it’s around $450k. Non-profit affordable housing builders face similar costs. Building even one unit of housing takes a lot of capital.

Meanwhile, California’s housing shortage, built up over decades, is huge. We need hundreds of thousands of new housing units in LA County alone. At $500k a pop, half a million housing units in LA County would cost $250 billion. If you could lower it to $300k per house, that would be $150b. No matter who is building the housing – public or private sector – that’s a lot of money. Policies that reduce the cost of construction per unit, such as lower impact fees, low or no minimum parking requirements, higher density, and no minimum unit sizes, will help solve the crisis, no matter who builds the housing. In addition, allowing higher density in more places may reduce the cost of land, by increasing the supply of places you can build.

The People’s Policy Project proposal tries to circumvent this problem by suggesting that the first round of social housing be built on land that cities already own, and then use the profits from those buildings to acquire more land and construct more social housing. Lower cost of land would benefit this proposal as well, but the immediate problem is that most cities don’t own enough vacant land in the right places to make this work. The mistake is the assumption that most profits are going to developers, when most likely the profits are going to incumbent land owners.

Amenity Effects are Real

The concerns of neighborhood activists that new construction might displace existing residents are not unreasonable. Amenity effects are real. If a new building with a Whole Foods in it opens up, it is a signal to people that shop at Whole Foods that this is a neighborhood you might want to live in. Things that make a neighborhood a more desirable place to live make more people want to live there. There’s a reason gentrification always seems to keep moving one more neighborhood to the east, from Silver Lake, to Echo Park, to Highland Park, to Lincoln Heights.

At the same time, the status quo is also not working at preventing gentrification. And the challenges there are similar for all types of housing. Lowering the cost of building new housing would decrease the price difference between new housing and existing housing, which should help, and it would help no matter who builds the housing.

Whether it’s market rate or social housing, the amount of new housing built in a neighborhood is likely to be small relative to the amount of existing housing, and the existing housing is where the concern lies. New housing, even under the People’s Policy Project Plan, is likely to have higher rents than existing housing because it hasn’t had time to filter. Either way, the problems experienced by existing low-income tenants in existing housing will need to be addressed with stronger tenant protections.

Agglomeration Effects are Real

Another take that seems to have proliferated recently is that instead of having more people move to California, we should make other places more prosperous. Kevin Drum laid out the case for this in Mother Jones.

As someone with family roots in Appalachia, let me just point out that if making other places more prosperous was as easy saying, “Siri, fix the economy of the coal region,” someone would have done it already. After decades of decline, the I-81 corridor has recently seen some growth due to e-commerce entities like Amazon killing malls and needing huge distribution centers. But it’s certainly not anything that economic planners saw coming.

I will also point out that the people pitching you this idea never think of themselves as the one who is going to have to leave California and move somewhere else, and they’re probably not telling you that you will have to leave either. It’s similar to the “don’t tax you, don’t tax me, tax that guy behind the tree” theory of taxation. It’s worth stating out loud what the actual policy would be here: obtain political power and use it to either force people out of a city or prevent new immigrants from moving in. The people who would lose would be the people with the least political power. We have a status quo very much like that today, and I don’t care to trade it for a similar situation but with different people losing.

Now, there are some things we know are good for your local economy, for example, having a major state university located in your city. Sitting on top of giant oil and gas deposits seems to work pretty well too. But these are obviously not strategies that can be applied to every place. My impression is that it’s hard to know what places are going to grow and what places aren’t, and the right thing to do is create opportunity for everyone in the places that are growing. So no matter who builds the housing, we need to figure out a way to do it in growing cities and make it work for everyone.

Finally, this solution does nothing to address the concerns of gentrification. We already have de facto caps on the population of many cities in California. A growing economy makes people want to move to LA, and all a population cap would do is accelerate the displacement of lower income people.

Conclusion

Even though SB 827 failed to make it out of committee, it helped move the window on housing in California, which is a good thing. However, the political landscape has not changed much. The primary obstacles to new housing are the same as they were, and the bad policies that prevent new housing from being built are the same. Removing those obstacles and changing those policies will help – indeed, is probably prerequisite to – any housing construction program that has a chance of solving CA’s housing crisis. The sooner we can do it, the better off we’ll be.

Was Housing Undersupplied During the Bubble?

Kevin Erdmann has a post up positing that there wasn’t any overbuilding during the housing bubble of the 00s. It’s not as crazy as you think. At a national level, in fact, the argument is pretty compelling.

The basic story is that there has been a troubling trend of declining housing construction over the last two decades. This shows up if you measure new housing construction relative to factors like total population growth or adult population growth, or total housing units relative to total population.

The problem, of course, is that housing is an unusually immobile good, such that having enough housing at a national level doesn’t really help you. Extra houses in Detroit – or even in Adelanto – don’t help solve a housing shortage in Los Angeles. Unlike, say, automobiles or almonds, you can’t simply pick up houses and move them to places where there’s more demand.

Erdmann describes this in terms of “Closed Access” cities and “Contagion” cities. Closed Access cities, like Los Angeles, are places where zoning makes new housing construction very difficult. Contagion cities, like the Inland Empire and Phoenix, are places where housing construction is easier and where many people forced out of the Closed Access cities by high housing costs end up migrating to. The Contagion cities ended up bearing the brunt of the crash as migration from Closed Access cities slowed, though it is picking back up in recent years.

Erdmann’s Figure 3 is particularly interesting, as it shows housing construction at the national level broken down into single-family (SFR), manufactured (mobile), and multi-family (MFR). It’s clear that the 2000s boom in SFR construction was very nearly offset by a decline in MFR and manufactured home construction. The contention is that MFR construction that would have taken place in the Closed Access cities was displaced and became SFR construction in the Contagion cities. Looking at housing permits in Los Angeles & Orange Counties since 1988, it’s hard to disagree. Housing construction in LA/OC remained at low levels, despite much higher real prices than in the 1980s.

The collapse in manufactured home production should also be troubling, as they are typically some of the most affordable housing units produced. It’s possible that manufactured housing production has dried up due to lack of needed zoning in suburban areas.

Erdmann’s conclusion, that the collapse and subsequent housing depression was actually caused by a “moral panic… about building and lending,” strikes me as odd, and not supported by facts, in the blog post or otherwise. I’m old enough to remember the crash in real time and the AAA securities backed by people who never had a prayer of paying back their loans, and to have friends who lived in condo complexes that were wracked by the resulting foreclosures. While there may not have been an oversupply problem in total, there was a problem of having many higher-end SFRs in suburbs and not enough affordable MFR in cities. The people who could not afford the suburban mortgages might have been able to afford more modest urban rents.

In this case, the experience of Texas is instructive. Like the Inland Empire, Phoenix, and Florida, Texas receives substantial domestic migration from Closed Access Cities like New York and Los Angeles. Yet, Texas saw much more modest price appreciation in the bubble, and a smaller bust during the crash – in other words, Texas cities didn’t become Contagion cities. The Dallas Fed published a short paper suggesting that Texas’s unique constitutional restrictions on maximum mortgage loan-to-value helped mitigate the boom and the bust:

In Texas, after purchase, mortgage debt along with any new borrowing – including home equity loans – cannot exceed 80 percent of a home’s market value unless the new debt funds home improvements.

Sadly, the lesson of Texas seems to have been lost. As prices in places like California keep rising, there will be another wave of out migration of vulnerable residents. There will also be increasing pressure on regulators and finance institutions to get loose again to make housing “affordable”, setting the stage for the next bus.

Post-Recession Intra-State Variability in Metro Growth by Size

One of the changes in demographic trends after the Great Recession was a shift of growth from smaller metros and suburban counties to larger metros and urban counties. There has been a lot of ink spilled over how much of this trend is caused by different factors:

• Structural factors, reflecting permanent changes in the economy and preferences. The story here is that the economic benefits of being in a large city relative to being in a small city have increased, and that people like cities more than they used to, both of which are causing more people to want to live in cities.
• Cyclical factors, related only to the severe economic downturn and its concentrated impact suburban housing values. The story here is that suburban areas in large cities suffered more because their housing markets crashed harder, but when housing markets recover, it will be business as usual like it was in the 1990s and 2000s.
• Demographic factors, related to a large cohort of twentysomething Millennials who moved to cities at a time young people always move to cities, which just happened to coincide with the Great Recession. The story here is that when Millennials get old, they will decide they want suburban houses and it will be business as usual like it was in the 1990s and 2000s.

My personal take is that it is a combination of all these things and more, but I always expected that suburban growth would ramp right back up because zoning makes it so hard to build new housing in cities. The last few years have disabused me of the idea that things would go back to business as usual. Suburban growth in the Inland Empire has not taken off like I thought it would, and cities in the Central Valley have not recovered to their previous growth rates. It seems that perhaps there have been structural changes to the US economy that increase the benefit of being in a large city. Perhaps upper class workers are also less willing to commute long distances, leading to lackluster suburban growth.

In this blog post, we’ll explore intra-state variability in growth by metro size, comparing the 1990s, 2000s, and 2010s. The goal is to see if there have been changes in relative growth rates between large, medium, and small metro areas. The reason to look at intra-state differences is that we want to ex out the impact of regional differences in growth in the US. We stand to learn more about the differences between large and small cities by comparing Tucson to Phoenix than to Chicago. We will look at a few western states (AZ, UT, and WA), a few southern states (GA and NC), a few Midwestern states (IL, OH, and MI), and California and Texas (in a league of their own, of course). I’m not going to look at Florida because of the heavy impact of retirees, who are less influenced by economic opportunity.

This analysis does not consider rural areas, which are continuing their decades-long loss of population to cities.

The West

Looking first at Arizona, no MSA has recovered to its 1990s or even its 2000s rate of growth, somewhat understandable in the case of Phoenix, since you can’t grow logarithmically forever. Tucson has always grown more slowly than Phoenix, and the growth differential is consistent. Smaller metros like Prescott, Yuma, and Lake Havasu were growing faster than Phoenix in the 90s, at the same rate in the 00s, and slower today. One note of caution is that those three areas see many retirees, so there could be factors besides economics at play. Growth in total population in MSAs in Arizona has consistently lagged Phoenix.

In Utah, the smaller metros are still growing as fast or faster than Salt Lake City, but the growth differential has shrunk since the 00s. Of particular note, the Salt Lake adjacent MSAs, Ogden and Provo, have seen their differential shrink by over 1.5%. Unlike Arizona, growth in total population in MSAs in Utah has consistently exceed Salt Lake City, though by less in the 10s than the 00s.

Finally, in Washington, we see the most striking change. In the 90s, most of the smaller metros were growing faster than Seattle, and the second biggest MSA, Spokane, was keeping pace. In the 10s, Seattle is growing faster than all except Kennewick, which has still seen its growth differential shrink by 1.5%. In the 90s and 00s, growth in total population in MSAs in Washington exceeded Seattle’s growth, but that has flipped in the 10s. Seattle is one of the few MSAs in the country that has grown faster in the 10s than in the 00s – let’s go Seattle!

The South

Looking first at Georgia, the story is a little different. Atlanta has long dominated the state, with other areas almost never growing as fast. However, unlike in the West, the general trend has been for the gap to close. This is not due to faster growth in the smaller areas; all of Georgia is growing more slowly than in the 90s and 00s. In fact, some small MSAs in Georgia have had negative growth in the 10s, but the decrease in growth in Atlanta has been larger than the decrease in growth in most other metros.

North Carolina has been dominated by Charlotte and Raleigh, the latter of which is North Carolina’s second largest MSA and consistently its fasting growing MSA. A few small MSAs exceeded Charlotte in the 00s, but the trend in the 10s has been for Charlotte’s growth differential to increase. Even Raleigh, while still growing quickly and faster than Charlotte, has dropped from growing 1.5%-2% faster to 0.5%.

The Midwest

Illinois is a different picture in several ways. No state on our list is more dominated by a single MSA, with Chicago over 25 times the size of Peoria, the second largest MSA. Chicago outpaces almost all other MSAs in the 90s, but in the 00s the small metros did as well or better than Chicago, excluding the two smallest which have consistently declined. In the 10s, Chicago again outpaces the others, except Champaign-Urbana. Chicago has grown slowly in the 10s but other than Champaign-Urbana and Bloomington, the small metros declined. The lesson, as always, is to get yourself a state research university.

Ohio is yet another case, with three MSAs of almost exactly the same size, but all going in different directions. Cleveland was the largest MSA in the state in 2000, but was growing slowly, and shrank throughout the 00s. Cincinnati, counter to the Rust Belt narrative, was growing at a moderate pace and became the largest MSA in the state in the 2010 census. Columbus was a good bit smaller in 1990, but has been growing quickly, and at current rates will become the largest MSA in Ohio by about 2023. Ohio is unusual in the modern US in that we are watching the dominant MSA in a state change in real time. Meanwhile, all of the state’s smaller MSAs have grown more slowly than Cincinnati and Columbus, and many have shrunk. Get yourself a state research university.

Michigan appears to be different than both Illinois and Ohio, with Detroit as a large, very slowly growing dominant MSA, a fast-growing mid-size MSAs (Grand Rapids), and two fast-growing small MSAs (Ann Arbor and Kalamazoo). Detroit is four times larger than Grand Rapids, and its supremacy as Michigan’s largest MSA won’t be challenged any time soon, but Michigan actually appears to be a case where mid-size Metros are outperforming large metros. Trends in Flint for the 10s are probably impacted by the terrible state-inflicted water crisis. Meanwhile, Michigan’s smallest MSAs, fewer than 200k people, are underperforming relative to Detroit in the 10s, with many actually shrinking. I’m not sure about Grand Rapids, but still, get yourself a state research university.

Don’t Mess with Texas

For Texas, I’m only doing the top 15 out of 25 MSAs, because, come on. This also cuts out the oil MSAs, Midland and Odessa, which are somehow not combined into one MSA.

All of Texas has grown fast. Let us pause for a moment and appreciate how much Texas is doing to create opportunity for people who can’t afford places like, well, California.

Despite impressive statewide growth, Dallas has remained the biggest MSA, at about 500k larger than Houston in 2017 as it was in 1990. Dallas has outperformed most of the smaller metros in the state throughout the analysis period, with only Austin consistently beating Dallas. If you can do it, for the love of everything good, get yourself a state research university!

McAllen and El Paso grew faster than Dallas in the 90s and 00s, since if you don’t have a state research university, becoming an important border town after a free trade agreement is signed is still pretty good. Houston dunked on Dallas during the oil boom of the 00s, but has barely outpaced Dallas in the 10s. Still, the overall picture in Texas is dominance of the large MSAs.

Still Golden

For California, I am going to do all 26 MSAs. And if Texas doesn’t like it, they can get their own damn blog. For the sake of readability of the graphs and general interest, I will present some analysis statewide, and then also graph things in two groups, NorCal and SoCal. If you disagree with my breakdown of north and south, I’m sorry, but my decisions are final.

On a statewide basis, the majority of MSAs smaller than LA/OC are growing more quickly. However, most of them have seen their growth differential to LA shrink, and LA actually grew faster in the 10s than the 00s (take that, haters)! The MSAs that have seen their growth differential to LA increase are mostly greater Bay Area/Silicon Valley MSAs – San Francisco, San Jose, Vallejo, Salinas, and Santa Cruz – plus Sacramento. The Bay Area’s distant suburbs like Stockton and Modesto are still growing faster than LA, but not as much as they were in the 00s. The most stunning change is the Inland Empire, which went from 2.69% growth and 2.31% greater than LA in the 00s to 1.10% growth and just 0.54% greater than LA in the 10s. Given the high price of housing in LA/OC and historic trends, you can see my surprise at relatively slow growth in the IE!

Looking at northern California, the change is more dramatic. Stockton, Sacramento, Merced, and Yuba City all grew much faster than San Francisco in the 00s. In the 10s, San Francisco has greatly outpaced the smaller MSAs in NorCal, with only Sacramento, San Jose and Stockton holding close to SF’s growth.

The pattern is clear looking at SoCal as well. Every smaller MSA grew at least 0.50% faster than LA in the 00s, with the Inland Empire and Bakersfield over 2% faster. In the 10s, only the Inland Empire has managed to grow more than 0.50% faster than LA.

Summary

I think the big takeaway here is that regions are different, states are different, and it’s hard to draw any broad conclusions. Some big MSAs are growing quickly, some are growing slowly, and some are shrinking – sometimes even within the same state. Some big MSAs are outpacing smaller metros and some are not. It does seem that smaller metros are generally growing more slowly compared to big metros than they were in the 00s. The only states where smaller metros seem to be doing better than larger metros are Utah, some small metros in Michigan, and college towns.

Now, large metros in CA have been seeing their growth slow down in the last year or two. But this has coincided with these counties hitting full employment and high housing prices keeping more people from moving in. It does not, yet, seem to be translating into faster growth in the outlying MSAs of larger cities (such as Stockton and the Inland Empire) or in the smaller MSAs like Bakersfield and Fresno. If it were easier to build housing in LA, might it grow faster than the IE? With luck, one day we’ll get to find out.

LA Rain: Skull Emoji Edition

With March in the rearview window and May grey on the horizon, let’s take another look at how SoCal fared this winter with rainfall. The short answer is… not good.

March brought a modest storm to Los Angeles, finally bumping us over 4” of rain for the season. With 4.60”, water year (WY) 2017-18 now stands as the third driest year recorded in LA since 1877. A storm forecast for this weekend might, at the high end, get us to 5” and fourth driest. Either way, barring a truly unusual storm this spring or tropical storm remnants this summer, this year will fall around the 2^nd percentile of water years, becoming just the 8^th year on record to record less than 6” of rain.

Looking at multi-year trends, the last 7 water years just crushed the record low for a 7 year period, with 62.46” to the previous low of 68.75” (1958-65). The record low 6 year period of 1958-64 with 53.25” holds the record by a hair, with the current 6 year period at 53.76”.

Despite the severity of recent drought, it’s important not to read too much about long-term trends into this data. Looking at 10, 20, 30, and 50 year periods shows that recent decades have been on the dry side, but not unknown in LA’s past.

One additional metric I think might be interesting is “streakiness” of precipitation in LA – that is, do we tend to get a lot of dry years clustered together and a lot of wet years clustered together? Here’s a plot of the “streak” for each water year, with positive values representing above average and negative below average. So, a value of 2 means that year is year 2 in a streak of above-average precipitation; a value of -3 means that year is year 3 in a streak of below-average precipitation.

There are more below average years than above average years, a fact also represented in the histogram above that shows rainfall distribution is skewed by a small number of very wet years. There was one streak of 7 below average years, and a further three streaks of 5 below average years. The longest above average streak was in the mid-1960s, with 5 above average years. Four other periods have had 3 above average years. Again, LA rainfall is highly variable, and you cannot use this historic data to predict that we are “due” for a wet year or anything like that.

Looking at SoCal a little more broadly, the Central Coast has fared a little better than LA, but other places have done worse. Parts of coastal Orange County have had less than 25% of normal precipitation and it wouldn’t be surprising if some stations there record all-time lows.

Percent of normal water year precipitation to date

The good news, such as it is, is that northern California received some beneficial storms in March that moved the year from “disaster” like we have in SoCal to just “bad”. The northern and central Sierra are at 65% of average for the whole water year and about 75% for year to date. The south Sierra is at about 52% and 62% respectively. An unusually strong April storm is poised to bring more rain and snow to the Sierra as well.

Finally, thanks to last year, major state reservoirs are still riding high with plenty of water for the summer.

Unfortunately, there isn’t really any hope left for SoCal this year. Let’s just write this year off, move on, and hope for a better winter next year.

Las Vegas is Good

Last weekend I ran a Twitter poll asking people if Las Vegas is a good city. The results were more or less what you’d expect from urbanist Twitter, with people saying Las Vegas is bad by a 3:1 margin.

Well, I’m here to tell you that Las Vegas is, in fact, good.

Las Vegas, as a very young American city (population was under 50,000 after World War 2), has a physical form that doesn’t appeal to most urbanists or to many people in planning. Like many newer cities, it actually has fewer freeways than older cities of similar size. Las Vegas essentially has 4 freeways, the 15, the 95/515, the 215, and Summerlin Parkway; compare that to similar size metros like Kansas City, Cincinnati, Cleveland, or Pittsburgh.

What Las Vegas lacks in freeways, it more than makes up for in medium density auto-oriented suburban development served by very wide arterial roadways. This makes it easy to see the physical form of Las Vegas as a symptom of urban dysfunction, but this is a mistake. Like Los Angeles before it, Las Vegas is a successful city that creates opportunity for many different people, misunderstood because it does not look like older cities.

To start, I think we need to remember what a city is and what it does. A city is a place that attracts many different people of diverse backgrounds because of the economic opportunity created by having lots of people in close proximity. A larger population allows for increased economic specialization, higher incomes and standard of living, and greater freedom to pursue one’s dreams. It also allows for larger communities of immigrants and marginalized groups to form, creating the support networks needed for those groups to thrive and build the social power necessary to combat discrimination.

This has very little to do with urban form, transportation, or walkability. East of the 100^th Meridian, America has lots of places that are pretty walkable with pleasant mixed-use cores. I like to call them… towns. It’s perfectly possible to have a city that is dense and walkable, but failing at being a city because of economic stagnation or decline, and it’s also possible to have small cities and towns that are walkable but not growing very much. This is largely a separate question.

As a simple example of how successful Las Vegas is in allowing economic specialization, consider that Carrot Top has headlined a show at the Luxor since 2005. I submit to you that there is no other city in America, perhaps the world, where this could happen. While Carrot Top is perhaps the silliest example, Las Vegas has created tens of thousands of jobs for artists and entertainers – as of February 2018, almost 22,000 jobs, up 40% from the post-recession low and doubled since 1990. The percentage of jobs in arts and entertainment in Las Vegas is 2.22%, comparable to Los Angeles (2.40%) and about twice that of Houston (1.12%).

So, Las Vegas has created opportunity for thousands of people in that industry, enabling them to settle down in one place, rather than have to travel from city to city to perform. In addition, the hospitality industry accounts for almost 30% of jobs in Las Vegas – almost 300,000. So Las Vegas has created a ton of working class employment as well.

Finally, Las Vegas has remained much more affordable than California, especially coastal Metros. The cheapest new homes in the distant reaches of the Inland Empire like Victorville and San Jacinto are about $250,000, over 60 miles from the city center. In LA/OC excluding the Antelope Valley you’d be lucky to find anything new for under $500,000. Meanwhile in Las Vegas you can get new construction much closer to the city center, about 10-12 miles out, for $200,000.

Given all of that, it’s no surprise that Las Vegas is a major destination for domestic migration out of southern California. Let’s look at some domestic migration data for SoCal to Las Vegas, and also to Phoenix, another major destination for domestic migration. Here’s net migration to Clark County (Las Vegas) and Maricopa County (Phoenix). All data is based on the 2011-2015 ACS.

Los Angeles County provides a disproportionately large amount of SoCal’s net migration to Las Vegas, perhaps due to the synergy between the entertainment industry in the two counties. On the other hand, Orange County is a disproportionate amount of SoCal’s net migration to Phoenix.

Let’s dig a little further into the migration data by age and by race, which I think helps make the case that Las Vegas is good.

Here’s four graphs, showing migration by age for each of the four SoCal counties (sorry, San Diego, get your own blogger) to Clark County.

Los Angeles County loses population to Clark County for every age group except 18-19, probably representing college students. The biggest age cohorts that move from LA to Las Vegas are 5-17 year olds, 25-29 year olds, 45-49 year olds, and 20-24 year olds. This overwhelmingly represents young people and families that cannot afford to live in Southern California, and are finding opportunity in Las Vegas instead. For Orange County, it’s people in their 20s and their 50s moving to Las Vegas. For the Inland Empire, migration is much more balanced due to the lower cost of housing in the IE, with Riverside County actually gaining children and more or less breaking even overall. San Bernardino County loses children and young people at almost the same rate as LA County, but gains people in their 30s.

For comparison, here are the same graphs for Maricopa County.

Again, LA loses many children, 20-somethings, and 30-somethings to Phoenix, while gaining a few college students. Like with Clark County, the IE sees more balanced migration but still overall loses population to Phoenix.

While trends may seem broadly similar based on age, Clark County appears to be doing a better job of creating opportunity for a more diverse group of people. Here’s migration by race from LA County to Clark County and Maricopa County.

Net white migration and net black migration from LA County to Clark County was practically the same, just over 2,000 each, despite whites being 52.4% of LA County’s population and blacks being only 8.6%, with each group making up roughly 30% of LA County’s net migration to Clark County. Asians, who are 13.8% of LA County, account for 20%, with other or 2+ race people making up the remaining 20%.

Meanwhile, whites made up almost 75% of LA County’s net migration to Maricopa County, with blacks being 18% and Asians 12%. Maricopa County actually lost other race and 2+ race people to Los Angeles County.

I’ll leave the reader to speculate why Phoenix attracts less diverse migration than Las Vegas, but it certainly appears, abstractly anyway, that Las Vegas is doing better at creating opportunity for more people. Note: I certainly do not intend any of this to gloss over or ignore the fact that African-Americans in LA County have paid the worst price for the loss of working class jobs and rising rents in low-income communities. The intent here is to compare places that people are moving to.

Here are the same graphs for the other three SoCal counties.

Las Vegas is, without question, very auto-oriented. Its one attempt at fixed guideway transit, the monorail, did not exactly deliver inspiring results. Its pedestrian infrastructure is savagely minimal off the Strip, while the Strip itself is a mix of throngs of pedestrians violating punishingly long light cycles and traffic engineering dystopia where all pedestrians are forced to cross on bridges. Its downtown revitalization project is single-handedly run by a tech mogul with some unusual business practices. No one is looking to Las Vegas for urban design ideas.

And yet, Las Vegas is pretty clearly succeeding as a city. California cities would do well to start measuring their success by how many people they create opportunity for, rather than how high they can drive housing prices.

LA Rain: Time to Push the Panic Button?

The Thomas Fire is still burning in Ventura and Santa Barbara Counties, while the Creek Fire, Skirball Fire, and Rye Fire recently contained in LA County. There has been almost no rain this fall in southern California, and indeed in what feels like a troubling case of déjà vu, the whole southwest has had a below average water year so far.

Like many Californians staring at week after week of dry weather forecasts, I’m worried about the state slipping back into drought, so I decided to look at the history of dry fall weather in LA. The overall picture is not particularly inspiring, but there is some good news.

Through December 17, LA has 0.11” of rain for this water year (October 2017 to September 2018). In LA, since 1877, there have been two water years with zero rainfall for the October-December period: 1929-1930 and 1903-1904. One other year, 1958-1959, had only 0.06”. All of these years ended up being below average, though 1929-1930 ended with 11.21”, about the 32^nd percentile in the distribution. 1958-1959 ended with 5.13”, the 4^th driest year on record for LA and drier than any of the recent drought years.

This year looks dry through the fairly reliable 7-day forecast period leading up to Christmas. After that the longer range forecasts bring some rain to SoCal, so maybe we’ll end October-December a little bit better off than we are right now.

Fall precipitation is an important part of rainfall for southern California, but dry periods are not unknown. Of the 140 water years on record, 41 have had less than 2” of rain in October-December. Of those 41 water years, 4 still finished the year above the long term average of 14.77” and 8 finished the year above the long term median of 12.94”. So based on straight historical probabilities, there’s still about a 20% chance of finishing at median or above. The distribution of fall precipitation is even more extreme than the overall distribution of LA precipitation, itself one of the world’s most variable.

The good news, such as it is, is that historically fall precipitation has literally zero bearing on what happens in the rest of the water year. If you plot October-December precipitation against the remainder of the water year, there’s no correlation; a linear trendline yields an R-squared value about as close to zero as can be.

However, for the yearly total, missing out on fall rain puts SoCal in a hole it’s just difficult to get out of.

Price Gouging is Bad

With Texas recovering from Hurricane Harvey, and Florida and the Carribean from Hurricane Irma, the internet is blossoming with takes on how actually price gouging is good. It’s not.

The Econ 101 argument offered in favor of price gouging is that higher prices provide a market signal to entrepreneurs to figure out a way to increase the supply of the desired good. This is indeed the very basic version of how supply and demand works. However, it’s a terrible way to allocate resources during the short term impacts of a natural disaster.

The point of the profit motive is supposed to be to reward people for doing things that benefit society, not to hand them windfall profits for just happening to be in the right place at the right time. This is why few people complain about Apple’s huge profits, since smartphones and laptops are generally considered to be good products. Creating the iPhone was hard and took a lot of time and money, and people generally accept that Apple has earned its profits. Apple also faces fairly robust competition in smartphones from other innovative companies like Samsung.

On the other hand, Martin Shkreli is widely and rightly considered to be a villain, who bought the rights to produce and distribute a drug created by someone else’s hard work and innovation, and then used a market distortion, a government-granted monopoly, to jack up the price. People see that Shkreli is just trying to enrich himself by squeezing sick people in need of medical treatment, and is not really interested in doing anything socially beneficial. In addition, the structural barriers to market entry created by the government-granted monopoly make it nearly impossible for anyone with entrepreneurial spirit to deliver to Shkreli the market smackdown his fiendishness so richly deserves.

The short-term supply shocks and demand panics induced by natural disasters are not quite the same as government-granted monopolies, but they create similar outcomes. For example, the airline industry did not do anything innovative to greatly increase the demand for air travel upon the approach of Hurricane Irma. There is not a large amount of slack in the airline industry that can be brought to market by enormous price increases, a fact revealed by the very ability of the airline industry to increase prices by an order of magnitude in advance of the storm.

Because their occurrence, in both time and space, is unpredictable and their impact is very short-lived, the incentives created by natural disasters align very poorly with good profit motives. No one expects that Delta raising prices to over $3,000 will lead to a burst of innovation or capacity growth in the airline industry, just as no on expects that Jet Blue’s $99 flights to flee Irma will have a long run impact on airline industry capacity or profitability.

Investment in expanding capacity of any industry requires time, money, and other resources. The unpredictable nature and short duration of natural disasters results in there being little long-term incentive to invest in capacity to overcome their short-term impacts. Nobody is going to build an oil refinery and gasoline distribution infrastructure that is only useful and profitable for the two weeks after the time a hurricane happens to hit a major American city.

In addition, many shortages caused by natural disasters are not structural shortages caused by lack of capacity in the supply chain, but panic-induced shortages similar to bank runs caused by fear of future shortages and a resulting desire to hoard. I happened to be in Fort Worth during Hurricane Harvey, and every gas station had a line out into the street, with many running out of gas, despite there being no real supply disruption in the area.

A large increase in the price of gas in such a situation is not the proper response. Again, no one is going to build extra refineries & distribution infrastructure for these random occurrences. A large increase in prices plus hoarding behavior will just lead to unearned profits for “first to the well” hoarders and inability of low-income people to afford resources they may really need.

The proper policy response to short-term disruptions caused by natural disasters is rationing, to ensure everyone has fair access to enough resources while normal supply chains are repaired.

The finance industry understands this, of course, when it itself is subject to short-term panics such as bank runs or similar events in markets for financial instruments. These situations are handled by limiting or suspending withdrawals, i.e. rationing, until the institution can find a way to overcome the panic.

A similar response to natural disasters is appropriate. Rationing, not price gouging, is the right way to distribute resources during short-term shocks.

Failed Housing Policy: Venice Edition

There’s currently a proposed project in Venice that will replace a 5-unit apartment building with a single-family home (with four parking spaces). The existing building was constructed in 1965, meaning that its demolition will result in the loss of 5 rent-stabilized units. It is worth asking how, in a city with a severe housing affordability crisis, we are getting projects that are reducing the amount of housing.

Contrary to what one might think, this outcome is exactly what we as a city have asked for through our planning and zoning. Decades of planning have been controlled by opponents of development, and have resulted in a set of policies that encourage the replacement of modest apartments with luxury single-family homes.

The existing 5-unit building is on a 2,520 square foot lot in the C1 zone. This building is illegal today for the following reasons:

• It is too dense. The current zoning only allows 3 units on this lot (R3 uses are permitted in C1 zones, and R3 requires 800 SF of lot area per unit).
• The lot is too small. The current zoning requires 5,000 SF minimum lot sizes for R3 uses.
• The building setbacks are too small. The existing building is built close to the lot lines, while the current zoning requires 10’ front yards, 3’ side yards, and 15’ rear yards.
• There is not enough parking. The building appears to have 3 parking spaces for 5 units; even if they are all studios, 5 spaces would be required today. If there are tandem spots not visible from the street, they are non-conforming.
• As a 5-unit building, it falls just below the threshold for needing private open space on-site, so it does not fail on that count.

Therefore, it is not surprising at all that someone is proposing to demolish this building. Current city policy says that this building is bad and should never have been built. Buildings like this, constructed in 1965, are what helped launch the “homevoter revolution” in LA politics around 1970. Changing the zoning and community plans to stop more buildings like it was part of their goal and they succeeded. Now, 45 years hence, they are finally getting their wish that renters and apartment buildings be driven out of their neighborhoods.

If we are going to solve LA’s housing crisis, policy needs to be aligned with that goal. Much of Venice is zoned RD1.5 or R1, only allowing low density development. Denser zoning, combined with widespread use of the density bonus program, would create the opportunity to produce both the luxury units in demand by the region’s growing tech sector and the dedicated affordable housing that is needed to help prevent displacement. But as long as policy is aligned towards demolishing apartments & building single-family homes, that’s what’s going to happen.