Category Archives: Uncategorized

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.

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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.

Company Towns Are Bad

This is one of those things that should be surprising to even have to mention, but the concept of company towns pops up from time to time in discussions on California’s housing crisis, so here’s a summary of why they are bad.

The specific proposal often takes different forms, but they are all variations of Gilded Age company towns (or Communist countries with internal movement controls if you like):

  • Workforce housing: because California’s housing crisis is so bad it’s impacting middle class professionals like teachers, some liberal communities have begun to feel embarrassed that people with “respectable” jobs can’t afford to live in the city where thy work. This generosity rarely extends to people who do things like work at 7-11, who are expected to have to endure long commutes as the price of their insistence on working in the service industry.
  • Company housing: misdirected anger at the tech companies that are a big part of California’s economy results in calls for these firms, which certainly have the profits to do so, to build housing for their employees to take pressure off the local housing stock.
  • Tying new office development to new residential development: this is a proposal to force cities to permit enough housing to accommodate the employees in new office space that they permit.

The first two proposals are similar enough to discuss as one, with the main difference being that in the first the government provides housing for its employees, while in the second the private sector provides housing for its employees.

These proposals are bad because they demote the employees to second class citizenship, where the ability to secure housing is contingent on employment with a single employer. It is not hard to see how this will easily lead to employees surrendering their rights and not speaking out against institutional problems, because of the fear of losing their housing. It also implicitly creates a third class citizenship, occupied by the elderly, the unemployed, government employees whose jobs are not deemed important enough to get them housing, and people employed by businesses that do not have the huge profit margin needed to provide subsidized housing.

Simply put, people’s ability to find housing should not be dependent on them staying at the same employer.

The third proposal may seem appealing because it targets recalcitrant municipalities like certain Silicon Valley cities that permit new office space and see a large amount of job creation, but allow almost zero new housing to be built. The idea here is to force these cities to build more housing, to relieve pressure on the housing stock in nearby cities that have not had the same amount of job growth.

The unintended consequences of such a policy are likely to be bad. The recalcitrant cities are just as likely, if not more likely, to respond by stopping or slowing office development. This will lead the high-profit industries to outbid small businesses and lower margin industries for office space, hurting the region’s economy and the people who work for those smaller or less profitable places. If we want to make cities that don’t build enough housing build more, we should just do that and not make it any more complicated than it needs to be.

History suggests that jobs-housing balance can only be achieved on a regional level. While coastal communities like Santa Monica and Venice complain about too much job growth (oh, the entitlement!), cities towards the edge, like Santa Clarita, Palmdale, and Moreno Valley worry about a jobs-housing imbalance in the opposite direction – too many houses and too few jobs. Employment always seems to like to concentrate to a greater extent than housing, perhaps because the efficiencies achieved are greater. It seems likely that we will always have more jobs than housing near the employment centers and more housing than jobs on the edges. In addition, policies to try to achieve jobs-housing balance at a local level ignore the fact that people changes jobs from time to time, and many households have more than one income earner.

There are a few places where company towns or workforce housing make sense. These are generally isolated towns where the economy is dependent on one enormous employer or one dominant sector. Examples are mountain resort towns, island resorts, and remote mining towns. Resort towns often feature a large number of second homes, owned by people with much greater means than local service industry workers. They may also face serious natural or imposed constraints on development, such as very limited space suitable for building, limited water, or business development plans that place a high priority on keeping the town to a small size or maintaining the appearance of natural surroundings.

These unusual circumstances certainly do not apply to any city in California (except maybe Avalon due to water availability, a desalination plant would be expensive for a city so small). People in California already face precarious housing situations due to the high cost of owning and renting; many would have a hard time keeping their housing upon loss of a job. The solution is to make housing cheaper for everyone in California and reduce people’s dependence on any particular employer for housing, not increase it.

Zoning Capacity Needs to Be Much, Much Higher

If you follow on Twitter, you’ve probably seen the graph below showing how much building capacity was lost due to downzoning in Los Angeles. The number of people that could be reasonably accommodated was reduced by more than half.

FrameWORK_Housing_ZoningCapacity-1024x748

When pro-housing advocates talk about the need to upzone, one common response from opponents of development is that there already are underutilized parcels that have fewer housing units than permitted by zoning. Why, they ask, is upzoning needed if developers aren’t even using existing parcels to their full potential.

It’s not hard to understand why upzoning is still necessary on a technical level. The microeconomic decisions of many actors will mean that a city is always below its zoned housing capacity. In many instances, owners are satisfied with the buildings already on their property, and don’t want to rebuild. In many other instances, there may be available zoning capacity, but not enough to make it profitable to reconstruct. For example, a lot might have 4 units on it and be zoned for up to 5 units. That property will not be redeveloped until prices get extremely high. Similarly, LA has many one-story retail buildings on C2 commercial zones, that could be redeveloped to R4 density (1 unit per 400 SF lot area) but with a max FAR of 1.5. It’s not worth it to demolish a rent-paying commercial structure for so meager a residential FAR.

Applying this logic to other common human necessities reveals on a much more fundamental level how weak the arguments against upzoning due to available capacity are.

For example, when you go to the supermarket looking for bananas, you don’t expect to be told that they have plenty of canned soup and won’t be ordering any more food until those are used up. People like to cook and eat many different things, and reasonably expect the supermarket to offer a wide variety of things to buy. How dull a culinary world would it be if we produced just enough food for people to survive and nothing more? If a farmer goes to plant kale, we don’t stop them from doing it because we’ve already got plenty of soybeans.

When you go to buy clothes, you don’t expect the retailer to have only one outfit, and told to take it or leave it. People like to wear lots of different kinds of clothes. How dull would the world be if everyone had to wear the same thing? Or consider a bookstore. Would you be satisfied if you went to Amazon and they only had 100 books, and weren’t planning to order any more until those were gone?

Likewise, people need a huge variety of buildings in cities to thrive. Providing people with more options creates greater opportunity for them to live their lives and pursue their dreams. A city that is zoned to allow barely enough housing is going to forfeit an enormous amount of human spirit and dynamism, in addition to burdening many of its residents with high housing costs. Zoning needs to allow people the flexibility to grow and try new ideas. In SoCal that means we need our zoning capacity to be much higher than it is today.

Points Based Immigration: Un-American

We hold these truths to be self-evident, that all men are created equal.

Republican Senators Tom Cotton (AR) and David Perdue (GA) have introduced a bill called the “RAISE Act” which would severely curtail legal immigration, reducing green cards from over 1,000,000 to about 500,000, the yearly number of family-sponsored immigrants to 88,000, and the yearly number of refugees to 50,000. It would create a points-based immigration system allowing 140,000 immigrants per year, where immigrants would be chosen on a points system, with younger, wealthier, more educated people scoring a higher number of points. The proposal was immediately backed by Donald Trump and ghoulish policy adviser Stephen Miller. Unlike health care or infrastructure, racism seems to be one policy area that the president actually cares about, having appointed regretfully competent people to run the Department of Justice and ICE, and willing to spend political capital to achieve specific outcomes.

As such, it is important to push back against this proposal as firmly and relentlessly as possible. The policy proposal for a points-based system has received far more respect than it deserves, with people debating the effectiveness and suitability of the specific standards, e.g. should a foreign professional degree count for less than a US professional degree, or should an 18 year old with $1.5 million dollars receive the same number of points as a 50 year old with $1.8 million? This is like phrenologists debating the relative importance of an enlarged constructiveness organ compared to an underdeveloped benevolence organ.

Set aside the absurdity of a points-based system to enter America being proposed by a set of people would almost surely fail to qualify under the proposed system. Set aside the hypocrisy of such restrictive immigration policy being proposed by people whose ancestors came to America when the federal government’s requirements were having about $600 and not being insane or carrying disease – or, as incredible as it may sound today, when the federal government was not involved in immigration at all. Never mind that it lays waste to the obvious lie that Trump’s base was concerned about illegal immigration. Forget that the points-based immigration quota is so low that it would have been exceeded by peak Ellis Island immigration alone in about 28 days.

Points-based immigration is un-American. End of question.

The promise offered by America when all those boats steamed into New York Harbor was the opposite of a points-based system. Any system that requires hard measurement of people’s value as human beings is wrong. Any such system is going to inherently privilege people who are already privileged: the people who already had the opportunity to learn English, obtain education, amass wealth, & gain social stature in their home country. Any such system is going to punish people who were unfairly discriminated against, who were already scored as unwanted rejects with nothing to offer.

To all of that, America said screw you, and gave millions of people a chance at a better life. America didn’t just theorize that immigration was good and that those people would help build a stronger, more innovative country, we proved it.

The darker side of America has always been there too, from the Know Nothings in the 1850s to the Immigration Act of 1924, from the Chinese Exclusion Act to Stephen Miller’s dull gaze and empty head. If we believe in America at its best, we need to push back against the RAISE Act on principle. The RAISE Act would deny America to the people who need it the most. Engaging in discussion on the specifics only legitimizes a concept that should have no place in American policy to being with.

Are Suburbs Triumphant?

In a recent post, I speculated that suburban development in the IE might be on the rebound after a decade of slow housing construction. Other cities, especially in the Sunbelt & Texas, have reached their pre-crisis housing output.

After the financial crisis, there was a moment when urban counties were growing faster than suburbs, and pop wisdom held that suburbs were dead and people were returning to cities. This was always suspect, because severe zoning restrictions were clearly going to make it difficult for many people to do so. Now, though, with suburban construction picking up and surveys consistently showing that most people want to own their own single-family home, it feels like the pendulum of pop wisdom has swung too far in the direction of suburban triumphalism. So let’s look at a few ways that post-crisis suburbanization is different than the pattern that had held since World War 2.

Suburbs Are Back, But They’re Not the Same

Like an athlete returning to play after a serious injury, the suburbs don’t have the same range of skills they once did.

One of the most obvious ways suburban development is different is a lack of golf course development. When I worked in highway design, we did a fair amount of land development work for new residential projects, including communities centered around golf courses. Nobody is building golf course development now; the number of courses in the US has been slowly declining. The decline has created a desire for infill development in some places; for example, Rancho Cucamonga is allowing housing to be constructed on a former course.

Another obvious difference is the lack of new commercial construction. Whether it’s due to oversupply from before the crash or the increasing impact of online retail, as of a few years ago, no new enclosed malls had been built since before the financial crisis. (I tried to find updated info but couldn’t.) Mall vacancy was very slow decline after the recession and has actually ticked up the last couple months. Since many suburbs depend on sales and property taxes generated by commercial development, the lack of growth in retail space strains municipal budgets.

Meanwhile, while some cities have recovered, national housing production remains at historically low levels, including for single-family housing. Some fast growing cities, like Atlanta and Phoenix, are still not producing as much housing as they once were, despite increasing prices. As Calculated Risk frequently notes, suburban builders are not producing entry-level homes they way they once did.

The Desire for Cities is Real

While the increase in desire to live in cities, or at least walkable neighborhoods and older suburbs close to cities, may have been overstated, it is nevertheless very real. On a recent walking tour of neighborhoods in East Hollywood, Silver Lake, and Los Feliz, someone mentioned this to me as one of the primary differences between now and the 1980s, and I think they’re right.

In the past, except for a few enclaves like Beverly Hills, Bel Air, and Hancock Park, people with the means to move to new development in the suburbs generally did so. For whatever reason, some people with money have decided they want to live closer to the city, and they are outbidding lower income people. Jed Kolko did an analysis in 2016 and found that people aren’t urbanizing, but money is. The result is that the people moving to new suburbs aren’t the wealthier people, at the same time that suburbs are not producing entry-level housing and are being squeezed by lackluster commercial growth.

We Still Need to Upzone Cities

A lot of new housing is going to be produced in suburbs, and we need to look at the reasons why it’s not as affordable as it once was. But that still won’t solve the problems in cities outlined above. People want to live closer to cities, and if we don’t build enough housing, somebody will lose out.

Where’s the IE Housing Boom: Lift Off?

I’ve written a few posts wondering why there’s no housing boom the Inland Empire. Prices have recovered, the zoning is there for it, and there’s limited opportunity to build in Los Angeles & Orange Counties. I started working on this next post as another entry in that series, to show all the approved residential master plans that are out there but not being built.

However, in the last couple months, there has been a noticeable increase in the number of permits pulled for housing construction in the IE.

IE-permits

June 2017 saw 2,076 permits, the first time since August 2007 that the number of permits in a month has been over 2,000. It appears that the IE’s lost decade of housing production might be over. Single-family builders are going to be wrapping up the timid completion of developments in partially built projects, and looking for bigger opportunities. So instead of asking why these residential master plans aren’t being built, consider this a field guide to what might be happening in the next few years.

Chino & Ontario

The closest greenfield developments to LA & OC are probably the best candidates to boom. In Chino there’s a plenty of space to build in The Preserve, and Ontario has a huge amount of development potential in Ontario Ranch.

The map below shows the approved master plans with Chino at the bottom and Ontario at top. I overlaid these from the planning documents, so the colors are not entirely consistent from plan to plan, but they follow the same pattern. Yellow and light orange are single-family, dark orange and brown are multi-family, red is commercial, purple is mixed use, blue is public (schools etc), and green is open space. For reference, the distance between Archibald Ave & Milliken Ave is 2 miles.

01-Chino-Ontario

Chino & Ontario provide (relatively) easy access to LA & OC, via the 71 north and 60 west to LA, and the 71 south and 15 south to OC. Riverside County is planning to start construction later this year on express lanes on the 15 from the 60 south to the 91, which will make commuting from Ontario Ranch more appealing.

Fontana & Rialto

Further north and east, there’s still a fair amount of undeveloped land in the northern parts of Fontana & Rialto. Fontana’s recently approved Westgate specific plan, near the junction of the 210 and the 15, allows for up to 3,248 dwelling units. Further up the 15, another set of plans allow another 5,000 units. Across Sierra Ave in Rialto, near the top of the image, Lennar is finishing up development in Rosena Ranch, and DR Horton is building the first neighborhood in Lytle Creek Ranch, zoned for 8,400 dwelling units. The distance from Sierra to Citrus is 1 mile.

02-Fontana-Rialto

Lake Elsinore

Heading the other direction on the 15 from Chino & Ontario, south to Lake Elsinore, there are master plans north and south of downtown ready to go, with several thousands of units of potential.

05-LakeElsinore

Perris & Menifee

Moving east to the 215 corridor, there are also plenty of developments that could be built. Between Parkwest, Green Valley, Riverglen, & Riverwoods, there is zoning for over 8,000 dwelling units. The Menifee North plan, beween Romoland and Homeland, allows about 2,800 units. And Winchester Hills on Domenigoni Parkway a few miles east of the 215, which has been frozen in time for almost a decade, allows over 5,000 units. The distance from the 215 to Menifee Rd is 2 miles.

04-Perris-Menifee

We’ll know the IE is back for sure when construction starts on a big project east of the 215. The big projects have been dormant for a long time. But with the closer-in developments in Menifee nearing completion, how long can that last?

Yucaipa to Banning

East of San Bernardino, there’s a string of approved plans in Yucaipa, Calimesa, Beaumont, and Banning. Combined these will allow almost 20,000 dwelling units. The bottom of the large plan east of Beaumont is 1 mile wide.

03-Yucaipa-Banning

There’s Lots of Development Capacity in the IE

This is just a sampling of the master plans that are approved for construction in the IE, and doesn’t even account for any of the development that can occur under the normal zoning in the many places not covered by a specific plan.

In previous posts in this series, I’ve argued that zoning is not the defining restriction on development in the IE. This is in contrast to LA & OC, where sky-high prices suggest that upzoning would unleash a large amount of development. Issues in the IE seem to relate more to land costs and impact fees, but perhaps prices have hit a tipping point where these obstacles can be overcome. If so, expect to see the number of housing permits issued in the IE continue to rise.