Missing Middle Musing

I recently had the opportunity to travel to both Philadelphia, a city I don’t know very well, and Boston, a city I lived in for 12 years before moving to LA in 2012. In Philadelphia, I was fortunate enough to have @riccoja show me around Northern Liberties and Fishtown; in Boston, I spent a lot of time walking around the city looking at how things had changed (or not changed) since I left. (I also visited DC, but really just the tourist thing and didn’t get to see much new development.)

I came away from my trip with two main thoughts on housing in Los Angeles:

  • We have systematically made it harder and harder to build missing middle (link) housing in LA. This is unfortunate, because I don’t think we can solve the housing crisis without building a lot more of it.
  • The homelessness crisis is the most visible and critical facet of the housing crisis. Even being away for just 10 days, it was shocking how bad things are in LA when I came back.

Row Houses and Ridiculously Narrow Streets

For historical reasons I don’t have the time to research or go into here, Philadelphia seems to have a strong development cultural emphasis on single-family housing, regardless of how small the lots or buildings are. Philadelphia is also cool with really narrow streets. This leads to a pattern of narrow streets with narrow two to four story row houses fronting right on the property line.

Unlike other American cities, it’s still possible to do development like this in Philadelphia, and there’s a ton of infill row house development in Northern Liberties and Fishtown. The only other place that allows townhouses like this is Houston, I think, and it’s certainly not on streets this narrow!

My biggest impression from Philadelphia is that LA needs to unleash this type of development. The virtues of small scale development like this are many:

  • It doesn’t require lot assembly, so there’s no delay for that and never any need for redevelopment agency shenanigans.
  • It’s cheaper per unit to build, because there is less common area and amenity space than a large building.
  • It’s cheaper per development to build, which means a larger number of people can build them. This both increases housing supply and increases community input into how development occurs. It also makes it more likely that small local developers, who know the community well, can participate.
  • It’s less complicated to build than a large building, which means a larger number of contractors and construction workers can be employed in its construction. This increases employment opportunity and lowers costs.
  • It’s faster to build than a large building, which means it can respond to housing needs faster than large developments. This also lowers costs because carrying costs are directly proportional to the time between when the developer buys the lot and when the building opens.
  • It creates small retail spaces, which increase the diversity of local business and creates opportunity for a wider range of small entrepreneurs.

All of this means a faster, larger, and cheaper response to the need for new housing. This is both good on the merits and good politics, because slow and expensive responses to the need for housing lead to more widespread disillusionment and agitation for radical action.

New Districts and Static Neighborhoods

In contrast, development in Boston seems to be focused in a handful of new districts: the Seaport, North Point, Harvard’s campus in North Allston, Station Landing, the area near North Station vacated by demolishing the Central Artery, Assembly Square, and Kendall Square. There was a little infill development (a couple buildings in the North End, a house in Brighton Center whose architecture my friends complained about) but it seemed to be the exception.

Now, there’s nothing wrong with replacing parking lots and abandoned rail yards with new neighborhoods. In fact, it’s pretty great. But it almost necessarily involves a lot more central planning from the city, big institutional developers, and big institutional finance. That means projects that move much more slowly, have a higher cost per unit, and are less likely to happen before the next market downturn. North Point is great… but it was one of the first projects I worked on when I lived in Boston after graduating, and it’s just getting built over a decade later. The same could be said for Assembly Square, Station Landing, Harvard’s campus, and the Seaport. These projects will happen when demand is high enough but they take a long, long time.

My friends in Boston are white collar professionals and public employees. They’re not housing insecure by any means. But they didn’t hold new development in Boston in high regard, and it’s somewhat understandable. It’s not really for them; it’s for people just a little higher up the income ladder. Comparing to Philadelphia, I can’t help but think that Boston would be better off if it were also building a crap load of small scale development like townhouses and small apartment buildings in places not quite as central as the new districts but still T-accessible.

Golden State Squalor

Returning to LA, I was more convinced than before that we need to allow more missing middle development here. If it were up to me, I would rezone every RD, R2, and R1 zone in the city to something like an “RD1.2” or “RD1” townhouse zone, with townhouses allowed by right with a minimum lot area of 1,200 SF or 1,000 SF. (I’d also eliminate parking requirements and reduce the impact fees.)

But more immediate, and more appalling, was returning to LA and walking around downtown, bearing renewed witness to the tide of human misery that floods downtown every night, retreating east of the double yellow line on Los Angeles St and south of 3rd St during the day, a thousand sidewalk washers in its wake.

I didn’t notice the absence of homeless on the east coast, but I noticed the presence when I got back, and it’s a complete embarrassment to LA and California that a state so rich should have so many people living on the streets. The numbers are overwhelming, the state of public health on the streets is atrocious, and yet still, proposals to relieve the situation face NIMBY opposition.

It’s hard to put into words how bad things are in California compared to other US cities, so let me not mince words in my final thoughts. We need to be out there trying to do something every day to fix this problem. And if you oppose new housing, especially permanent supportive housing or temporary shelters for the homeless, you are a bad person, and I hope you feel bad about yourself, because you should. I’m not a religious person but if this crisis doesn’t move you, by god, what would?

Advertisements

Impact Fees Are Bad, Taxes Are Good

One of the more nefarious impediments to housing construction in California, in my opinion, is the proliferation of impact fees on new development. Impact fees first became widespread in the 1980s, a consequence of Prop 13 bankrupting local governments’ ability to pay for public improvements like parks and schools. The state allowed cities and counties to start charging community district fees, also known as Mello-Roos fees, whereby each unit in a new subdivision pays a fixed amount to cover the construction of new public facilities. These fees only apply to new construction in a particular district.

Other development impact fees, charged on all new construction in a city regardless of location, have also been expanding. For example, the City of LA charges a park (or Quimby) fee on all new construction to pay for new parks in the city, and recently enacted an affordable housing linkage fee, where all new construction pays into the city’s affordable housing fund. Impact fees are popular among conservatives and progressives alike, the former because it keeps taxes lower on a majority of voters, and the latter because it symbolically punishes people that progressives don’t like, such as developers and the people who can afford new housing.

Unfortunately, impact fees are bad. They are a regressive and inefficient way of funding improvements, and they unintentionally hurt many people as a result. People who support progressive outcomes should oppose impact fees and support general broad-based taxes instead. Let’s take a closer look at why.

Impact fees often form a large portion of the cost of new housing. For example, a recent study of impact fees found that some cities, such as Irvine and Fremont, have impact fees of over $60,000 per multi-family unit. That translates to about $450/month in higher rent  — just to pay for impact fees.

Progressives tend to not care about this, because they view these taxes as falling on big bad developers and on the people rich enough to afford new housing. However, by raising the price of the cheapest new construction, it enables landlords to raise rents to higher levels without any competition from new construction. Since the vast majority of housing is existing units, and there are relatively new units, impact fees are in effect taxes on renters for the primary benefit of landlords.

Here’s a visualization. Supposed that every year, you have one new housing unit built for every 50 existing units (an optimistic assumption in California). For simplicity’s sake, assume all housing units are equal, and the city has 10,000 housing units. If new construction rents for $2,000/month, prices for existing units will not rise higher than $2,000/month because they will be undercut by new construction. This year, we would expect 200 new housing units to be built.

before

Now, let’s impose a $20,000/unit affordable housing impact fee on new construction. The cheapest new construction will rent for now is about $2,150/month. That allows landlords to raise the price for existing units to the same level. The net effect is that we raise $4,000,000/year for affordable housing construction (enough for about 8 units at California prices) and we increase landlord profits by $18,000,000/year ($150/month x 10,000 units * 12 months/year). So our “impact fee” is really a 7.5% tax on renters, and we give over 80% of the revenues generated to landlords. Is this really what we wanted to do?

after

A better approach would be to enact a much smaller tax on everyone that would generate the same amount of revenue. In this example, a 1.67% tax on rent on all units would generate the same amount of money for affordable housing, and none of the money would go to landlords.

tax

Of course, having made it clear that the cost is actually being paid for by renters, the next logical question is why we should be taxing housing in this way at all. Now, this model is clearly an oversimplification; dynamic effects are hard to predict, but it stands to reason that at least some of the cost will effectively be paid for by people selling land, since higher costs of new construction will make people less likely to build new housing, lowering the demand for land. And taxing all units does not lead to the perverse outcome of rewarding landlords for doing nothing.

But it is still logical to conclude that if you increase taxes on new housing, the cost of housing will rise. It is not revolutionary economics to say that if you want more of something, you shouldn’t tax it. Increasing the cost of new housing during a severe housing shortage is just poor policy.

Really, tying taxes or fees for public improvements to new construction in this way is not progressive at all. There’s no reason funding for affordable housing has to come from anything to do with development. The progressive way to do it would be to tax things that are bad and use the revenues to fund things that are good. A carbon tax whose revenues are used to develop affordable housing would be great. So would a congestion tax used to develop affordable housing. A broad property tax that applies to everyone would also be fine. But impact fees should be avoided if possible, unless the goal is increasing landlord profits.

Never Tweet

It’s not an exaggeration to say Twitter changed my life. I’ve met people that I probably never would have otherwise. My knowledge and world view has been greatly expanded by connecting with people in transportation, urban planning, architecture, and many other fields. I’ve been able to listen and understand where people are coming from on issues I have no experience with and from communities I have no direct connection to. I probably wouldn’t be involved in housing advocacy if not for Twitter.

That said, it has felt very exhausting lately, and I’ve had a few conversations with some of my earliest Twitter connections who feel the same way. Twitter made it possible to quickly connect with experts and people doing new research, and even to seek out and follow people you disagree with to try to hear their perspective and broaden your horizon. But it also made it possible to quickly find people you disagree with and spend a lot of time disagreeing, and not learning anything.

It’s probably been happening for a while, but the SB 827 debate is what threw this fact into the open for me. On both sides, we spent a lot of time arguing the same points back and forth, RT’ing and faving what we thought were our side’s sick burns, and pushing things into nasty attacks. At its best Twitter offers the prospect of instant dialogue with people you’d never know otherwise; at its worst, it’s the comments section on an unmoderated news site but without the benefit of news preceding it.

Part of this is because the fight over housing became political. That’s not a complaint – the fight had to get political! But politics is done by finding like-minded people and convincing them to do stuff in real life, not flaming people you disagree with on the internet. I know the SB 827 debate was just making me mad, and that I wasn’t learning anything. And I bet you know that too.

This is not a “why I’m leaving Twitter” post. But it is me realizing that I’m not getting what I want out of it, and I need to do something about that. The goal is to spend less time on it but make that time more valuable. So, the first thing I’m going to try is to make myself do less Twitter and do more reading and blogs. I know it’s 2018 and no one reads blogs anymore but an important part of the exercise is to make myself think through things more clearly.

I’m going to try to read things that are a little outside the urbanist mainstream, to help expand my thinking and also hopefully increase the value of the time you spend engaging with me. To that end, here’s what I’m planning on reading this year, in no particular order:

  • Black Los Angeles (Darnell Hunt & Ana-Christina Ramón)
  • Learning from Hangzhou (Mathieu Borysevicz)
  • The Architecture of Red Vienna (Eve Blau)
  • The City in History (Lewis Mumford)
  • Glitter, Stucco, & Dumpster Diving (John Chase)
  • City of Darkness Revisited (Greg Girard & Ian Lambot)
  • Urban Planning and the African American Community (June Manning Thomas & Marsha Ritzdorf)
  • Learning from Las Vegas (Denise Scott Brown & Robert Venturi)
  • Infinite Suburbia (Kotkin et all)
  • Code and Clay… Data and Dirt (Shannon Mattern)
  • China Road (Rob Gifford)

Suggestions are welcome too! I also might break out the hiking, water, geology, and meteorology stuff into its own thing. We’ll see!

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.

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.

sjz1

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.

sjz2

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.

LAOC starts.png

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.