April 22, 2007
Demand Supply
Former Editor-in-Chief Ryan Avent writes a weekly column about neighborhood and development issues.
It's nearly two years now since the great Housing Boom of the Aughts© peaked. While prices have leveled off or declined in many places, the affordability of homes in metropolitan areas as an issue has not gone away. In central cities in particular, where the issue of gentrification is most sensitive, prices have shown the most resilience. Certainly, matters haven't changed enough to prompt the local press to put down its "changing neighborhood" story template. None but the coarsest of us wish to see whole neighborhoods displaced at a stroke, but different approaches to the problem of housing affordability come with different costs. What's a metro area to do?
Turn to the economists, of course (or at least this one). Supply and demand is practically a throwaway explanation for price changes, employed with varying levels of actual understanding by journalists with their business writer cap on. Still, the concept has considerable explanatory power. For home prices, one of the principle determining factors is consumer demand. At the level of the metro area, demand is driven by economic vitality more than anything else, but things like environmental amenities ("sunshine") and cultural options are important as well. At a neighborhood level, demand is affected by things like location, the crime rate, location, school quality, housing quality, location, and retail and entertainment options. Observers of housing markets tend to get this side of things pretty well.
But just as important to prices is supply. Recent economics research has shown, unsurprisingly, a connection between the number of new building permits issued in a location and housing prices. That connection is generally reflected in the Washington area. Where Arlington and Alexandria, long the stingiest jurisdictions for new construction, also have high average home prices, exurban counties like Prince William and Loudoun have had a build anything anywhere approach and were, until recently, rewarded with rapid population growth and relatively low home prices. That all has begun to change. Over the past few years, those jurisdictions have responded to fears of too-rapid growth by cutting new construction significantly. As a result, population growth has slowed and prices have begun to converge toward those closer in.
Supply in Alexandria (or Prince William County or the District) contributes to supply in the Metro area as a whole, so restrictions on growth -- from government action or resident opposition -- help to reduce home affordability for the entire Washington area. It's an interesting problem that residents often fight new development to protect the character of their neighborhoods, but by limiting development they push up home prices and push out long-time residents, changing the character of their neighborhoods just the same.
Picture taken by dougvansant.
How, then, to help residents deal with the increasing cost of housing? Presumeably, we don't want to try and reduce demand for the area, either by undermining the economy or generally junking up the town. What other options do we have? Rent control is a popular but controversial suggestion. Certainly for those individuals able to get into a rent controlled unit, the benefits are significant and tangible. But because rent control policies reduce the incentive to build new homes, they constrain total supply, meaning that everyone who isn't in a rent controlled unit will face increases in their housing costs.
Subsidies, to residents or builders, are a better option, since they tend to encourage the creation of new supply. This week, the Post detailed the Housing Production Trust Fund, which helps to provide affordable housing by subsidizing construction projects that include affordable units. That's a good strategy to pursue, but it does have the downside of requiring public investment. Better still is an inclusionary zoning strategy, which rewards developers who include affordable housing units with the right to increase the density of their developments. The plan doesn't require major public expenditures, it provides for the creation of affordable housing, and increases overall supply and density.
It's also important to remember that the real cost of housing, as felt by residents, is the total of the home price and the cost, in time and money, of commuting. That's why housing units cost more near Metro, and that's why real estate types like to trot out the phrase "drive until you qualify." One of the best ways to make housing more affordable, therefore, is to improve the quality of local transportation infrastructure, AND to plan new housing so that it works better with transit.
In the end, more people will want to live here than the area can easily accomodate. Growing takes time, infrastructure improvement takes time, and supply will always be a bottleneck on growth. As a result, we can expect housing costs to grow over time, and people -- lots of them -- will be displaced, not just out of the central areas of the city but out of the Washington metroplex as a whole. Barring a national commitment to improving education and the status of middle and lower income individuals, cities will have a difficult time making room for a diverse range of incomes. By combining subsidies with a commitment to increasing density where possible and improving transportation systems, the Washington area can help to reduce the worst effects of housing cost pressures. How well the area moves in that direction will go a long way toward determining what the city looks and feels like down the road.
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I'm not sure I buy the idea that there will be more affordable housing if we encourage more development with affordable set-asides. I think new construction will raise the value of all the buildings nearby, which will counteract whatever effect the token newly constructed affordable housing has (and that's assuming the developer actually delivers the housing it promises).
I think it's a myth that there is no affordable housing in DC. There are plenty of structures that people of modest means can afford to live in. It's just that those structures are not in the most desirable neighborhoods. A quick check on Realtor.com tells me there are 151 two bedroom properties for sale in DC for under $200,000. There are 15 properties for under $100,000.
We don't have an affordable housing crisis. The housing is there. What we have is a quality of life crisis. The crime and poor public schools make the neighborhoods that have plenty of affordable housing undesirable. Rather than use public money to cram in more apartments with token affordable housing into desirable neighborhoods, we should redouble our efforts to improve the quality of life for those in the undesirable neighborhoods.
Reid is absolutely right. We have literally miles of affordable housing in DC itself. But the quality of life in most of it is shameful.
The real solution is public safety.
And making those areas safe won't automatically make them unaffordable. We often underestimate just how much housing stock there is in DC. For those of us that never leave gentrified NW and Capitol Hill, or at best venture to the 'wilds' of fringe neighborhoods, we often forget just how much of DC isn't gentrified.
Reid, we can do both. What you have to understand is that improving things like schools or the crime rate will boost demand for DC further (falling crime in the District has had this effect). Without a steadily increasing housing stock, that increased demand will just push up housing costs more.
It doesn't have to be token affordable housing, either. The DC government estimates that inclusionary zoning could result in the creation of up to 100 units of housing for below-median income residents a year. Based on recent construction figures, that's between 5 and 10 percent of all new construction. Not bad.
Yes, because we all know how long-time DC residents take to the idea of people coming in and telling them how their neighborhoods need to change one way or another. Change has been driven by slow, methodical development around certain areas of the city and the resulting changing demographics, primarily near Metro stations. It's unsurprising that many of the areas that don't benefit from this transportation "amenity" have plenty of affordable housing.
DCist Ryan: Decades ago DC had 300,000 more people than it does now. We've got plenty of housing stock. It's just in unsafe or otherwise undesireable neighborhoods.
Yes, making these areas magically safe would drive prices up. A bit. But the sheer size of these areas pretty much guarantee that affordable housing would be in no short supply for quite some time.
It's not like magically all the suburban dwellers would move into Far NE. That just ain't happening, no matter how safe the areas become.
But that all depends on your definition of affordable housing. Is it housing stock for workers, cops, etc? Or is it public housing? DC has for decades provided only public housing, stunningly poorly done, given out for generations without requiring the recipient get a job. In the meantime, the city ignores the lower income workforce.
First thing's first, DC became the "DC" that people complain about in 1968 during the riots. In 1967 there was still very much a vibrant multi-ethnic middle class community shopping at the Landsburgh and living in Southeast and to a lesser extent Northeast, let alone Northwest. I wasn't born until weeks after the riots, but I remember being in pre-school with my parents friends in Dupont Circle, AU Park, Glover Park, Mt Pleasant, Cleveland Park, 16 St Heights, etc. These were neighborhoods where white, black and Latin people lived, integrated. I remember asking a kid at one friends house if he was "Chicano" or Puerto Rican and he exploded with Salvadoran pride to set me straight- that was almost definitely 1974.
The "bad old days" of Washington, DC only really existed seriously from 1975-1995. Before that and after that, the city was different. Therefore it's really confused to talk about DC being a problem for a long time- it was a problem for 20 years, possibly 25, and that's it.
When I moved into a basement apartment in DC, some young teenagers harassed me for "moving into a black neighborhood" as if it was fact. Our landlord was white and an older white neighbor later explained the house always had white tenants, usually GWU students, since the family moved out in 1974. Turns out what the kids called a "Black neighborhood" was at least 1/4 white since the "Whites Only" covenant was broken in 1954. People talk about this race-based issue of gentrification in a once-African American DC, but the reality is that African-American Baby Boomers appear to be completely myopic to the racial realities before 1975 and after 1995. And I'm answering the teenagers and others that want to paint gentrification as the race-based "Plan" that people once talked about- just in case you never heard about it and think I'm nuts.
I firmly see no value in trying to make housing affordable. If you cannot afford housing then that should be a wake-up call that you need to change your lifestyle. For instance, I knew an older woman (maybe 50-55) with little education who worked as a babysitter. She lived on her own in a 2 bedroom apartment that went condo. She freaked out because nothing was available for her under $750 per month rent. She married her longtime boyfriend and went back to school to get her GED and now has a nicer apartment, but not sure where. Is she a better person, living a better quality life, married, sharing her life and home with someone in a new job with a GED or would she be better off as a babysitter in a rent controlled apartment?
Every day I wake up knowing that I'm getting further behind the eight ball. Once a six figure salary was my dream. Now, I can cover mortgage and car payment, but I could not pay for Sidwell or GDS for my kids (approx $45k for 2 kids per year). My wife has two jobs, one salaried and consulting company. I work 7 days a week as a manager with whiny-ass employees who call me at all hours on Sunday nights. A McMansion on my old block in Bethesda sold for $2 million- approx 4x what I could afford. So I can't live where I grew up because housing costs are too high. I have plenty of options, no complaints here, but if someone told me they can't afford to live where they grew up, well then get a second job.
The economy shifted. Everyone I know is talking about $3 gas and why they're farther behind now than they expected. I have at least a dozen examples, from a friend who thought he could live in Georgetown with a PhD in English and a $60k job to a retired CEO who went back to work when foundation repairs crossed the $100k mark. It sucks for everyone and all anyone can do in this city is go back for that Masters Degree and work 12 hour days and that's the same if you're a janitor or a government employee.
We don't have as much useable housing stock as you might think. The average family size now is smaller than it was in 1950, which means that 300,000 Washingtonians today consume many more units of housing than 300,000 Washingtonians did 60 years ago. Quality of the housing is important, as well. Many of the homes listed for below $200,000 require significant work. You don't have to neglect a home or apartment building for long before major repairs are necessary.
It isn't that suburban dwellers will pack up and move to Barry Farms. Tens of thousands of people move to this area every year and make decisions about where they're going to live. If once unsafe neighborhoods become safe, newcomers will begin to consider homes in those areas and bid up housing prices. The very expectation that something like that might happen in the future is enough to raise house values. Take a look at housing price increases over the last two years; the double digit percentage increases are in Wards 7 and 8.
Finally, it is worth asking on which groups affordable housing programs should be focused. For the lowest earners, supply will never come close to what's needed. Most will be displaced. Things like setasides are effective but limited in scope, while subsidies are expensive but could conceivably be extended to as much of the population as was deemed necessary.
Ultimately, high home prices are a deterrent even for well educated, middle to high income workers. Slow growth in places like Boston and San Francisco is due largely to the expense of living in those places relative to job markets like Phoenix or Raleigh, where salaries are lower but home prices are MUCH lower. For now. How much we build will determine what the metro area looks like. The more difficult it becomes to put up new and dense housing, the more we'll resemble New York or the Bay Area, where the very rich live close in and the rest travel two hours each way to work.
The answer is more density. Given constant demand, the only way to makes things affordable close to the city center is by increasing supply.
So as much as I like the height restriction (and trust me, it really has grown on me), it IS making prices higher than they have to be. As are nimbys that don't want dense condos built in their neighborhood (Ahem....Tenleytown...cough cough)
I don't think the restriction will change, just stating whats so.
"The more difficult it becomes to put up new and dense housing, the more we'll resemble New York or the Bay Area, where the very rich live close in and the rest travel two hours each way to work."
Don't you see the contradiction in this sentence? Is there an American city more dense than NYC? Yet it suffers from some of the worst "drive until you qualify" affordability problems.
I am not against density, particularly strategically placed density, but I do not believe it creates more affordable housing in the long term (and perhaps not even in the short-term). You yourself point out two cities with very low housing costs: Phoenix and Raleigh. But what trait do those cities share? Extremely low density.
Two words, and two words alone, describe why New York is so unaffordable:
Wall Street.
For the past decade-plus, and particularly under Bloomberg the billionaire, NYC has hitched its economic star completely to the financial-services industry. Financial companies get lots of city incentives to stay in the five boroughs, and the city now relies substantially on the Street to provide the bulk of its tax revenues. While it's worked on a macro financial level - the city has money - the emphasis on Wall Street has thrown the demographics of the city as a whole out of whack. Obviously, Wall Streeters have insane amounts of money, and coupled with the fact that crime has come down, they're opting to live in the city more often than they would have otherwise. And, because the industry is expanding and attracting more new people, the sheer numbers of Wall Street hangers-on is rising, and that means prices for everything are getting bid up all the time.
To an extent, DC now follows the same path, although in DC the big horse in town is government, and government doesn't pay as much at the high reaches as does finance (how many government employees get six- or seven-figure bonuses?)
As any of the demographers at COG can tell you, this region (not just the District, but the region) is creating more jobs than housing units. And as more and more jurisdictions around the region adopt slow-growth positions that limit the number of housing units that can be built but do nothing to address job growth, the gap will only grow larger, which will force more and more people to move to the far hinterlands of West Virginia and southern PA to find localities that haven't artificially limited supply.
It is true that there's plenty of room left in DC to accommodate many more people, but 300,000 units isn't enough to solve the problem in a region that, depending on your definition, will quickly be pushing 9 million souls. Baltimore's historic stock will help a lot too, but it's still not enough. This region is substantially bigger than it was in 1950, and will continue to grow in all directions.
DC and its suburbs must get past the idea that this problem is solvable by burying our collective heads in the sand. Doing that will accomplish nothing but drastically increased sprawl, congestion and economic segregation. It is a recipe for another round of riots some time in the future. The only solution is more density anywhere it can be fit. Rowhouse neighborhoods should remain rowhouse neighborhoods and single family home neighborhoods should remain single family home neighborhoods, but commercial and mixed-use corridors all over the region must begin to accommodate much more than a single story of retail.
The difference is in the number of people each area is able to support. Sprawl is not a very sustainable strategy, so a city like Raleigh, which still has less than a million people, is already running into significant congestion difficulties. Remember that total housing cost includes the price of a home and the cost, in time and money, of a commute.
The phrase you quote, Reid, is a poor choice of words on my part. I should have pointed out the differences between San Francisco and New York. NYC does continue to issue many more building permits per year than SF; it's much easier to build in New York than in the Bay Area. It shouldn't be a surprise, then, that the median home price in NYC is far less than the median price in San Francisco--by nearly $300,000--despite the fact that the city of New York and its metro area contain far, far more people than reside in SF and the surrounding environs. New York does a remarkable job providing access to its economy to a very large number of people.
That there are still extreme commutes into the city is a testament to 1) the awesome power of the New York jobs market, 2) underinvestment in high capacity transit, and 3) while NYC has done a good job accomodating density, its suburban counties have not--you don't have to travel far before residential density plummets.
The difference between NYC and DC is that their public transit system was designed from the ground up to meet a 24/7 lifestyle. DC's Metro was designed to meet a 9-5 lifestyle in a urban to suburb context. Commuting growth is in suburb-to-suburb transit and express rail from the far suburbs to the core, two issues Metro cannot address (no third express track and no spoke-and-hub extentions). Adding a third track was left off the drawing boards in the 1950s because they couldn't find the funding. Now that prices for this sort of expansion are astronomical, where is the political will to expand these services? Local jurisdictions sure as hell won't pony up the cash, they're already getting soaked by tax increases to cover deficits based on last year's housing growth/property tax numbers.
You have to increase density in many areas. We have already started this around certain corridors, but we must become denser and at the same time concentrate it so that people there can use mass transit and walk.
If you think DC has plenty of stock available, you're right that DC has a lot of slums available for people. There aren't a whole lot of affordable places inside the district that would attract families. Location wouldn't offset the work that would need to be done, the immediate environment, and what you could find at the same price in the suburbs.
We need to improve the quality of life of residents, but how do you do that? We've been trying for so long to do that, it's a daunting task, we have to at the very least build more units in conjunction w/ this to grow. If they're done at the same time, they will just help eachother.
monkeyrotica re NYC transit System. Actually I'm going to have to correct you on that. The NYC subway system was built when much of NYC was thinly populated and large parts were farmland. The fact that there hasn't been a new subway line built in decades should make this obvious. The 2nd Avenue line looks it might get built this time, but people have heard that before. So no, it was not built for 24/7 operation in the sense we think of today, it has tried to adjust, and has a huge state behind it to help with cash.
Density will have to be a factor, including forgetting about the much vaunted height limit. Not that we need skyscrapers, especially not in public housing, but it has created an artificial supply limit in the most desirable areas. It might be part of the trend to move further into distressed neighborhoods, but I don't know if the effect can be quantified.
Re your #2, NY just announced they'll pony up half the cost for the new Hudson rail tunnel and rebuilding/expansion of Penn Station (about $7 billion total cost). This is part of Bloomberg's transporation plan (which also includes a $8 congestion charge).
As far as density around NYC.. depends on where you're talking about. Hudson County is almost as dense as SF.. but the NY counties are not nearly as dense as NJ.
"NYC subway system was built when much of NYC was thinly populated and large parts were farmland."
Really? I thought most of the rail lines were converted from elevated to buried tracks during the 20th century, well after most of Manhattan was developed.
The commuter lines, on the other hand, were built before large scale suburban development. This is a big deal, because the incredible cost of inner-suburban land is the reason that building more commuter rails to DC (like the obvious choice of a Washington to Annapolis line) is not even an option.
Reid,
Most of the underground subway lines in Manhattan were built in the 19th century. The underground lines are the oldest in the system - as the system expanded into what was then the hinterlands, they started building some of the lines above ground. I have an old picture of the 1 train (which comes up into the sunlight north of 200th St.) from the 1910s or so, when they were building it, and you see giant foundation holes where the apartment buildings were going to go on either side of the tracks. In the Bronx, you see farmhouses.
The elevated lines in Manhattan were separate operations from the subway system. In fact, they got approval in the 1950s to tear down the 3rd Ave. el, the last elevated line, by saying they'd build the 2nd Ave. subway, which still doesn't exist.
Go into Lower Manhattan and take a look at the City Hall subway station or the other ones on the 4/5/6 lines. They're pretty amazing - the old tilework is beautiful.
You know, the height restriction in general is probably not as much of an issue as the fact that in certain neighborhoods, there is a one story height restriction (there was a DCist post a while ago that mentioned this in passing) while discussing an old run-down apartment building.
Everytime I pass a storefront that's just a 1-story building that could have had apartments built over it, I think, "Wow, what a waste."
ryan, I like your articles. keep 'em coming.
Mixed income housing is a misguided idea. One of the reasons the affluent pay more for better housing is that is also means better NEIGHBORS. Meaning neighbors who are usually highly educated, genteel etc. If you live next to someone in a subsidized situation, working two jobs to raise unsupervised teens attending DC public schools you are increasing the possibility of some kind of unwanted result. I know that's not PC but you search your common sense and you know that's true.
Sara, thank you. Chris Lee, please.